copyright 2004 john wiley & sons, inc.3 - 1 information technology: strategic decision making...

Copyright 2004 John Wiley & Sons, Inc.

3 - 1

Information Technology: Strategic Decision Making For Managers

Henry C. Lucas Jr.

John Wiley & Sons, Inc

Dinesh MirchandaniUniversity of Missouri – St. Louis


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Chapter 3

New Business Models


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IT’s Impact on Business Models

• The value of technology includes– New business models– Extensions to existing models– The possibility of serving new customers– The possibility for entering new markets– Sales growth


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Metrics of the Impact of IT on Business Models

• Market share• Number and type of new markets the firm

has entered• Sales growth• Size of the average sale• Sales per employee


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New Business Models

• A business model is a description of how an organization functions. The model:– Describes the firm’s major activities– Identifies the firm’s customers, products, and

services– Provides information about the firm’s organization– Identifies how the firm generates revenues and

profits– Identifies the firm’s key business processes

• Business models combine with strategy to guide the major decisions of the firm


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Evolution of Business Models

• The traditional business model was– A manufacturing or services company

• Selling product(s)/service(s) to customers• Maintaining a physical location• Maintaining its own workforce• Utilizing IT to make internal operations more

efficient, though some companies were also using IT strategically to generate revenue

• The Internet and the WWW have in recent years enabled new and creative business models


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The Internet

• Provides a worldwide communications infrastructure that brings together individuals and firms


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Definitions

• Internet– The basic infrastructure of hardware and

software that spans the globe• The World Wide Web– Software standards for presenting information

• Portals– Starting points for browsing the web– Provide services to attract users such as

shopping opportunities, directions, and search engines


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Examples of Businesses on the Internet

• Business to Consumer (B2C)– E.g., Amazon.com, L.L.Bean, CarsDirect.com

• Business to Business (B2B)– E.g., Cisco’s linkages to its contract manufacturers

• Hubs (Exchanges)– Vertical: within the same industry – Horizontal: across industries– Can be Public or Private based on whether group

membership is required to use the hub– An Exchange with many buyers and sellers that is both

Vertical and Horizontal is called an Electronic Market


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Examples of Businesses on the Internet (Continued)

• Information Providers• Electronic Communication Networks• Outsourcers• Entertainment Services Providers


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Components of Technology

• The three components of technology working together to enable commerce on the Internet are– Computers– Databases– Telecommunications


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Electronic Commerce

• Even before the advent of the Internet, companies used Electronic Data Interchange (EDI) for commerce– Today EDI is classified as a Business-to-Business (B2B)

commerce– EDI initially utilized private networks or value added

network providers (VANs)• Electronic Commerce on the Internet

– Retail Sales (E.g., Amazon.com and CDNow)– B2B commerce and EDI on the Internet

• These will likely dwarf retail sales in the future


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The Retail Sales Model

• Traditional Model– Goods transit from a manufacturer to a wholesaler to a

retail store to the customer• Internet-based Model

– Pure model• Eliminates retail store• Distributor becomes fulfillment partner and ships

orders to the customer– Variations to the pure model

• Amazon.com has its own warehouses• Conventional retailers are allowing Web ordering


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Characteristics of the Electronic Commerce Retail Business Model

• No physical store– No real estate purchase or lease

• No retail store employees– No retail salaries or benefits– No transportation between distributor and retail store– The addition of a Web site– The substitution of credit cards for cash and checks– The substitution of a fulfillment partner for a distributor– The addition of a shipping firm to deliver merchandise

• Lower cost structure and overhead than bricks-and-mortar retailer


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The Response of Traditional Retailers

• The bricks-and-clicks model– Maintains a physical store and an online store– Uses the Internet as a sales channel

• Advantages of the bricks-and-clicks model– Brand recognition of the retailer– Availability of financial resources to support

the online store– Customers can order online and pick up the

product at a store


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Business-to-Business Electronic Commerce

• B2B Internet commerce will result in more traffic and more dollar volume than retail sales

• B2B Models– Traditional– Electronic


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Lean and Agile Manufacturing, Mass Customization

• The Dell Model– Phone and Internet orders– Little or no in-process inventory– No finished goods inventory– Purchasing agreements with companies,

universities, and government agencies• Customized Web ordering pages


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Lean Manufacturing (Continued)

• The Cisco Model– Virtual manufacturing– Primarily Internet orders– Web based technical support


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New Businesses on the Web

• The Portal– A place to begin a session on the Internet– Provides services such as search engines,

shopping, online chats, etc.– Revenues generated through advertising and

referrals– Benefits from network externalities and critical

mass– Example• Yahoo!


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• The Hub or Exchange– Electronic broker or intermediary– Connects two groups that wish to interact– Benefits from network externalities and critical

mass– Describes vertical or horizontal marketplaces– Creates a network of firms– Example• Avendra: A vertical exchange in the hotel

industry


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• The Service Provider– Internet service providers• Private networks that connect to the

Internet– Web hosting companies• Develop and host applications for

customers– Application service provider• Offers the use of an application or parts of it

through the Internet to the customer


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New Markets

• A Market needs a central meeting place– The Internet provides the mechanism for such

a meeting – It eliminates time and location barriers that

affect many physical markets e.g., Auctions


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Auctions

• Types of Auctions– Sealed bid auction– Open outcry– Dutch auction

• Auctioneer begins at a high price and then decreases it till the buyer stops the process

• Favors the seller– Reverse auction (or demand aggregation)

• Internet Auctions– Retail auctions: eBay– B2B purchases: FreeMarkets– Reverse auction: Priceline


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Business Models need Revenue Models

• Examples of Revenue Generation in Internet Business Models– Traditional markup on a product sold: Amazon– Allowing other companies fee-based use of Website to

sell products: Amazon– Charging sellers in an auction: eBay– Purchasing airline tickets and hotel rooms at low prices

and selling to customers at a markup: Priceline– Advertising

• Targeted to the interests of the Web customer


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Electronic Commerce: Pervasive Technology

• In a truly electronic business all aspects of strategy and operations involve IT

• The Auto Industry uses IT heavily– EDI– Electronic markets for supplies (e.g., Covisint)– Trends include• Internet based car ordering• Internet enabled cars

– Car manufacturers may even become ISPs


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Atomic Elements to Characterize Business Models

• The firm of interest• A supplier• A consumer• Allies• Electronic relationships• Primary relationships• The flow of money• The flow of product• The flow of information


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Analyzing a Business Model to Evaluate its Value Proposition

• WebVan– Value Proposition

• Home Delivery of Internet ordered groceries to customers– Flow of Information: From Customers to WebVan and from

WebVan to Suppliers– Flow of Money: From Customers to WebVan and from WebVan

to Suppliers– Flow of Product: From Suppliers to Webvan and from WebVan

to Customers– Weaknesses

• Assumed customers would be willing to pay higher prices for convenience and would be able to plan their purchases in advance

• Customers could not inspect merchandise• Company needed costly physical infrastructure


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Summary

• Concept of a Business Model• Internet companies failed for many reasons including

– Lack of knowledge of business processes in entrepreneurs

– Lack of understanding of customers• These failed business models will likely be back in the

future after shedding their flaws• It is important to understand a company’s existing

business model and think carefully about new ones• The Internet does not guarantee success to a

business adopting it

copyright 2004 john wiley & sons, inc.3 - 1 information technology: strategic decision making...

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