Crafting the Network Economy Business Model Some of the best innovations involve a paradigm shift, a real mental change of assumptions and certainties. In fact, the process of innovating and entrepreneuring is much less about invention or new ideas. It’s much more about rethinking and questioning the assumptions people already make… The ability to rethink fundamental assumptions and take what people accept as certain and question it [is the central] talent of being an entrepreneur. Scott Cook, Founder of Intuit Inc. If there is one lesson we can learn from continuing evolution of work and competition in the new economy, it’s this … Change the question and you change the game… Slywotsky and Morrison, Profit patterns (NY Times Business, 1999)
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Crafting the Network Economy Business Model
Some of the best innovations involve a paradigm shift, a real mental change of assumptions and certainties. In fact, the process of innovating and entrepreneuring is much less about invention or new ideas. It’s much more about rethinking and questioning the assumptions people already make… The ability to rethink fundamental assumptions and take what people accept as certain and question it [is the central] talent of being an entrepreneur.
Scott Cook, Founder of Intuit Inc.
If there is one lesson we can learn from continuing evolution of work and competition in the new economy, it’s this … Change the question and you change the game…
Slywotsky and Morrison, Profit patterns (NY Times Business, 1999)
Crafting the Network Economy Business Model
Old economy question What business am I in?
New network economy question What is my business model?
Emerging networked technology enable us to create new business model and redefine existing ones. IT can provide flexible channel for procuring and
distributing products and services As well as the tools to create and package content in
all its many forms Data, voice, video
Crafting the Network Economy Business Model
Concept describes the
opportunity and strategy
ValueMeasures the
benefits to investors and
other stakeholders
Capabilities define resources
needed to execute strategy
Crafting the Network Economy Business Model
Classifying the Business Models
Producers Design and build products and services that customer
or market needs May sell, service, and support the product
Distributors Enable buyers and sellers to connect, communicate,
and transact business. May assume control of inventory and resell a product,
solution or service (retailers, wholesalers). May simply act as agents, connecting buyers and
suppliers but no assuming control of inventory (aggregators, marketplaces, and exchanges).
Classifying the Business Models
Classifying the Business Models
Business Built on Networked Infrastructure Focused distributors Portals Producers
Business That provide networked Infrastructure Infrastructure distributor Infrastructure Portals Infrastructure Producers
Business Built on a Networked Infrastructure
Focus Distributor Provide products and services related to
a specific industry or market niche E.g. InsWeb and E-Loan as focused
distributors offering products and services within the financial services industry.
Staples.com was a focused distributor for office products and suppliers.
Classifying the Business Models
Five type of focused distributors business model Retailer Marketplace Aggregator Exchange Infomediaries
Classifying the Business Models
These five types can differentiated by asking the following questions Does the business assume control of
inventory? Does the business sell online? Is the price set outside the market, or is
online price negotiation and bidding permitted?
Is there a physical product or service that must be distributed?
Classifying the Business Models
Focus Distributors: Retailers E.g. ToysRus and Staples.com
Assume control of inventory, set a nonnegotiable price to the consumer, and sell physical products online.
The primary revenue model is based on product/service sales,
The cost model includes procurement, inventory management, order fulfillment, and customer service.
Classifying the Business Models
Focus Distributors: Marketplaces E.g. E-Loan and InsWeb
Sell products and services but do not take control of the physical inventory.
Sell products with a nonnegotiable price and complete sales online.
The revenue model is based on a commission or transaction fee for sale.
Usually e-link to supplier databases and transaction systems to ensure that transactions can be completed and revenue can be recognized.
Classifying the Business Models
Focus Distributors: Aggregators E.g. Autoweb
Provide information on products or services for sale by others in the channel.
Allow a comparison of features and pricing but do not enable buyers and sellers to complete the final transaction
The revenue model is based on referral fees and advertising
Classifying the Business Models
Focus Distributors: Infomediaries Internet Securities
Special type of aggregators that unites sellers and buyers of information-based products, such as news, weather, sports, and financial information.
Transaction can be completed online because no physical product is involved
Revenue model include subscription fee, advertising
Classifying the Business Models
Focus Distributors: Exchanges eBay and FreeMarket
May or may not take control of inventory May not complete the final sales transaction online The key differentiating feature of this model is that the
price is not set; it is negotiated by the buyer and the seller at the time of the sale.
The revenue, cost, and asset models vary depending on weather the online exchange assumes control of inventory and completes the transaction.
B2B auction exchanges such as FreeMarket charge transaction fees and supplement revenues with fees for consulting services.
B2C and C2C exchanges often supplement transactions revenues with advertising revenues
Focused Distributor Business Models
Models and Examples
Own Inventory
Sell Online
Price set Online
Physical product or service
Likely Revenues
Likely costs
Retailer ToysRus.com Staples.com
Yes Yes No Yes Product/service sales
Advertising and marketing; physical facilities; inventory and customer services; R&D; IT infrastructure
Marketplace Eloan.com nsweb.com
Possible Yes No No Transaction fees; service fees; commissions
Advertising and marketing; R&D; IT infrastructure
Aggregator Internet Securities
No No No Possibly Referral fees; advertising and marketing fees
Advertising and marketing; R&D; IT infrastructure
Exchange ebay.com freemarket.com
Possibly Possibly Yes Possibly Depends on model
Advertising and marketing; staff support for auctions (especially B2B)R&D; IT infrastructure; inventory control; R&D; technical infrastructure.
Focused Distributor Business Models Trends
Focused distributors that do not allow customers and business community to transact business online are losing power
Aggregators are evolving into marketplaces and/or vertical portals
Multiple business models are required to ensure flexible and sustainability
Focused distributors are aligning closely with vertical and horizontal portals or are evolving their model to become vertical portals
Classifying the Business Models
Portals “Door way” Early Pre-Internet Portals
American Hospital Supply’s ASAP AA Sabre
Online consumer portals America Online CompuServe
Classifying the Business Models
Types of Portals Horizontal Vertical Affinity
Classifying the Business Models
The different types of portal can be differentiated by:
Does the business provide gateway access to a full range of online information and services, including search, calendar, e-mail, instant messaging, chat, and other community-building tools
Does the business provide access to deep content, products, and services within a vertical industry (e.g. financial services, travel, etc.)
Does the business provide information and services for all types of users, or are information and services specific to a well-defined affiliation group (e.g. women, people selling or buying a home)
Classifying the Business Models
Horizontal Portals Aol.com , Yahoo and Quicken.com
Provide gateway access to the Internet’s vast store of content and services.
Provide a broad range of tools for locating information and websites, communicating with others, and developing online communities of interest.
Revenue models Advertising Transaction fee from multiple vertical solutions channels. Strategic alliances with dial-up and broadband Internet
service providers (ISP) Cost includes development, maintenance, and operation
of infrastructure and content
Classifying the Business Models
Vertical Portals E.g. Covisint and WebMD
Provide deep content: a place to conduct business, learn, and shop; communicates and community-building tools
Often composed of a variety of business models, all of which generate separate revenue streams. Advertising and referral fees if transactions are not
completed online Service fees and transaction fees may be generated
if transactions are completed online Subscription fees may also be generated for unique
content
Classifying the Business Models
Affinity Portals iVillage.com and Realtor.com
Provide deep content, commerce, and community features such as those found in vertical portal but these offerings are targeted toward a specific market segment.
Some towards a specific gender The revenue model is similar to vertical
portals, cost, and asset models are based on business model adopted by the portal
Portal Business Models
Models and Examples
Gateway Access
Deep Content
and Solutions
Affinity Group Focus
Likely Revenues
Likely costs
Horizontal Portal AOL.comYahoo.comQuicken.comSmall business
Yes Possibly; often through partnership with vertical and affinity portals
Possibly; often partnerships
Advertising, affiliations and slotting fees; possibly subscription or access fees
Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure
Vertical Portal WebMD.comCovisint.com
Limited Yes No Transaction fees; commissions; advertising, affiliation and slotting fees
Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure; legacy system integration to support transactions
Affinity Portals Realtor.com iVillage.com
Possibly Focused on affinity group
Yes Referral fees; advertising and slotting fees
Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure
Portal Business Model Trends
Horizontal and vertical portals are emerging as dominant sources of power within consumer and business markets
Horizontal portals are joining forces with horizontal infrastructure portals to provide not just access to content and services but also access to network and hosting services
Large media and entertainment portals that represent the convergence of data, telephone, television, and radio networks are emerging in the consumer space. These portals unite content development, packaging, and
distribution components of the value chain
B2B portals provide both horizontal access to business networks and vertical industry-wide solutions
Classifying the Business Models
Producers Producers design and make also may directly market, sell, and
distribute products, services, and solutions.
Producers held the position of power in the traditional business market
In contrast, the Internet and associated networked technologies of the Network Economy create wealth by connecting buyers and suppliers.
Many believed that distributors would become the dominant players in the Network Economy. Gaining control of the distribution channel is a key success
factor in the today Producers are also thinking of taking steps to recapture the
position of power by forming coalitions with distributors Covisint in the automobile industry and Global Healthcare
Exchange in the health-care industry.
Classifying the Business Models
Six categories of producers business model Manufacturer Service provider Educator Adviser Information and new service Producer portal
Classifying the Business Models
Differentiating between producers Does the business sell physical products
and/or provide face-to-face services
Does the business sell information-based products and/or services
Does the business provide customized products and/or services
Producer Business Model
Manufacturer Ford Motor Company and Procter & Gamble
Design, produce and distribute physical products, components and parts
The Internet and associated networked technologies has been used to streamline, integrate, coordinate, and control physical channels of production and distribution.
Often these IT-enabled process redesign efforts often begin inside the organization and extend to connect customers, suppliers, and partners.
Producer Business Model
Service Providers American Express and Singapore Airlines
Offer a wide range of services offerings that may be delivered through multiple channels.
Like manufactures of physical producer, service providers that offers physical services (e.g. car rental agencies, restaurants, etc.) often use it to streamline, integrate, coordinate, and control service delivery and to connect and share information with customers, suppliers, and partners.
Service providers that offers primarily information-based services (e.g. financial services) can use IT to digitize service delivery.
Producer Business Model
Educator DePaul, Harvard, and Virtual Universities
Create and deliver online educational programs, products, and services.
The ability to use the Internet and associate technologies to define new multimedia educational offerings and to customize those offerings to meet of individual and businesses is revolutionizing education.
Distance will never replace face-to-face class room education offerings.
Producer Business Model
Advisers McKinsey and Accenture
Consulting and coaching services to business and individuals.
Use online to extend the nature of the relationship with customers from a one-time consulting project to an ongoing education and advisory service.
Online channels can used to disseminate knowledge, connect consultants with their clients, and create communities of interest.
Producer Business Model
Information and News Services Dow Jones and Euromoney
Create packages and deliver information through both online and offline channels and across multiple media formats
Because information in all its many forms can be digitized, stored, and delivered to meet personalized needs, we convergence among polishing, television, radio, and information industries.
Producer Business Model
Producer Portal Covisint and Global Healthcare Exchange
Use the Internet and associated technologies to support all aspects of the production and distribution process
Portal Business Models
Models and Examples
Sale Physical Product/ Services
Sale Information
-based Product/ Services
Level of customization
Likely Revenues
Likely costs
Manufacturers Ford Motor Company Procter & Gamble
Yes Possibly Low to moderate
Product sales; services
Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure
Service ProvidersAmerican Express Singapore Airlines
Yes Possibly Moderate to high
Commissions, service, or transaction fees
Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure
Educator DePaul.eduHarvard.edu
Possibly Possibly Moderate to high
Registration or event fee; subscription fee; hosting fee
Content/information asset management; R&D; IT infrastructure
Portal Business Models
Model differentiators
Models and Examples
Sale Physical Product/ Services
Sale Information
-based Product/ Services
Level of customization
Likely Revenues
Likely costs
Information and news Services Dow JonesEuromoney
Yes Yes Moderate to high
Subscription fee; transaction fee; or service fee
Advertising, marketing and sales; content/information asset management; R&D; IT infrastructure
Producer Portal Covisint Global Healthcare Exchange
Possibly Yes High Service or transaction fee; membership fee; Consulting and integration fee; hosting fee
Content/information asset management; R&D; IT infrastructure; software development logistics
Producer Business Model Trends
Producers must be best in class – the number one or two brand – to survive
Some large full-service producers, such as American Express and Citigroup in the financial services industry and AOL Time Warner in the entertainment and media industry, are acquiring a full range of products and services and then integrating them to provide vertical solutions required by customers. This solutions are offered through company-owned portals and
also through a wide variety of distribution agreements.
Industry supplier coalitions are forming to enable virtually integrated B2B commerce within and across industry groups
Businesses that Provide Networked Infrastructure
Until recently, there was a distinct separation between businesses that were built using IT and those developing and selling IT.
“Charles Schwab is a technology company that just happens to be in the brokerage business. Everything we think about as we run our business has technology in the center of it with the goal of engineering cost down and service up…” David Pottruck co-CEO of Charles Schwab
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