E-Business and E-Commerce

Session 3 – Business Models for E-business

Prof. Gopinath K
 Business Model
A Business Model is a framework for making money.

It is the set of activities

which a firm performs,
how it performs them, and
when it performs them

so as to

offer its customers benefits they want

and to earn a profit.

Allan Afuah, “Business Models: A Strategic Management Approach”, McGraw-Hill, New York, 2004
 What is a Business Model anyway?
• A business model is an organization's core logic for creating
value.

• Since organizations compete for customers and resources, a

business model must highlight what's distinctive about the
firm-how it wins customers, woos investors, and earns profits.

• Effective business models are rich and detailed, and the

components reinforce each other: change any one and you've
got a different model.

• Large, complex firms frequently have different "unit" models in

each business unit as well as a corporate model that explains
how the entire organization works together to create value.
Framework for Internet based Economy

Commercial Layer

Intermediary Layer

Application Layer

Infrastructure Layer
 Emerging Market Structure

Market Structure B2C Segment B2B Segment

Portals AOL.com ZDNET

MSN.com Cnet.com
Yahoo.com

Market Makers Ebay.com IndiaMart

Priceline.com Udaan
Etrade.com Alibaba

Product/Service Zara Cisco

Providers Netflix Compaq
Warby Parker Dell
Business Model for Internet based E-commerce

Value Revenue
Streams Streams

Logistics
Streams
 Value Streams in Internet-based Business
Buyers Perceive
Added Value
Increased
Better Price
Improved Service
Supplier
Greater Convenience Base
Improved Experience
Other Benefits

Market Maker of Portal

Perceived Added Value
More More
Selling Buying Robust Revenue Stream
High Switching Costs

Suppliers Perceive Added

Value

Reduced Customer Search Costs

Increased
Reduced Supply Chain
Transaction Costs Customer
Reduced promotion efforts More Business Base
for Suppliers
Effects of Free Offerings in Revenue Streams

Adobe
Jio
Online news
 Business Model for Internet based E-commerce

Value Streams Revenue Streams Logistic Streams

• Virtual Communities • Increased margins over • Dis-Intermediation

• Reduction in transaction Brick and Mortar • Infomediation
costs operations • Meta-mediation
• Exploitation of • Revenue from online
information asymmetry seller communities
• Value-added market • Advertising
making process • Variable pricing
strategies
• Revenue from
information asymmetry
• Free offerings
▪ New, powerful methodology to
systematically develop innovate
business models
Quiz question: How to innovate a black sock?
Blacksocks: Sockscription TM

European sock subscription service and online retailer

▪ Founded in 1999
▪ Idea: Receive 3, 4 or 6 deliveries per year
of the identical socks
▪ Each SockscriptionTM lasts 1 year
▪ More than 40,000 customers from 74
countries

https://www.blacksocks.com/en/pages/our-story
Business model innovation is a major source of competitive
advantage which is superior to other forms of innovation
Percent compound annual growth rate over 5 years
6

-1
Product/service Process Business model
innovation innovations innovation
 Business model innovation is at the top of the
management agenda
More than 50% of executives believe that in future
competition takes place not between products or
services, but between business models.
Source: Economist Intelligence Unit

Business model innovation matters

and it is a top priority of CEOs.
Source: IBM

More than 60 % of executives believe

that their business model will undergo
fundamental changes in the next 5
years.
Source: IBM

Emphasize business-model innovation as much as

business protection.
Source: IBM (2023)
Evolution of Innovation Management: trend towards
Open Innovation and Business Model Innovation
Solutions

Business
Models FUTURE

Service /
Process
PRESENT

Product /
Technology
PAST

Lonely inventor Corporate Open Innovation Era

Innovation
Business model innovation allows companies to
escape from cutthroat competition

Traditional business model: Business model innovation:

▪ High level of service ▪ No frills approach
▪ Main airports ▪ Secondary airports
▪ Hub-and-spoke system ▪ Point-to-point system
Business model innovation allows to capture the
value of technology or product innovation

Turning Invention into a Scalable Business

Creating an Ecosystem
Monetizing the Experience
Mass Production and Commercialization
Business model innovation plays a key role in capturing
the value of product or technology innovation -
Example Apple

Traditional
Business Model
Product / Technology
Innovation X Value

+ =

Business Model
Innovation
Business model innovation plays a key role in capturing
the value of product or technology innovation -
Example Apple

Product / Technology
Value
Innovation

+ = • 10 billion USD revenue

after 3 years
MP3 Business Model
• Market capitalization
from 2.6 billion USD
Innovation (2002) to 33 billion
USD (2007)
This image cannot
currently be display
ed.
Examples of successful business model innovators that
were able to capture the value of new technologies

3-D printer
Internet / Data
Voice over IP
mining

Cloud computing

Genetics
GPS
Internet
Digital
photography

mp3
 One explanation is a lack of systematic tools to
develop innovative business models
«There are multiple tools and Which methods and tools are used to develop
methods to come up with new business model ideas?
product ideas but nothing to In percent
support idea generation for 100
business models»
80

«Business model innovation 60

is more like a coincidence 60
and connot be initiated
sytematically» 40

20 20
20
«The real innovative
business model ideas can
only be developed by the 0
creative genius» No tools Strategy Brainstorming
tools techniques

Source: Frankenberger et al., (2013), International Journal of Product Development

 Business model innovation myths: Overcome them to
successfully innovate your business model
Initial • Ideas no one had
Ascent • Borrow from other industries
myth
R&D Think Big • Radical, new to the world
• R&D source of innovation myth myth • Incremental
• Interdisciplinary

BMI
• Big breakthrough – big Techno- • Fascinating superior
resources Size myths tech.
• Startups revolutionize BM myth logy • Creative, economic
myth potential

Einstein Luck
myth myth • Not systematic
• Creative genius required • Persistence and drive
• Ipod – Tony Fadell
• Interdisciplinary
The goal was to develop a construction methodology
for business model innovation
Research Question:
Are there any recipes that can be used by companies to systematically
generate innovative business model ideas?

Approach:

Define Analyze Extract

Define a theoretical Analyze more than Extract the patterns

framework of how to 350 business model responsible for
describe a BM/BMI innovations from the successful business
last 50 years model innovations
 Business Model Definition
What is offered to the
customer?
The magic triangle

How is the value

Why is the proposition created and
business delivered to the
profitable? customer?
Who is the target
customer segment?

A business model is a blueprint of how a company creates and

captures value.
 Business model elements
Who? (customers) What? (value proposition)
• What customers and customer segments • What customer problems do we solve and
do we mainly serve? what needs do we meet?
• What kinds of relationships do our • What are the products and services we put
customers expect and how do we maintain in place to accomplish this?
them? • What is the perceived customer value?
• Who are our most important customers? Usually this is not the same thing as a
• Who are the other important stakeholders product or service’s technical specifications.
that need to be considered? • What value or benefit do we create for
• What distribution channels do we use to customers? How do we communicate it?
serve our customers? • How do our offerings differ from those of
• Who influences our customers (opinion our competitors? What alternatives do
leaders, stakeholders, users)? customers have?
• Do different departments address the • Does our current business model meet our
same customer segments differently? customers’ needs fully?
• What people are behind our customers?
Will the same people be here for the next
ten years?
 Business model elements
How? (value chain) Why? (profit mechanism)

• What key resources are behind our • Why will the customer pay for our
offerings and value proposition (e.g. product or service?
physical, labour, financial resources, • What are our main sources of
intellectual property)? income?
• What competencies and key activities • How is the income generated?
do we need? • What are customers willing to pay
• Does our value chain make full use of for?
our core competencies? • What are our main costs and the
• Who are our most important partners? most significant cost drivers?
What is their relation to our business • What are the main financial risks
and what do they bring us? in our current revenue model?
• Who are our most important suppliers
and partners and what do they
contribute?
 Business Model Innovation

Change in the What,

Who, How and/or Why

Business model Business model innovation

A business model innovation introduces a new logic of how a

company creates and captures value by changing multiple
dimensions of a business model.
 Creative Imitation & Recombination

• Ninety per cent of all new business models

aren’t actually new. They are based on 55
existing patterns.
• Creatively imitating business models from
other industries can empower your business
to become an innovation leader in your
industry.
• Just remember: learning and understanding is
more important than pure copying.
 The Business Model Navigator:
A systematic approach for developing innovative
business models
 Business Model Innovation - Dell

Old: Pre-configured computer

New: Mass customized computer

Old: Retail margin

High inventory costs
Positive cash conversion cycle
Component prices as main cost driver
New: Old: Built-to-stock/
Skip retail margin Selling through retail network
Lower inventory costs New: Built-to-order production/
Negative cash conversion cycle Direct selling
Lower component prices

Old: Private users, companies

New: -
 Business Model Innovation
Example Skype
Old: Calls are costly, especially international
New: Free VOIP based video calling /
cheap calls to phones (SkypeOut)

Old: Maintenance of own

Old: Charge for each phone call telecommunication infrastructure
New: 90 % of Skype users New: No own infrastructure, mainly
subscribe to the free version / 10 software development
% of Skype use SkypeOut

Old: Mass market

New: Mass market (especially
global web +smartphone users )
 Business model pattern «Razor and Blade»
What?

The basic product is cheap, or given away free. The

Who?
consumables that are needed to use or operate it, on
the other hand, are expensive and sold at high margins. Why? How?

Standard Oil Gillette Hewlett- Nestlé Apple Amazon Better Nestlé Nestlé
Company (1904) Packard Nespresso
iPod/iTunes Kindle Place Special.T BabyNes
(1880) (1984) (1986) (*) (2003) (2007) (2007) (2010) (2012)

(*) reverse ‘Razor and Blade’

 Business model pattern «Freemium»
What?

The basic version of an offering is given away for free in

the hope of eventually persuading the customers to pay
Who?
for the premium version.
Why? How?

Hotmail SurveyMonkey LinkedIn Skype Spotify Dropbox

(1996) (1998) (2003) (2003) (2006) (2007)
 Business model pattern «Peer-to-Peer»

What?

This model is based on a cooperation that specializes

in mediating between individuals belonging to an Who?

homogeneous group. It is often abbreviated as P2P. Why? How?

eBay Couchsurfing Zopa Airbnb TaskRabbit RelayRides

(1995) (2003) (2005) (2008) (2008) (2010)

Hospitality exchange People list, find, P2P Online and mobile

and social P2P lending and rent lodging carsharing marketplace that allows
networking website marketplace users to outsource small
jobs and tasks to others in
their neighborhood.
 Business model pattern «Self-Service»

What?

A part of the value creation is transferred to the customer in

exchange for a lower price of the service or product. This is
particularly suited for process steps that add relatively low Who?

perceived value for the customer, but cause high costs. Why? How?

McDonald’s IKEA Accor Mobility BackWerk

(1948) (1956) (1985) Carsharing (1997 ) (2001)

"Super low budget" or "no Self-service

frills" hotels bakery
 Business model pattern «Subscription»
What?

The customer pays a regular fee, typically on a monthly

Who?
or an annual basis, in order to gain access to a product
or service. Why? How?

Premiere blacksocks Salesforce Jamba Dollar Shave Club

(1990) (1999) (1999) (2004) (2012)

Premium-rate
Listed Pay TV in Germany and Austria monthly SMS Razors and other
mobile phone personal
content provider grooming products
in Germany by mail.
 Add-on
Additional Charge for Extra
The core offering is priced competitively, but there are numerous extras that drive
the final price up. In the end, the costumer pays more than he or she initially
assumed. Customers benefit from a variable offer, which they can adapt to their
specific needs.
 Affiliation
Your success is my success
The focus lies in supporting others to successfully sell products and directly benefit from
successful transactions. Affiliates usually profit from some kind of pay-per-sale or pay-per-display
compensation. The company, on the other hand, is able to gain access to a more diverse
potential customer base without additional active sales or marketing efforts.
 Aikido
Convert competitors strength into weaknesses
Aikido is a Japanese martial art in which the strength of an attacker is used against him
or her. As a business model, Aikido allows a company to offer something diametrically
opposed to the image and mindset of the competition. This new value proposition
attracts customers who prefer ideas or concepts opposed to the mainstream.
 Auction
Going once, going twice,…Sold!
Auctioning means selling a product or service to the highest bidder. The final price is achieved
when a particular end time of the auction is reached or when no higher offers are received. This
allows the company to sell at the highest price acceptable to the customer. The customer benefits
from the opportunity to influence the price of a product.
 Barter
Tit for tat
Barter is a method of exchange in which goods are given away to customers without the transactio
of actual money. In return, they provide something of value to the sponsoring organisation. The
exchange does not have to show any direct connection and is valued differently by each party.
 Cash Machine
Coining money with negative working capital
In the Cash Machine concept, the customer pays upfront for the products sold to the customer
before the company is able to cover the associated expenses. This results in increased liquidity
which can be used to amortise debt or to fund investments in other areas.
 Cross-selling
Killing two birds with one stone
In this model, services or products from a formerly excluded industry are added to the offerings,
thus leveraging existing key skills and resources. In retail especially, companies can easily provide
additional products and offerings that are not linked to the main industry on which they were
previously focused. Thus, additional revenue can be generated with relatively few changes to
the existing infrastructure and assets, since more potential customer needs are met.
 Crowdfunding
Taking finance by swarm
A product, project or entire start-up is financed by a crowd of investors who wish to support the
underlying idea, typically via the Internet. If the critical mass is achieved, the idea will be
realized and investors receive special benefits, usually proportionate to the amount of money
they provided.
 Crowdsourcing
Outsourcing to the crowd
The solution of a task or problem is adopted by an anonymous crowd, typically via the Internet.
Contributors receive a small reward or have the chance to win a prize if their solution is chosen
for production or sale. Customer interaction and inclusion can foster a positive relationship with
a company, and subsequently increase sales and revenue.
 Direct Selling
Skipping the middlemen
Direct selling refers to a scenario whereby a company's products are not sold through
intermediary channels, but are available directly from the manufacturer or service provider. In
this way, the company skips the retail margin or any additional costs associated with the
intermediates. These savings can be forwarded to the customer and a standardized sales
experience established. Additionally, such close contact can improve customer relationships.
Result: 90 percent of business model innovation is a
recombination of 55 business model patterns

Business Model Innovation Map

Source: Gassmann, Frankenberger, Csik (2013)
© 2014 Holcim Ltd
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