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CHAPTER 7

BUSINESS MODELS AND


STRATEGIES FOR THE
INTERNET ERA

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2003 The McGraw-Hill Companies, Inc., All

The key question in not whether to deploy


Internet technologycompanies have no choice
if they want to stay competitivebut how to
deploy it.
Michael Porter
Professor, Harvard Business School

Our strategy is to integrate the Internet into all


of our core businesses.
Thomas Middelhoff

Quote

CEO, Bertelsmann, AG, Germany

McGraw-Hill/Irwin

2003 The McGraw-Hill Companies, Inc., All

Chapter Outline
The Internet: Technology and Participants
How Internet Technology Impacts Company
and Industry Value Chains
How the Internet Reshapes the Competitive
Environment
Strategic Mistakes Made by
Early Internet Entrepreneurs
E-commerce Business Models
and Strategies for the Future
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The Internet : A Revolutionary Driving Force


Adds an important new distribution channel
An important technological tool
for performing some value
chain activities better and
for bypassing others
Alters the strength of competitive forces
Spawns entirely new industries
Affects a companys competitiveness vis--vis
rivals
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Internet Technology
Internet consists of
Integrated network of users connected

computers
Banks of servers and high-speed computers
Digital switches and routers
Telecommunications equipment and lines

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Suppliers of Internet Technology and


Services
Makers of specialized communications
components and equipment
Providers of Internet communications services
Suppliers of computer components and hardware
Developers of specialized software
E-commerce enterprises

Business-to-business merchants

Business-to-consumer merchants

Media companies

Content providers

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The Impact of Vigorous Competition Among


Alternative Internet Technologies
Often, competing technologies have materially different
pluses and minuses
Competing technologies may well be incompatible,
preventing users of one from interfacing with users of
anotherand costs of parallel systems may be prohibitive
Strategic options for technology rivals:
Invest aggressively in R&D to win technology race
Form strategic alliances to build
consensus for the favored
technological approach
Acquire other companies with
complementary technological expertise
Hedge the companys bets by investing resources in
more than one of the competing technologies
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How Internet Technology Impacts Company


Value Chain Efficiency
Companies can use the Internet and Internet technologies
to improve the efficiency and effectiveness of particular
value chain activities
Powerful tool for better supply
chain management
Internal operationsjust-in-time inventory, gear
production schedules and production quantities to
buyer orders, more accurate monitoring of buyer
preferences and shifts in demand
Collaborative data sharing with
distribution channel partners
online systems reduce
transactions costs
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How Internet Technology Can Revamp


Company Value Chains
Internet technologies allow some value chain
activities to be bypassed entirely
Some manufacturers can build-to-order and sell
direct (thus eliminating traditional wholesalers
and brick-and-mortar retailers)
Online systems facilitate
build-to-order instead
build-for-dealer inventory
The benefits of Internet technology are pervasive,
spawning fundamental changes in the ways business
is conducted internally and with suppliers,
wholesalers, retailers, and end-users.
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How the Internet Reshapes the


Competitive Environment
The Impact on Competitive Rivalry
Use of Internet widens a firms

geographic market reach

Rivalry is often increased by

freshly launched e-commerce


initiatives of existing rivals

Rivalry is often increased by

entry of enterprising dot-com


rivals with sell-direct strategies

Rivalry is often increased when an industry consists

of online sellers against pure brick-and-mortar


sellers against combination brick-and-click sellers

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How the Internet Reshapes the


Competitive Environment (cont.)
The Impact on Barriers to Entry
Entry barriers into e-commerce
are often relatively low
Can be easy for new
dot-coms to gain entry
into some businesses
Can be easy for many
existing firms to expand into
new geographic markets via online sales
When the Internet lowers and industrys barriers to entry, the
outcome is nearly always heightened competition and
stronger competitive pressures for industry participants to
contend with
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How the Internet Reshapes the


Competitive Environment (cont.)
The Impact on Buyer Bargaining Power
Use of Internet allows buyers to gather extensive
information about competing products and brands
Buyers can readily use the Internet to shop the market
for the best deal
Buyer efforts to seek out the best deal spurs
competition among rival sellers to provide the best deal
Internet makes it easier for buyers to join buying groups
and pool their purchases to negotiate better terms and
conditions
Overall impact of Internet is to
increase buyer bargaining power
(or at least to make buyers wiser
and more informed)
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How the Internet Reshapes the


Competitive Environment (cont.)
Impact on Supplier Bargaining Power and Supplier-Seller
Collaboration
Helps companies extend geographic reach for the best
suppliers
Sometimes via online marketplaces or e-markets
Helps companies collaborate
closely with suppliers across a
wide frontfosters long-term
partnerships with key suppliers

Impact on bargaining power is unclearcan enhance or


diminish bargaining power depending on specific
circumstanceshave to assess case-by-case
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Other Strategy-Shaping Features of


Internet Technology
Internet is a force for globalizing competition
Internet and PC technologies are advancing at uncertain speeds and
in sometimes unexpected directions
Internet technologies tend to reduce variable/incremental costs and tilt
the cost structure more toward fixed costs
Some Internet-related businesses have high fixed cost/low
variable cost structure, which accounts for heavy losses until
sales volume builds significantly
Internet results in much faster diffusion of new technology and new
ideas across the world
Widespread adoption of Internet technology puts companies under the
gun to move swiftly - at Internet speed
The Internet can be an economical means of delivering customer
service
The capital for funding new e-businesses is available for ventures with
solidly attractive business models and has dried up for ventures with
dubious prospects
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Difficulty of Relying on Internet Technology


to Gain Competitive Advantage
All companies are rapidly gaining experience in use
and application of Internet technology
Mostly with use of generic, off-the-shelf software

packages readily available to rivals

Most industry participants gravitate to

use of many of the same Internet


technology applications
(and achieving comparable
operating benefits)

Achieving sustainable competitive advantage generally


requires use of proprietary Internet technology not
readily available to rivals
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The First Mover Advantage Myth


Early Internet businesses failed to capture a durable
competitive edge over late-moving rivals because
User/buyer switching costs to
visit/patronize new sites of
competitors are very low (not high
as some once believed)
Network effects (where a sites
features became more valuable as
more people use them) have proven comparatively
weak in blocking competition from rivals and
discouraging Internet users from using multiple
networks

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Strategic Mistakes Made by Early Internet


Entrepreneurs
The mistake of ignoring low barriers to entry
Eager capital providers paved the way
for market overcrowding and fierce rivalry
The mistake of competing solely on the
basis of low price
Price became the predominant attention-getting
competitive variableprice war atmosphere
turned into a battle for market share and profits
later (when volume built to levels high enough
to support fixed costs)
Low price is not a competitive advantage
unless it is accompanied by truly lower costs
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Strategic Mistakes Made by Early Internet


Entrepreneurs (cont.)
The mistake of selling below cost and trying to
make it up with revenues from other sources
(selling site ads, charging partners for clickthroughs to their site, selling data on visitor
browsing patterns)
Foolish to employ price discounting
without offsetting cost advantage
Makes firm reliant on ever-rising
ad revenues to offset losses from
growing unit sales volumes below cost
Ignores strong bargaining power of Internet
advertisers
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E-Commerce Business Models and


Strategies for the Future
Three basic options
A pure dot-com strategy
Combination brick-and-click
strategies
A traditional business that
only uses Internet
technology to improve
operational effectiveness
and value chain efficiency

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Business Models and Strategies for Pure


Dot-Com Enterprises
Successful dot-com strategies tend to incorporate
the following features:
A distinctive strategy that delivers
unique value to buyers and
makes buying online very appealing
Deliberate efforts to engineer a value
chain that enables differentiation or
lower costs or better value for the money
Focusing on a limited number of competencies
and performing a specialized number of value
chain activities where proprietary Internet
applications and capabilities can be developed
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Business Models and Strategies for Pure


Dot-Com Enterprises (cont.)
Successful dot-com strategies tend to incorporate the
following features (cont.):
Having strong capabilities in cutting-edge
Internet technology
Using innovative marketing techniques
that are efficient in reaching the targeted
audience and effective in stimulating purchases (or help
boost ancillary revenues like advertising)
Minimal reliance on ancillary for bottom-line profitability
Keeping the Web site fresh, user-friendly (Southwest
Airlines) , and often entertaining (eBay) or innovative
(audio, video, appealing to eye, interesting content)
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Issues for Pure Dot-Com Enterprises


Broad versus narrow product lines
One-stop shopping (Amazon.com, eBay) or a classic
focus strategy (eToys)
Whether to outsource order fulfillment to specialists or
handle it internally
Whether to employ unconventional
business models and strategies
Yahoo!rely heavily on advertising
Provide information for a fee
Pay per use (software, video games)
Priceline.com

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Brick-and-Click Strategies: An Appealing


Middle Ground Strategy
Gives customers the option of shopping online or in stores
Effective when customers want to
see or inspect before purchasing
Effective when customers want to do
some part of their business in person
and some online (banking)
Many brick-and-mortar enterprises can
enter online retailing at relatively low costs (a web site and
systems for filling and delivering customer orders)
Web ordering can enhance the value of local stores
because they can be used as local stocking and
delivery/pick-up points (Office Depot)eliminates the
need for picking, packing, and shipping from a central
warehouse
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Internet Strategies for Traditional Businesses


Few, if any, businesses can/should avoid making use of
Internet technology to squeeze out internal cost savings
and improve operational effectiveness
Key issue is how to use the Internet to position the
company in the marketplace
Use Internet as
companys exclusive distribution
channel
primary channel
one of several important channels
secondary or minor channel
Solely as a vehicle for disseminating product
information (with traditional distribution channel
partners making all sales to end-users)
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