Crafting the Network Economy Business Model

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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. Its 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, its 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

• 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

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Crafting the Network Economy Business Model
Concept describes the opportunity and strategy
Value Measures the benefits to investors and
other stakeholders
Capabilities define resources needed to execute
strategy
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Crafting the Network Economy Business Model
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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).

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Classifying the Business Models
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Classifying the Business Models

• Business Built on Networked Infrastructure
• Focused distributors
• Portals
• Producers
• Business That provide networked Infrastructure
• Infrastructure distributor
• Infrastructure Portals
• Infrastructure Producers

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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.

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Classifying the Business Models

• Five type of focused distributors business model
• Retailer
• Marketplace
• Aggregator
• Exchange
• Infomediaries

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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?

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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.

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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.

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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

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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

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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

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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

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Classifying the Business Models

• Portals
• Door way
• Early Pre-Internet Portals
• American Hospital Supplys ASAP
• AA Sabre
• Online consumer portals
• America Online
• CompuServe

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Classifying the Business Models

• Types of Portals
• Horizontal
• Vertical
• Affinity

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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)

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Classifying the Business Models

• Horizontal Portals
• Aol.com , Yahoo and Quicken.com
• Provide gateway access to the Internets 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

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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

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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

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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

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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.

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Classifying the Business Models

• Six categories of producers business model
• Manufacturer
• Service provider
• Educator
• Adviser
• Information and new service
• Producer portal

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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

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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.

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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.

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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.

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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.

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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.

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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

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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

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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