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Unit 6

Business Models

Structure
6.1 Introduction
Objectives
6.2 Evolution of Internet Business Models
6.3 Business Models in Practice
6.4 Business Model: The Six Components
6.5 Summary
6.6 Glossary
6.7 Terminal Questions
6.8 Answers
References

6.1 Introduction
In the previous units, you have learned that e-commerce is a business transaction
that is performed using an electronic medium. This unit discusses the types of
transactions in an e-commerce. A transaction in an electronic market describes
the number of interactions between parties, for example, ordering, making
payment, supporting delivery and of course marketing.
One must therefore have a marketing strategy for transacting commerce
through which a corporation maintains itself and generates revenue. Business
models are created for the purpose of trying to answer the following questions:
(i) How can you get competitive advantage?
(ii) Which product-market strategy should be followed?
(iii) What should be the marketing mix?
Business models are defined as, A set of shared common characteristics,
behaviour and methods of doing business that enables a firm to generate profits
through increasing revenues and reducing cost.

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Raw material producer

Manufacturer

Business-to-Business

Distributor
Retailer
Consumer

Business-to-Business

Thus, in this unit, you will learn about the evolution of the Internet business
models and the business models that are currently in vogue. The latter is of
three types, namely business-to-business (B2B), business-to-consumer (B2C)
and consumer-to-consumer (C2C). It will also familiarize you with the six
components of a business model. This will help you to differentiate between a
business model and a revenue model. This unit will also elaborate on the role of
business models. To get value from a new product, a firm needs a proper
business model. You will learn how business models differ from business strategy,
and about entrepreneurial advantage.

Objectives
After studying this unit, you should be able to:
Discuss the evolution of Internet-based business models
Evaluate the business models in practice
Identify the components of business models
Summarize the functioning of business models vis--vis revenue models
State the role of a business model
Differentiate between business model and business strategy
Classify the advantages of entrepreneurship

6.2 Evolution of Internet Business Models


In the past few years, e-commerce has pervaded every aspect of daily life. In a
very short time since its evolution, both people and institutions have used Internet
technologies to increase production, increase convenience and enhance
communications worldwide. The Internet has become integral to daily activities
from banking to shopping and entertainment. For example, just a few years
ago, many people went into a bank and interacted with other people to conduct

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regular banking. Today, people have embraced the automated teller machine
(ATM) that has made banking easy. Today, millions of people rely on the Internet
banking services for their banking needs.
The fast expansion and general acceptance of online business has people
wondering as to why this e-commerce did not happen earlier. The answer is
quite simple; the technology and infrastructure needed were not there to support
e-commerce. Consider, the example of computersmany business enterprises
used large mainframe computers with private data formats. These were not
easy to share with home or office users. The ubiquitous personal computers
(PCs) were not generally available. Thus, only a few computers outside the
business circle could get that information. Even when PCs became popular,
both in offices and at homes, the ability to process business was restricted.
This was because the infrastructure needed was not available.
At the same time, to set up an online or e-commerce earlier, it required
the individual company to develop the whole technology infrastructure. It was
required to develop its own business and marketing planning. However, these
days this is not the case. Now the only problem of an e-commerce is how to
integrate its business, because now many companies have resolved the complex
work of (i) developing individual Internet-based products and (ii) services that
take care of the problems of customer and supply interactions. Nevertheless,
the real challenge is the ability to combine these technologies and services
based on solid business and marketing plans, working on a real-time basis.
Today, the growth of e-commerce is at a fast pace as both organizations
and consumers have access to the Internet, either from their homes or offices.
Thus, there is excitement and the potential for success has also grown. At the
same time, the tremendous growth of the Internet has led to challenges of
increased integration of e-commerce of all capability and capacity.
The growth of e-commerce can be studied at two phases. Companies in
the first phase set up e-commerce, when e-commerce technology was new to
the market.
The trend of companies that set up e-commerce in the first phase are as
follows:
Business organizations rushed to get an e-commerce website up.
Little or no regard was given to check how scalable or reliable the site
needed to be.
It was a matter of beating competition.

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Another drawback of these first-to-market consumer sites was that there


was no or little integration with the production side of the business. The production
part of the business tried to establish its own online-based relationship with
suppliers. Thus, the lack of integration proved to be a major obstacle for many
business organizations. This was due to:
Growth of customer base
Request for real-time order status
Return of products
Today, in the second phase of establishing an e-commerce, owning a
website is not considered to be a way to distinguish a business. The expectations
of customers and suppliers have increased manifold. Organizations are forced
to start planning about integrating the back-end and real-time transaction
processing. Business organizations should maintain a complete customer
supplier relationship with the help of Internet-based technologies and join those
systems to the interpersonal aspects of the business transaction when needed.
Many businesses have realized the prospects of e-commerce and are addressing
the whole business cycle and controlling the Internet technologies.
It can be concluded that these days, online business has the power to
change the business scene. Previously, the business model of a company was
considered to be the basic determination of its value. Nowadays, the value of a
company is based on its strategy, business model and its ability to sell.
Technology has started a new competition. Businesses using Internet
technologies and integrating their systems and processes more efficiently now
break the barriers and make it to the Fortune 500 stalwart. These start-ups are
able to vastly reduce the obstacle to entry while significantly increasing their
own market reach. This has been possible due to the following:
(i) Capitalizing on a continuous business proposal
(ii) Rightly applying technology.
In e-commerce, the motto is first to market equals first to success.
Nevertheless, a sound foundation has to be made. Using Internet technologies
is important to be successful in this business.

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Self-Assessment Questions
1. State whether the following statements are true or false.
(a) Today, both people and institutions use Internet technologies to
increase production and enhance communications worldwide.
(b) Companies in the first phase set up e-commerce when e-commerce
technology was in its infancy.
2. Fill in the blanks with the appropriate words.
(a) One of the drawbacks of the first-to-market consumer sites was that
there was no integration with the _________of the business.
(b) Today, the value of a company is based on its strategy, business
model and_______.

6.3 Business Models in Practice


There are three fundamental types of business models in practice. These are:
1. Business-to-Business (B2B)
2. Business-to-Consumer (B2C)
3. Consumer-to-Consumer (C2C)
Table 6.1 Summary of E-Commerce Model
Model

Description

Example of Website

Business-toConsumer

Goods or services sold


directly to consumers

pets.com, edirects.com,
amazon.com, autobytel.com

Business-toBusiness

Goods or services sold


between business and
other businesses

verticalnet.com,
metalsite.com,
shop2gether.com

Business-toGovernment

Goods or services sold to


government agencies

igov.com

Consumer-toConsumer

Goods or services sold


between consumers

ebay.com, inforocket.com

Consumer-toBusiness

Consumers fix the cost of


their goods or services for
other consumer

priceline.com

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1. Business-to-Business Model
The business-to-business (B2B) model needs two or more business
organizations that do business with each other. It entails commercial activity
among companies through the Internet as a medium. At present, there are
many types of e-commercees. The B2B e-commerce is of the following types:
(a) Supplier oriented
In this type of B2B e-commerce, a supplier establishes the electronic market
where a number of customers or buyers transact with suppliers. Generally, it is
done by a supplier which has monopoly over products that it supplies.
(b) Buyer oriented
In this type of B2B electronic commerce, big business organizations with high
volume purchase capacity creates an e-commerce marketplace for purchases
and gains by starting a site of their own. The online e-commerce marketplace is
used by buyers for placing requests for quotations and carrying out the entire
purchase process.
(c) Intermediary oriented
In this type of B2B e-commerce, a third party establishes the e-commerce
marketplace and attracts both buyers and sellers to interact with each other.
Application of B2B model
Some of the applications of B2B model are, inventory management, channel
management, distribution management, order fulfilment and delivery payment
and payment management.
2. Business-to-Consumer Model
The business to consumer model clearly concentrates on individual buyers and
is thus known as Business-to-Consumer (B2C) model. The B2C model offers
consumers the capabilities to browse, select and merchandise online from a
wider variety of sellers and at better prices. The B2C e-commerce interaction is
most appropriate for the following types of transactions:
(i) Easily transformable goods, i.e., products that are easily transformable
into digital format, such as videos, software packages, music books, and
so on
(ii) Highly rated branded items or items with return security
(iii) Items sold in packets that are not possible to open in physical stores
(iv) Items that follow standard specification

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The following steps summarizes the working of B2C:


(i) The customer identifies his/her need.
(ii) Then, the customer looks for the product or service that suit his/her needs.
(iii) The customer selects a vendor and negotiates a price.
(iv) The customer then receives the product or service.
(v) The customer makes the payment for the received product service.
(vi) The customer gets the services and warranty claims that are associated
with the product.
3. Consumer-to-Consumer Model
In a consumer-to-consumer (C2C) model, consumers sell directly to other
consumers via online classified advertisements and auctions or by selling
personal services or expertise online. The C2C model involves the growing
popularity of peer-to-peer (P2P) software that facilities the exchange of data
directly between individuals over the Internet.
Table 6.2 Summary of Business Models
Model

Description

Example

B2B

One business sells products or services


to other businesses

metalsite.com

B2C

Business sells products or services


directly to consumers

amazon.com

C2C

Consumer sells
consumers

directly

to

other

ebay.com

Activity 1
Research on the Net and prepare a table showing the evolution of business
models and the contributions of important personalities towards the same.

Self-Assessment Questions
3. State whether the following statements are true or false.
(a) There are four basic types of business models.
(b) In consumer to business models, consumers fix the cost of their
goods or services for other consumers.

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4. Fill in the blanks with the appropriate word.


(a) A_______needs two or more business organizations that do business
with each other.
(b) In intermediary-oriented B2B e-commerce, a______establishes the
e-commerce marketplace and attracts both sellers and buyers to
interact with each other.

6.4 Business Model: The Six Components


According to Henry Chesbrough and Richard S. Rosenbloom there are six
components of a business model, namely :
(i) Value proposition
(ii) Market segment
(iii) Value chain structure
(iv) Revenue generation and margins
(v) Position in the value network
(vi) Competitive strategy.
(i) Value proposition: It has three components as follows:
(a) It is an explanation of any problem faced by a customer.
(b) It is about the resolution of that problem
(c) It is the value of this resolution from the customers point of view.
(ii) Market segment: Since diverse market segments have different
requirements, it boils down to which group to target. At times, the full
benefit of a new product development is realized only when a new market
segment is focused.
(iii) Value chain structure: The concept of value chain structure demonstrates
the company's place and the value addition tasks done by it in the value
chain. It also shows in what ways the company captures part of the value,
which it has helped to add in the chain.
(iv) Creation of revenue and profits: It means how income is created in the
business, such as rental, sales, subscription, and so on. It also includes
revenue made from the target profit margins and the cost structure.
(v) Place in the value network: It identifies competitors and sellers whose
products, services or relationships create more demand for your product.
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It also looks for other effects in the business network that might be used
to give more value to the customer.
(vi) Competitive strategy: It refers to the ways in which a business
organization tries to expand a permanent competitive benefit and utilize it
to advance the competitive situation of the company in the market.

6.4.1 Business Model vs Revenue Model


The term business model is a broad term that explains things, such as the
place of a business organization in the value chain, the choice of the customers,
products and the cost of doing business. The business model plans the course
through which the company would in fact make profit. It states clearly the price
it would charge the customers.
The old model corporations have been discredited as overmanaged,
overcontrolled and overstructured but underlet. Thus, todays top managers
should focus on their real managerial skills that would bring success to the firm
in the future. Today, a brand latest business model has come up. Here many of
the important tasks of the company are delegated to the different individual
parts, but synergy results from the vigour of the employees and unrestricted
flow of information.

6.4.2 Role of a Business Model


To profit from an innovation in a product or a service, a new firm or a start-up
needs an appropriate business model so that it is able to exploit its innovation
and be the market leader. Business models are needed to bring in new
technology that will yield an economic value. As the old and familiar business
models cannot be used for all new firms, new business models are planned.
The importance of the business model cannot be denied, because in many
cases the profitability of the innovation rests more on the business model itself
than on the product or service provided by the innovation. In their paper, The
Role of the Business Model in Capturing Value from Innovation, Henry
Chesbrough and Richard S. Rosenbloom provide a crucial structure explaining
the basics of a business model. As there is a complex inter-play of markets,
products and the environment in which a business organization runs, it is very
difficult to understand the organizations responsibility in its totality. While
business experts are acquainted in their area, technical experts understand
theirs. Figure 6.1 makes it clear how the business model serves to connect
these two domains.

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Technical
Inputs

Business
Model

Economic
Outputs

Figure 6.1 Role of a Business Model

Many business subjects including finance, economics, entrepreneurship,


marketing operations and strategy are used to finalize a business model. The
business model itself is an essential determinant of the profits to be generated
from an innovation. A below average innovation with a great business model
could be more profitable than a good innovation with a below average business
model.

6.4.3 Business Model vs Business Strategy


You have read earlier in this unit about the six components of business models
by Chesbrough and Rosenbloom. They further strike a comparison between
the concept of the business model to that of strategy, identifying the following
three differences:
(i) Creating value vs capturing value: The focus of the business model is
on the creation of value. Though the business model only addresses how
that value would be captured by the organization, strategy focusses on
building a sustainable competitive advantage.
(ii) Business value vs shareholder value: The business model helps in
the conversion of innovation to yield economic value for the businesses,
but it does not focus on delivering business value to the shareholders.
For instance, though the business model does not consider the financing
methods, nonetheless, it impacts shareholder value.
(iii) Assumed knowledge levels: Business model assumes a limited
environmental knowledge, even though strategy is dependent on a more
intricate examination that needs more conviction about the environment.

6.4.4 Advantages of Entrepreneurship


According to Chesbrough and Rosenbloom, a good business model like Xerox
has a tendency to establish thrust, but the company remains constrained to its
thriving model. At the same time, the coming up of new technologies forces
business organizations to evolve new business models. This gives new
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companies or start-ups a freehand to make a choice or even develop a new


business model themselves. Otherwise, in adddtion to the risk taken up in the
technology and economic areas, an unproven business model increases the
risk further. Business ventures, generally, are more prepared to acknowledge
this risk.
On the other hand, many venture capitalists fancy themselves as investors
in business models. Thus, when it becomes obvious that the previous model is
not working, the venture capitalists often try and push for a change in the business
model.
Activity 2
A below-average innovation with a great business model could be more
profitable than a good innovation with a below average business model.
Justify this statement citing an example.

Self-Assessment Questions
5. State whether the following statements are true or false.
(a) According to Rosenbloom and Chesborough, a business model has
five components.
(b) A business model enables to bring the technical experts and business
experts to the same platform.
6. Fill in the blanks with the appropriate word.
(a) The___________plans the course through which a company would
make profit.
(b) Business strategy focuses in delivering _____________to the
shareholders.

6.5 Summary
Let us recapitulate the important concepts discussed in this unit:
In a very short period since its evolution, the Internet has become integral
to the daily activities of people.

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Today, three basic types of business models are usedbusiness-tobusiness, business-to-consumer and consumer-to-consumer models.
According to Henry Chesbrough and Rosenbloom, a business model has
six components.
A business model plans the course through which a company would make
profit and also states the price of the product/service it would charge the
customers.
To really profit from an innovative product or service, a firm needs an
appropriate business model so that it is able to exploit its innovation and
be the market leader.

6.6 Glossary
E-commerce: A business interaction that is performed by using the
electronic medium
Business model: A set of shared common characteristics, behaviour
and methods of doing business that enables a firm to generate profits
through increasing revenues and reducing cost
Consumer-to-consumer: Consumers sell directly to other consumers
via online classified advertisements and auctions or by selling personal
services or expertise online
Buyer oriented business: The online e-commerce marketplace is used
by buyers for placing requests for quotations and carrying out the entire
purchase process
Intermediary-oriented: A type of B2B e-commerce, is which a third party
establishes the e-commerce marketplace and attracts both buyers and
sellers to interact with each other
Internet banking: A system allowing individuals to perform banking
activities at home, via the Internet
Digital format: Use of discrete integral numbers in a given base to
represent all the quantities that occur in a problem or calculation

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6.7 Terminal Questions


1. Describe the evolution of Internet-based business models.
2. Discuss the main features of the three fundamental types of business
models.
3. Describe the six components of business models.
4. Summarize the role of a business model.
5. Differentiate between a business model and business strategy. State the
differences in tabular form.
6. Prepare a list of the advantages of entrepreneurship.

6.8 Answers
Answers to Self-Assessment Questions
1. (a) True; (b) True
2. (a) production side; (b) its ability to sell
3. (a) False; (b) True
4. (a) B2B model; (b) third party
5. (a) False; (b) True
6. (a) business model; (b) value

Answers to Terminal Questions


1. Refer to Section 6.2
2. Refer to Section 6.3
3. Refer to Section 6.4
4. Refer to Section 6.4.2
5. Refer to Section 6.4.3
6. Refer to Section 6.4.4

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References
1. Turban, Efraim, Jae Kuy Lee and Michael Chung. Electronic Commerce:
A Managerial Perspective. Prentice-Hall, 1999.
2. Whitley, David. E-Commerce: Strategy, Technologies and Applications.
Tata McGraw-Hill, 1998.

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