Internet and Business

Strategy
Sumeet Gupta
Outline

Understanding a Business Model

Properties of the Internet

Internet and Business Strategy

What makes Internet a better technology?

How does it transform the rules of Business? ITC

e-
Choupal

SnapDe
al.com
Understanding a
Business Model
Business Model

A Framework or recipe for making money for

creating and capturing value
Components of a Business
Model

Customer Value Market

Proposition Segments

Capabilities

Growth Revenue
Model Model
Components of a Business
Model
Customer Value Proposition
Those things that the firm and its products / services can do for
customers to solve their problems and/or satisfy their needs better
than competitors
What is so compelling, engaging, rewarding, or delightful to
customers about what a firm has to offer them that will attract them
from competitors
The customers must perceive the benefits as valuable
Depends upon
Products / service and their attributes
Reputation / Image and other assets controlled by the firm
Components of a Business
Model
Market Segment
Groups of customers to whom a value proposition is being offered or
should be offered, their willingness to pay, attractiveness of each
group, size of the group etc.
Quality and quantity of co-opetitors of the suppliers, customers,
complementors, competitors and any other institution with which a
firm has to cooperate to create value and compete to capture
value.
Market segments where industry forces are weak are more likely to
be profitable
Components of a Business
Model
Revenue Model
Generating Money from the customers or other stakeholders
Customer reservation price is the highest price that a customer is
able to pay for the product
Some examples
Advertising, razor-and-blade, brokerage, subscription, freemium,
leasing, licensing, asset sale, loss leader, bait-and-hook, usage fee,
cash and carry, recurring revenues etc.
Pricing is an important part of revenue model: Auction pricing,
posted pricing, cost-plus, skimming, tiered pricing, value pricing, limit
pricing, bundling, give-away, loss-leader and two-part tarrif.
Depends upon customer value proposition, market segments, growth
model and capabilities components of the business model.
Components of a Business
Model
Growth Model
How can a firm grow profitably and remain sustainable in the
market?
What can a firm do to increase its customers and their willingness to
pay, keep prices close to customers reservation price while keeping
costs low
Depends upon
Action of competitors, government regulations etc.
Strategies
Block, Run, Team-up
Cost Structure
Production (Fixed, variable, marginal and sunk costs)
Transaction (Search and acquiring information costs, costs
associated with creating, monitoring and enforcement of
contracts)
Components of a Business
Model
Capabilities
Building capabilities is necessary for offering better customer value
proposition, find attractive market segments whose needs it can
satisfy
Consists of:
Resources
Assets owned by a firm or having access to
Brands, people, equipment, products, culture, finance,
knowledge, patents, copyrights, trademarks, trade secrets,
relationships with co-opetitors, distribution channels, shelf space,
position in a network vis--vis co-opetitors, installed base
Activities
Activities performed by a company to transform resources into
value created and/or captured
Activities of value chain, value shop, value network and include
vertical integration / alliances to accounts receivables
Components of a Business
Model
Relational Capabilities (Social Capital)
Defined as the sum of the actual and potential resources
embedded within, available through, and derived from the
network of relationships possessed by an individual or social unit
Capabilities that a firm has by virtue of its relationships to its
coopetitors
Example: When introduction iPod, Apple obtained access to a
huge library of songs from record labels by teaming up with
them
Coke and Pepsi have access to distribution channels and shelf
space by virtue of agreements or contracts with bottlers and
distributors
Network Effects that a firm enjoys by being a member of a large
network
Evaluating E-Commerce
Performance
How would you say that an e-Commerce firm is successful?

Flipcart etc. are burning Cash

When will an E-Commerce firm be profitable?

Is it good to run a company without turning profits thinking that

one day we will be able to turn profits?
Lets artisans
create their
own online
store within
Craftsvilla

Takes note of
diversity of
crafts in India

Build on a
note for
Artisans News
welfare

Charges 15%
on every
transaction
Evaluating e-Commerce
Performance
Sustainability

Revenue Generation and Profitability

Properties of the
Internet
Properties of the Internet

Mediating Technology
Connects independent parties (B2B, B2C, C2B, C2C) or within the firm
or organization (Intranet)
Facilitates exchange relationships among parties distributed in time
and space
Allows two-way communication, rather than one-way
communication
Properties of the Internet
Properties of the Internet
Properties of the Internet
Properties of the Internet

Universality
It enlarges and shrinks the world
Enlarges: A musician can make his music available to everyone by
posting it on the Internet
E.g., Facebooks Videos going Viral
Shrinks: One can have access to skilled worker from all over the world
(E.g., Chinese developing mobile apps)
Apps Marketplace by Google, Nokia, Samsung
Enabling round the clock distributed work all over the world
Properties of the Internet

Network Externalities
A technology or product exhibits network externalities when it
becomes more valuable to users as more people take
advantage of it.
Example: Mobile Phones, Software
Size of the network increases Switching Costs
Properties of the Internet
Properties of the Internet

Distribution Channel
Distribution Channel for digital goods, such as software, music,
information, tickets etc.
Replacement effect: Serving old customers through new
channels, such as selling tickets online to traditional customers
Extension effect: Lowering of brokerage fees for stock market
transactions
Properties of the Internet
Properties of the Internet
Properties of the Internet
Properties of the Internet

Time Moderators
Ability to shrink and enlarge time
Shrink Time: Easy search for new information online
Enlarge Time: 24 Hours Auctions online, Computer
Supported Collaborative Work
Properties of the Internet
Properties of the Internet
Properties of the Internet

Information Asymmetry Shrinker

Removes the advantages due to information asymmetry
E.g., E-Choupal
Properties of the Internet
Properties of the Internet

Infinite Virtual Capacity

Moores Law: Computing power doubles every 18 months
Infinite Virtual Storage
Googles
Virtually infinite customers served at the same time Data
Center
Properties of the Internet
Properties of the Internet

Low Cost Standard

Easy Adoption
Same protocol for information transmission
Development costs were underwritten by US Government
Properties of the Internet

Creative Destroyer
Free distribution of News on Internet
Travel Industry being destroyed due to Internet
Properties of the Internet

Free
Conferen
cing
Properties of the Internet

Transaction Cost Reducer

Cost of searching for sellers and buyers
Collecting information on products
Transportation Costs associated with buying and selling