APPENDIX

STRUCTURE AND COMPONENTS

OF THE E-COMMERCE B
BUSINESS MODEL
INTRODUCTION
A successful e-commerce venture requires a viable business model and a long-term sustainable strategy.
When planning and implementing e-commerce ventures, business executives must address several
strategic questions, such as: What are the functions and components of a viable business model?
How does one capture and capitalize on the unique features of the Internet and e-commerce to
achieve sustainable competitive advantage and profits? How are values being created in the digital digital economy
economy? How can network effects and scope economies change a company’s competitive position in The economy for the age
e-commerce? How can cost, revenue, and growth models in e-commerce differ from those for of networked intelligence.
traditional businesses? This article extends Lee (2001) and Lee and Vonortas’s (2004) works on busi- The digital economy is also
ness model and strategy to discuss the structure, components, and key issues of a viable e-commerce a knowledge economy.
business model.
Information, in all forms
digital, is the input of an
organizational transforma-
BACKGROUND tion or value-creation
A business model describes the basic framework of a business. It is the method of doing business by process.
which a company can generate revenue to sustain itself (Rappa 2003; Turban et al. 2004). It also iden-
network effects
tifies the market segment that is being served (who), the service that is being provided (what), the
Products or services
means by which the service is produced (how) (Chaudhury and Kuilboer 2002), and how it plans to
make money over the long term using the Internet (Afuah and Tucci 2003). A firm’s business model whose value to an indi-
should also describe how the organization is positioned in the industry value chain. Timmers (1998) vidual buyer increases
defines business model as an architecture for the product, service, and information flows, including a when many other people
description of the various business actors and their roles, a description of the potential benefits for the also consume the same
various business actors, and a description of the sources of revenues. Weill and Vitale (2001) define an products or services.
e-business model as a description of the roles and relationships among a firm’s consumers, customers,
allies, and suppliers that identifies the major flows of product, information, and money and the major business model
benefits to participants. The method of doing
In terms of business areas, Rappa (2003) identifies nine basic Internet business models: brokerage, business by which a
advertising, infomediary (e.g., recommender system, registration model), merchant, manufacturer company can generate
(direct marketing), affiliate (provide commission for online referrals), community (voluntary contribu- revenue to sustain itself.
tor model or knowledge networks), subscription, and utility (e.g., pay by the byte). Turban et al. (2004)
identify several types of Internet business models, including name your price, find the best price,
dynamic brokering, affiliate marketing, group purchasing, electronic tendering systems, online auctions,
customization and personalization, electronic marketplaces and exchanges, supply chain improvers, and
collaborative commerce.
An e-commerce business model should consist of multiple components that perform different func-
tions. Rayport and Jaworski (2001) argue that a “new economy” business model requires four choices on
the part of senior management. They include the specification of a value proposition or a value cluster for
targeted customers; a scope of marketspace offering, which could be a product, service, information, or all
three; a unique, defendable resource system—that is, the associated resource system to deliver the benefits;
and a financial model, which includes a firm’s revenue models, shareholder value models, and future
growth models.
Chesbrough and Rosenbloom (2002) identify the functions of a business model: (1) articulating the
value proposition; (2) identifying a market segment; (3) defining the structure of the firm’s value chain;
(4) specifying the revenue-generation mechanisms(s) for the firm; (5) describing the position of the firm
within the value network; and (6) formulating the competitive strategy to gain advantage over rivals.
Other scholars, such as Dubosson-Torbay et al. (2002) and Alt and Zimmermann (2001), also have
made significant contributions to the theoretical discussions and business practices of e-commerce
business models.

Source: C.-S. Lee, Y. Ze, Y. G. Chen, and Y.-H. Fan. “Structure and Components of E-Commerce Business Model,” in
Encyclopedia of E-Commerce, E-Government, and Mobile Commerce, M. Khosrow-Pour (ed.), pp. 1058–1063. Copyright B-1
IGI Global, igi-pub.com Reprinted by permission of the publisher.
B-2 Appendix B: Structure and Components of the E-Commerce Business Model

MAJOR COMPONENTS AND KEY ISSUES OF AN E-COMMERCE

BUSINESS MODEL
In order to sustain a successful business venture, a viable business model should address a number of issues
and the dynamics of the respective elements, including what value to offer customers (strategic goals and
value proposition), which customers to provide the value to (scope of offerings), what capabilities are
needed to build a successful and unique resource system, how to price the products or services and gener-
ate streams of revenues, how to increase the scale and the scope of the venture, and what strategies and
processes are needed to build and sustain a successful e-commerce business model.

STRUCTURE AND COMPONENTS OF A VIABLE E-COMMERCE

BUSINESS MODEL
Exhibit B.1 identifies the major components of and several key issues affecting a viable e-commerce busi-
ness model. It can be used to assist business executives and entrepreneurs in planning and implementing
e-commerce business ventures. It also serves as a basic framework for further study of the e-commerce
business model and strategy.

VALUE CREATION IN E-COMMERCE

In the physical or traditional industrial economy, the inputs to a value-creation process are the raw mate-
rials or the necessary physical inputs that are required to produce the finished products or services.
Outputs are finished goods or intermediate goods used as inputs to the subsequent downstream value-
creation processes. In the value-creation process, information serves as a supporting element. Information,
such as design and engineering know-how, as well as production methods and procedures, is applied to
facilitate the “physical” transformation process, which involves one or more of the four value-adding activ-
ities describe in Meredith and Schaffer (1999): inspect, alter, transport, and store. Under this paradigm,
management’s main focus is to make the transformation process more efficient.
In contrast, input to the value-creation process in the digital economy (Tapscott 1996) is information
(e.g., customer information or digital assets, and the status of production and distribution process) that
firms gather, organize, select, synthesize, and distribute (Rayport and Sviokla 1995) in the transformation
process to provide individual customers a customized solution. In the digital economy, information is a
source of value, and every business is an information business (Earl 1999). Organizations in the Digital
Economy should understand and be able to apply the concept and practice of virtual value chain (Rayport
and Sviokla 1995) to create value and to generate new business opportunities. Because physical and digital
economies coexist within a firm and across an industry supply chain, business executives must go beyond
focusing on improving the transformation process itself to concentrate on leveraging information assets and
capitalizing on the unique features of e-commerce and the Internet to create more value for the customers.

FIVE STEPS TOWARD E-COMMERCE SUCCESS

Lee (2001) proposes five essential steps toward e-commerce success. First, companies must redefine their
competitive advantage in the Digital Economy, because e-commerce is changing the basis of competition.
Business executives must redefine their competitive advantages in terms of cost, differentiation, market-
ing, and distribution. For example, Compaq built the best retail-distribution network in the computer
industry in the 1990s but was unable to compete with Dell’s “fast and light” direct-sales approach enabled
by Internet technology (Browning and Reiss 1999).
Second, companies must rethink the traditional ways of formulating business strategy. Executives
must generalize thinking beyond building a Web site to designing an architecture that will support the
company’s e-commerce strategy. They must take a comprehensive look at how their companies can focus of
an investment behind a single winning strategy that makes it easy for customers to do business with them.
For example, Edmunds.com offers customers assistance throughout the automobile-purchase process.
Third, business executives must reexamine the traditional business and revenue models. For example,
information itself is a source of value and presents opportunities to develop new relationships with cus-
tomers at very low cost (e.g., UPS and FedEx). It also presents opportunities to create new services and to
improve internal efficiency (e.g., Boeing’s intranet).
Fourth, companies must reengineer the organization structures and processes to capitalize on the bene-
fits of e-commerce. For example, to implement a customer-centered e-commerce model, a company needs to
integrate its suppliers, back-office functions, and front-office functions in order to achieve the organizational
flexibility necessary to move at Internet speed and to satisfy customer demand. Finally, companies must be
able to reinvent customer services by building cost-effective total experience and loyalty-enhancing relation-
ships with the most profitable customers. Companies can involve customers in the product development
process through initiating technology-facilitated dialogue. In addition, companies can gather knowledge
 Appendix B: Structure and Components of the E-Commerce Business Model B-3

EXHIBIT B.1 Components and Key Issues of the E-Commerce

Business Model
Component Element Key Issue
Value propositions Choice of focal customer benefits ■ Core products/services:
• What value or benefit do we provide for our
customers?
• How unique is the value or benefit?
• Do those values satisfy customer’s demand?
• Do the products or services have strong network
effects?
• Are there substitutes for our products or services?
■ Supplement products/services:
• How important are the supplement products
or services?
• How do we increase customer value by improving
or redesigning business processes?
• How important is it to provide product instruc-
tions, user training, and customer services?
Target segment ■ Market attractiveness:
• How substantial is the market segment?
• Is the market under- or overserved?
• What is the growth rate of the market segment?
• Which stage is the product in the product lifecycle?
■ Intensity of market competition:
• What is the market or industry structure?
• How intense is the competition?
• How large are the entry and exit barriers?

Scope of offerings Customer decision process ■ Prepurchase:

• How do we make it easy for customers to obtain
and compare product- or service-related
information?
• How important is the advertising to inform or
persuade customers to make the purchase?
• Do we need to obtain a third-party certificate or
verification (e.g., VeriSign) in order to build a
trust relationship with our customers?
■ Purchase:
• When, where, and how do customers make the
purchase?
• What kinds of service are required to assist
customers in purchasing the product or service?
• Is the delivery of products or services efficient?
■ Postpurchase:
• Do we understand customer’s evaluation and
satisfaction of the product or service?
• Do the majority of the customers make repeat
purchases?
■ Purchasing process:
• How important is it to offer customer assistance in
the whole process of purchasing a product?
• Can we identify the customer decision process and
be able to provide effective assistance?
(continued)
B-4 Appendix B: Structure and Components of the E-Commerce Business Model

EXHIBIT B.1 (continued)

Product or service contents
Unique resource system Resources and capabilities
• Do we have an effective
e-commerce site that is
user friendly? transaction costs
• How do we lower the Costs associated with
transaction costs to make contractual relation-
it easy for customers ships in a market
to do business with us? economy; that is, costs
■ Core product or service: that the consumer or
• Do we understand which the producer pays to
business we are in? make the market trans-
• Do our products or action happen.
services solve the
digital assets
customers’ problems?
The information (in
■ Supplementary product digital form) a com-
or service: pany collected about
• Do we build and maintain its customers.
a set of digital assets Companies that create
in order to know our value with digital
customers better? assets may be able to
• How do we leverage on a reharvest them through
single set of digital assets a potentially infinite
to provide value across number of transactions.
many different and
disparate markets? switching costs
• How do we increase Refers to costs
customers’ switching incurred by buyers
costs from using our when they switch to a
company’s products or different supplier.
services? economies of scope
■ Core delivery process: Supply-side economies
• Do we understand and of scope—Cost of the
take advantage of the joint production of two
economies of scope in or more products can
production and distribution be less than the cost
of the product or service? of producing them sep-
• What kinds of channel arately. Demand-side
(digital and/or physical) economies of scope—A
do we need to deliver our single set of digital
products or services? assets can provide
• How efficient and effective value for customers
are the products or services across many different
being delivered? and disparate markets.
■ Specifying a resource system:
• Do we identify the resources (e.g., labor, capital,
assets) needed to build our core competencies or
capabilities?
• Do we have all the necessary core capabilities to
support our scope of product or service offerings?
• Do we need to outsource and/or partner with others
to gain missing capabilities?
• Can we identify key players who can fill out the
missing capabilities?
(continued)
 Appendix B: Structure and Components of the E-Commerce Business Model B-5

EXHIBIT B.1 (continued)

Logistics and delivery systems
• How important is the role of intellectual property
rights (e.g., patents and trademarks) in building
capabilities?
■ Assessing the quality of the resource system:
• How unique is our resource system?
• How difficult is it for competitors to imitate our
system?
• Do each of the capabilities support the delivery of a
customer benefit?
• How well do the capabilities complement and
support each other?
• Are the specific resources mutually reinforcing?
Are they complementary?
• Does the online resource system support the offline
system?
■ Integration:
• Can we deliver a unique customer experience
through e-commerce?
• Are we able to achieve supply chain integration and
synchronization (e.g., applying Internet-based
collaborative planning, forecasting, and
replenishment, CPFR)?
• Are we able to collaborate with business partners
across a common technical platform using common
e-business applications?
■ Fulfillment:
• Can we match the performance of the physical
activities to the virtual world?
• Can we develop a flexible and reliable channel to
reach the end customers?
• Can we radically reduce the order-to-delivery time
to customers?

Revenue and growth Revenue models ■ Product/service sales:

models • Are our revenues primarily deriving from product
sales or from complementary products or services?
• Can we generate revenues from utilizing intellectual
properties?
■ E-commerce-related revenues:
• How do we identify new sources of revenues from
e-commerce (e.g., advertising, referrals, subscription,
membership, commissions, transactions, etc.)?
• How do we use information to create value both
online and offline (e.g., FedEx’s packaging tracking
system)?
• How do we develop cross-selling opportunities to
achieve synergy?
• Do our customers value the benefit of one-stop
shopping?
■ Pricing:
• How do we test prices, segment customers, and
adjust to changes in supply and demand in real
time?
(continued)
B-6 Appendix B: Structure and Components of the E-Commerce Business Model

EXHIBIT B.1 (continued)

Financial growth models
• How do we analyze digital assets and experiment
with new ways of pricing?
• Are we able to implement innovative e-commerce
pricing methods (e.g., reverse auction, one-to-one
bargaining)?
• How do we build online brand equity to enhance
loyalty and to reduce price sensitivity?
■ Growth strategy:
• How should we develop new revenue growth
(e.g., deeper penetration into the current market,
new product development, new market
development, and/or completely new products
and markets)?
■ Growth model:
• Do we need to spin off an online division to
establish a new company?
• Do we need to establish strategic alliances or merge
with other online/offline companies?

Competitive strategy Value chain positioning ■ Value system or network

• Where do we position our products or services in an
industry value chain? Can we integrate or move
upstream or downstream to increase added values?
• How do we create value? Do we create customer
value as a partner in a supply chain (e.g., manufacturer
or retailer), as a value shop (e.g., professional
service), or as a central player of a network (e.g.,
intermediary service)?
• Can we join a business business ecosystem
ecosystem (Gossain and A system in which com-
Kandiah 1998) (e.g., panies work coopera-
online mega sites such as tively and competitively
Amazon.com) as a member to support new prod-
to provide products or ucts, satisfy customers,
services to the final and create the next
customers? round of innovation in
Generic Strategy ■ Competitive advantage: key market segments.
• Do we have advantages over our competitors in
terms of marketing, cost structure, and product or
service differentiation?
• Do e-commerce and the Internet redefine the
competitive advantage in the market or industry
we are in?
■ Generic strategy:
• Which strategy should we pursue in order to sustain
our competitive advantages (e.g., increase entry
barriers or block strategy, innovation or run strategy,
and/or alliance or team-up strategy)?
 Appendix B: Structure and Components of the E-Commerce Business Model B-7

about their customers by building and controlling a comprehensive customer database (i.e., digital assets).
For example, mega retailing sites such as Amazon.com, Yahoo!, and eBay are able to redefine economies of
scope by drawing on a single set of digital assets to provide value across many different and disparate markets
to maximize customer value.

FUTURE TRENDS
Business models are largely believed to determine the success of an e-commerce venture. Alt and
Zimmermann (2001) argue that business models are perhaps the most discussed and least understood
area of e-business. Business scholars have been conducting research in the e-commerce business model
for more than a decade to assist business executives and entrepreneurs in formulating and implement-
ing innovative business models. We now have a much better understanding of the taxonomy, compo-
nents, and architecture of business models. Future research on the analysis, design, development, imple-
mentation, and controlling of the e-commerce business model include, but are not limited to, the
following areas:

◗ Innovation in the e-commerce business model and the continuing business model innovation process
to achieve competitive advantage
◗ Convergence of strategy and business model
◗ Models and modeling techniques of e-commerce business models
◗ Trust-building in the e-commerce business model
◗ Sustainable business models for services, digital contents, mobile commerce, collaborative commerce,
and peer-to-peer architecture
◗ Other specific industry perspectives on implementing e-business models

CONCLUSION
A viable business model in the digital economy must transform value propositions and organizational
structures and systems to enhance value creation. It must be able to take advantage of the Internet
network effects and other unique attributes to achieve and sustain a critical mass of installed base of
customers. Companies must also build and maintain a large set of digital assets and leverage them to
provide a scope of offerings or value across many different and disparate markets to satisfy customers’
demands. That is, companies must identify customers’ latent needs and transform their business models
from a product- or component-based model to a knowledge- or solution-based model. To achieve those
goals, companies must be able to build a unique resource system that supports their value propositions
and product or service offerings. Companies should also be able to use the Internet to make pricing
more precise, to be more adaptable in responding to fluctuations in supply and demand, and to segment
customers more effectively (Baker et al. 2001). In addition, companies need to understand the impact
of e-commerce that has redefined a company or industry’s competitive advantages and be able to for-
mulate and implement competitive strategies to gain and sustain new competitive advantages in the
digital economy.

KEY TERMS
Business ecosystem 6 Digital economy 1 Switching costs 4
Business model 1 Economies of scope 4 Transaction costs 4
Digital assets 4 Network effects 1
B-8 Appendix B: Structure and Components of the E-Commerce Business Model
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