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Electronic Commerce: Business Models, Strategies, Investment and Implementation in the Network Economics Minder Chen, Ph.D. Associate Professor of Management.

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Presentation on theme: "Electronic Commerce: Business Models, Strategies, Investment and Implementation in the Network Economics Minder Chen, Ph.D. Associate Professor of Management."— Presentation transcript:

1 Electronic Commerce: Business Models, Strategies, Investment and Implementation in the Network Economics Minder Chen, Ph.D. Associate Professor of Management Information Systems E-Mail: Web site:

2 EC - 2 © Minder Chen, 1996-2011 Electronic Commerce: Introduction E-Business E-Commerce Internet Commerce

3 Travelocity Microsoft expedia

4 EC - 4 © Minder Chen, 1996-2011 Priceline (PCLN) was recognized in 2010 for being the single best-performing stock in the S&P 500 over the past five years.PCLN Reverse auction, customer-driven e-commerce Perishable goods/services

5 EC - 5 © Minder Chen, 1996-2011 The Low-Friction Market "[The Internet] will carry us into a new world of low friction, low- overhead capitalism, in which market information will be plentiful and transaction costs low." -- Bill Gates, The Road Ahead "Where there is a friction, there is opportunity!" -- Net Ready.

6 EC - 6 © Minder Chen, 1996-2011 EC Business Opportunities New business models and ideas are driving EC initiatives. Internet technologies are enablers. Innovative Ideas, Business models, and Business strategies Funding Business and technical talents Technological enablers

7 EC - 7 © Minder Chen, 1996-2011 EC and Business Processes Seller Customer Corporate Databases Provide Info Get customer Provide info Fulfill order Support Identify need Find source Evaluate offerings Purchase Operate, Maintain, Repair Phone, fax, e-mail Web site Newsgroups Net communities Web site EDI Web site, phone, fax, e-mail, e- mailing list Credit cards, e-cash P.O.s Demos, reviews Send info Data sheets, catalogs, demos Request info Web surfing Web searches, web ads Deliver soft goods electronically Selling Process Procurement Process

8 EC - 8 © Minder Chen, 1996-2011 The Cycle of Electronic Commerce Customers Online AdsOnline Orders Standard Orders Access Searches Queries Surfing Distribution Online: soft goods Delivery: hard goods Electronic Customer Support Follow-on Sales

9 EC - 9 © Minder Chen, 1996-2011 Changes in the Net Economy Business environment –Local / Physical  Global /Virtual Business assets –Tangible  Intangible Business change –Periodic  Continuous Business production –Mass Production  Mass Customization Mass Personalization Customization is under direct user control: the user explicitly selects between certain options (a "portal" site with headlines from the New York Times or from the Wall St. Journal; enter ticker symbols for the stocks you want to track). Personalization is driven by the computer which tries to serve up individualized pages to the user based on some form of model of that user's needs. --

10 EC - 10 © Minder Chen, 1996-2011 Network and Information Economy Information is costly to produce but cheap to reproduce. –Price information according to its value not its cost. Managing intellectual property. –Maximize the value of your intellectual property, not the terms and conditions that maximize the protection. Information as an “experience good” –Consumers must experience it to value it. –Brand and trust building is critical. The economics of attention –A wealth of information creates a poverty of attention. Source: Information Rules

11 EC - 11 © Minder Chen, 1996-2011 Popularity Adds Value in a Network Value to User Number of Compatible User Vicious cycle Virtuous cycle Networks Real: LAN, Internet, Fax Virtual: Virtual community, Chat room, Instant messenger, Skype, FaceBook Positive Network Externality

12 EC - 12 © Minder Chen, 1996-2011 Externality, PageRank, Traffic, and Ads Externalities is a concept that holds that money is not the only scarcity in the world. Chief among the others are your time and respect. “Attention economy” and “reputation economy” are too fuzzy to measure. But, because of Google (and other search engines), we can now convert from reputation (PageRank) to attention (traffic) to money (ads). Adapted from: [PDF]why $o.oois the future of business (free) Chris Andersonwhy $o.oois the future of business

13 EC - 13 © Minder Chen, 1996-2011 Challenge Consumers: Everything on the Internet should to be free. Merchant: How can I make a profit if everything is free. Examples: –Free web browsers: Netscape Communicator and Internet Explorer –Free email: Juno, and –Free Internet Access: Freeserve in Britain –Free PC: eMachine and CompuServe; Free-PC –Free web hosting: Geocities, Angelfire, Zoom –Free... Price Year $250 $0 1930 1999 Cost of a 3-minute Long Distance Call Gilder's Law All tangible and intangible items that can be copied adhere to the law of inverted pricing and become cheaper as they improve. Anticipate this cheapness in your pricing strategy and product/service development strategy All tangible and intangible items that can be copied adhere to the law of inverted pricing and become cheaper as they improve. Anticipate this cheapness in your pricing strategy and product/service development strategy

14 EC - 14 © Minder Chen, 1996-2011 [PDF]why $o.oois the future of business (free) Chris Andersonwhy $o.oois the future of business [PDF]FREE: The Future of Radical PriceFREE

15 EC - 15 © Minder Chen, 1996-2011 Moving Your Business Online Companies are motivated by either fear or greed to move to their businesses to the net. your company is becoming an imperative. They have to obsolete their current business models and work very hard to search a new business model. Be aware of internet tax law and interstate/international commerce laws. – Your competitor is just one-click away

16 EC - 16 © Minder Chen, 1996-2011 Business Models Based on the Value Chain in the Market Place Raw material producer Manufacturer Distributor Retailer Consumer Exchange Examples: B2B: B2C: C2B: C2C:, C2B B2C C2C New Middleman Independent market operators Consortia Service Providers: Logistics Financial Channel Conflict Online Procurement Buyer-side EC Model

17 EC - 17 © Minder Chen, 1996-2011 Market Capitalization Market Cap (4/16/99) $11.6 Billion $ 4.3 Billion $ 2.5 Billion Who Can Afford Not to Play in the Internet EC Space? Cap: 9.771B Share: $57 7/16 As 6/28/2011 SymbolPriceChgChg %Market Cap PCLN495.408.301.70%23.94B

18 EC - 18 © Minder Chen, 1996-2011 No vendor loyally No switching costs Time-insensitive Short-term Casual Many vendors Products differentiated on price, image Relationship-based Very high switching costs Extremely time-sensitive Long-term Mission-critical Few partners Partners differentiated on reliability, flexibility Business-to-ConsumerBusiness-to-Business Business-to-Business vs. Business-to-Consumer <

19 EC - 19 © Minder Chen, 1996-2011 Business Channel: Multi-Channel Presence Buyer Seller Brick-and-mortar –Face-to-Face Mail order –Mail –Printed catalog Phone order –Telex –Phone –Fax Electronic commerce EDI Email Web Multi-channel plays will have extraordinary power if companies elegantly blend and synchronize those channels. Pure Play Click and Mortar

20 EC - 20 © Minder Chen, 1996-2011 The B2C Business Models – Bricks, Clicks, Revolution and Evolution Bricks Clicks Bricks & Clicks Sat on the sidelines for the explosion Evolved to online commerce Online services are incremental Not huge differentiators for clients Source of convenience Took advantage of lessons learned Assets CHEAP from Click failures Mergers or sales of assets to Bricks Folding bricks ventures into portfolio Narrow focus of offerings eBay, Amazon, Webvan, Wingspan Bank, Yahoo Gap, Safeway, Wallmart Bricks organizations set up separate click organizations to give the required freedom to operate in the fast moving Click environment or Clicks organizations were created through VC capital Wells Fargo, Safeway, Barnes and Noble

21 EC - 21 © Minder Chen, 1996-2011 Showrooming at Retail Stores Source:

22 EC - 22 © Minder Chen, 1996-2011 Web Metrics Hit – any Web server request that generates a log file entry. A page has many elements (html, gifs), each generating a hit. Page – Web server file that is sent to client user agent, usually a browser. Session – all actions (i.e. requests, resets) made in single visit, from entry until logout or time out (e.g., 20 minutes of no activity). Visitor – a user or bot/spider/crawler that makes requests at a site. Can be new, returning, registered, anonymous. Buyer – visitor that purchases something Customer – a visitor that registers (sometimes defined as buyer) Conversion – rate at which visitors transition to desired state (buyers, customers, registered, started checkout) Host – remote machine, identified by IP address, used for visit. Referrers – Page that provides a link to another page. Can be internal or external Web logs, Google Analytics, and Alexa

23 EC - 23 © Minder Chen, 1996-2011 Hit/page hit/ Referrers/ Host (location), domain, IP address/

24 EC - 24 © Minder Chen, 1996-2011 Product Variety Comparison for Internet and Brick-and-Mortar Channels Product Category Large Online Retailer Typical Large Brick-and-Mortar Store Books3,000,00040,000 – 100,000 CDs250,0005,000 – 15,000 DVDs18,000500 – 1,500 Digital Cameras21336 Portable MP3 players 12816 Flatbed Scanners17113 The unlimited “shelf space” of the Internet. Free:The Future of a Radical Price, Chris Anderson

25 EC - 25 © Minder Chen, 1996-2011 Pure Players vs. Physical Retailers

26 EC - 26 © Minder Chen, 1996-2011

27 EC - 27 © Minder Chen, 1996-2011 Mass Customization: –The unfulfilled need of a user again was the mother of invention –The unfulfilled need of a user again was the mother of invention: The two brothers, Bobby and Jeff Beaver, wanted to create a cool t-shirt to advertise a party at their fraternity (in order to "draw in plenty of nice girls"). They realized how difficult it was at that time to get high-quality custom t-shirts without having to order larger quantities at a promotions company or to rely on the low quality of heat-transfer at the local copy store. –unique digital custom printing technologies –Zazzle is not a technology company – it is a "market maker". –"Niching the niche“ - a mass customization ecosystem

28 EC - 28 © Minder Chen, 1996-2011 EC Strategies: 4 CsCommerce Content Community Customers

29 EC - 29 © Minder Chen, 1996-2011 Customers Obsess over your customers Remember that the Web is an infant –What do you have to offer that the physical world cannot in order to attract customers? If you make one customer unhappy, he won't tell five friends -- he'll tell 5,000 on newsgroups, list servers, and so on. –"Word of mouth" (WOM) factor gets amplified on the Net The shifts of balance of power away from business and toward customer. - Jeff Bezos

30 EC - 30 © Minder Chen, 1996-2011 Self Assessment: Customer Caring What do your customers need?What requests do they make of you? How do you respond to customer’s requests? What kind of information can they get from you? What process do they go through?How do you produce and distribute it to them? What are the steps that your customers have to take to complete a purchase transactions? How do they get shipment status? How are exceptions handled? What do you need from customer?What do you know about customer preferences? What information could you use to better target your product and service offerings? What to build relationships? How can you engage customers in an ongoing dialog? How can you continue to provide information, products, and services to reinforce your ongoing relationships?

31 EC - 31 © Minder Chen, 1996-2011 Is EC Appropriate for You? Industries who set up virtual storefronts

32 EC - 32 © Minder Chen, 1996-2011 Technology-Fit: Customer and Product Customer Need for Product Information High Low Customer Demographics Match PoorHigh Earlier Adopter Second Wave Web Laggards Tide Denny's AA FedExp Microsoft Nike Pepsi Jenny Craig Chrysler Source: Forrester Research Compassion about the product (SMM)

33 EC - 33 © Minder Chen, 1996-2011 Virtual Communities Virtual Community Users Money Content Demographics Providers Content Hard goods Games Services Other Websites Advertisers Advertising

34 EC - 34 © Minder Chen, 1996-2011 -- Community Web Site

35 EC - 35 © Minder Chen, 1996-2011 Groupon Business Model

36 EC - 36 © Minder Chen, 1996-2011 Group Buying Sites Site NameNumber of Cities Rewards for Sharing With Friends Type of DealsiPhone App Groupon.com42$10 for you if new invitee joins and buys a deal Hip city locales and activities Yes LivingSocial.c om 13Free deal if 3 friends buy it; $5 to invitees who sign up; $5 to you if they buy a deal Hip city locales and activities Yes Tippr.com1Deal gets better as more people buy it Hip city locales and activities No Woot.comonlineNoneTechnology gadgets Yes Gilt.comonline$25 for each invitee who buys High fashionYes Ideeli.comonline$25 for each invitee who buys High fashionNo Source:

37 EC - 37 © Minder Chen, 1996-2011 Revenue Streams Transaction Subscription / Listing Fee Value-added services Donation and Sponsorship Advertising –Google AdWords –Google AdSense

38 EC - 38 © Minder Chen, 1996-2011 Multifaceted Model for Web-Based EC Design ATTRACT: Hits –Communities of interest –Changing topics for repeat customers –Features that encourage customers to explore ENGAGE: Leads –Special areas encourage customer to register (i.e. selection of articles customized for visitors interests) PARTICIPATE: Sales revenue –Free download (video, audio, & software) –Shopping –Chat and News –Subscription JUMP: Advertising revenue –Other products of interest to customer –Other sites of interest to customer Adapted from Netscape Communications Inc., 1996. Attract Engage Participate Jump

39 EC - 39 © Minder Chen, 1996-2011 Transact Manage Payment Advertising Order processing Fulfillment Merchandising Lead generation Customerservice Objectives Of An eCommerce Site Engage

40 EC - 40 © Minder Chen, 1996-2011 EC Site Life Cycle

41 EC - 41 © Minder Chen, 1996-2011 Opening Online Business Identify a need and a niche Determine what you have to offer (products/services) Set your business goals Design your EC architecture Assemble your EC teams Build your web site Set up a system to handle sales Provide customer services Advertise/promote your online business (online and offline) Evaluate site performance & improve continuously

42 EC - 42 © Minder Chen, 1996-2011 EC Hosting Yahoo!Small Business – Ebay – Amazon Marketplace – l?nodeId=1161232 l?nodeId=1161232 – Wordpress: Open source solution for a web site. – Webs’ point-and-click Site Builder requires no technical skills.

43 EC - 43 © Minder Chen, 1996-2011 Web Site Architecture Design: Website Navigation Diagram

44 EC - 44 © Minder Chen, 1996-2011 Site Elements Home page –Menu-driven, News-oriented –Path-based, Splash screens or image maps Graphics and texts Submenus pages and subsites (alternative home pages for special audiences) Tables of contents, site indexes, site maps Product/service/information pages "What's new" pages Search features Contact information –Street address, phone number, fax numbers, maps, travel directions, parking information User feedback and victual community pages Bibliographies and appendixes FAQ (Frequently Asked Questions) pages Customized server error pages Source: Web Style Guide

45 EC - 45 © Minder Chen, 1996-2011 Cross-Selling and Up-Selling Amazon’s Collaborative Filtering/Recommendation system

46 EC - 46 © Minder Chen, 1996-2011 Personalization

47 EC - 47 © Minder Chen, 1996-2011 The Evolution of EC Implementation Maturity Functionality Publishing (Brochure-ware) Advertising Marketing Information Customer Interactivity Registration / Forms Email Games / Chat room / eForum Web-based Transaction Product database queries / Search Electronic Payments Fund transfer Process Integration Fulfillment Settlement Workflow Extension eCRM eProcurement / SCM eMarketplace / Auction 1:1 Relationship Real-time organizations Communities of Interests Marketplace creator

48 EC - 48 © Minder Chen, 1996-2011 Future EC Trends Broadband internet connection: I.e., ADSL, Cable modem Streaming media and web-based learning More interactive virtual community Customization and personalization Mini-portal and corporate portal Affiliate partner Multiple-channel integration E-commerce is driving E-business Affordable EC software and hosting service for small- medium-size companies Emerging standards such as XML to enable Business-to- Business electronic commerce

49 EC - 49 © Minder Chen, 1996-2011 Elevator Pitch Our business [list name] will deliver [list key deliverables] to [list key beneficiaries] to enable them to [list key benefits]. The business is headed by [list founder and key executives, investors, and advisors] that have [list key background and qualifications]. The business [will launch/was launched] on [date] and we [will begin/began] delivering [first product or service] on [date]. We expect to prove our business model and achieve profitable growth on [date] and anticipate that the terminal value of the business will be [list anticipated value], which represents a [list return] to investors. The total cost to achieve this goal will be [total cost], which includes the following key cost categories [list]. We have currently received [list dollars of funding secured to date] from the following sources [list]. We anticipate receiving the remainder of the funding by [date] from [list sources]. The key risks for the project are [list risks]. These risks will be managed by [list key approached to managing each risk]. Source: Applegate and Saltrick, “Developing an Elevator Pitch for a New Venture.”

50 EC - 50 © Minder Chen, 1996-2011 Elevator Pitch Elevator Pitch – What is it? –In the time it takes to ride an elevator from the 1 st to the 10 th floor – explain the gist of your business idea to a stranger! –An elevator pitch conveys the businesses’ key features and rationale in a clear, concise way so that it can be communicated easily to others Who is the primary audience? –Potential investors, customers, suppliers, partners, employees –Anyone who has or could have a stake in your business Why does it matter? –Communicate – What, why, how, where and when –Teaser to generate interest – the upfront hook! –Share a coherent vision of the firm’s goals and high level strategy for achieving these goals –And, last but not least - Raise $$$! –Plus, it might be your only shot!

51 EC - 51 © Minder Chen, 1996-2011 Key Issues Overview of the problem your business will solve and opportunity it will address –Why does this problem matter? –How severe is it? –How big is the opportunity? –How fast is it growing? –Why has it not been solved yet? –Why can you solve it when others could not? What value is being created? Who are the primary beneficiaries? –Think about who is capturing the value –Consider that some groups may capture more than others – these represent the ideal first customers

52 EC - 52 © Minder Chen, 1996-2011 Products/Services and Competitors What are the products and services that you will deliver to solve the problem How do these products and services meet the unsolved market problem? –Do they immediately solve the entire problem? –Or what is the product and service “path” for getting there? Who are the competitors and why are your products and services superior? –Focus on direct competitors –Consider segmenting direct competitors by type –Why, where and how does each competitor or type fall short?

53 EC - 53 © Minder Chen, 1996-2011 Revenues and Resources How do you plan to generate revenues –Short term –Longer term if there is a twist or kicker Hit the high points of your business model –Profitability –Leverage – As revenues and size increases, do gross and/or operating margins improve? –Scale efficiencies - how do the mechanics and economics of your business model scale What are the resources required? –Money – Capital intensity? –Time – core development, unique product versions for different customer types, distribution channel build, etc –Team background and expertise – what are the critical competencies of the team?

54 EC - 54 © Minder Chen, 1996-2011 Teaser and Vision Teaser to pique interest –Punchy, crisp and clearly articulated –Incentivizes stakeholders to care by logically presented the case for how the business benefits them –Delivered with confidence but not cockiness –Should leave them wanting to hear more about the details at a later date Communicate a common vision and goals –Everyone on the same page, working toward the same goal –Minimize non-productive activities, speeds up time to market

55 EC - 55 © Minder Chen, 1996-2011 Raising Money Raise $$$ –Distilling the essence of your business idea into a few critical points reflects well on you –Strong elevator pitch results in more favorable assessment of your talents by potential backers »VCs would rather back a Grade A management team with a Grade B product than vice versa –Decisions to proceed forward with due diligence are often made on the basis of the elevator pitch and the accompanying follow up conversation by seasoned VCs

56 EC - 56 © Minder Chen, 1996-2011 Cash Flow How What Who


58 EC - 58 © Minder Chen, 1996-2011 Reverse Engineering Facebook’s Business Model with Ballpark Figures

59 EC - 59 © Minder Chen, 1996-2011 Five Essential Elements Of Business Source: Ram Charan, What the CEO Wants You to Know

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