Framework for e-Commerce

Framework for e-Commerce
Chapter 1 Framework for e-Commerce McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Key questions covered in this chapter:
What are the categories of e-commerce? What are the new views of strategy in the networked-economy? What is the framework for the field of e-commerce? Why does a senior manager need to know all four infrastructures? What are the roles and responsibilities of senior e-commerce managers? What key challenges do senior leaders face today?

e-Commerce as the Networked Economy
The networked economy business traits can be summarized as: Create value largely through gathering, synthesizing and distribution of information Formulate strategies that make management of the enterprise and technology convergent Compete in real time rather than in “cycle time” Operate in a world characterized by low barriers to entry, near-zero variable costs of operation and shifting competition Organize resources around the demand side rather than supply side Manage better relationships with customers through technology

How Do We Define e-Commerce?
Technology-mediated exchanges between parties as well as electronically-based intra- or inter-organizational activities that facilitate such exchanges

Exhibit 1.1: Four Categories of e-Commerce
Business originating from… Business Consumers Business B2B C2B And Selling to… Consumers B2C P2P

Distinct Categories of e-Commerce
Business to Business (B2B) refers to the full spectrum of e-commerce that can occur between two organizations. This includes purchasing and procurement, supplier management, inventory management, channel management, sales activities, payment management &service and support. Examples: FreeMarkets, Dell and General Electric Business to Consumer (B2C) refers to exchanges between business and consumers, like the ones managed by Amazon Yahoo and Charles Schwab & Co. The activities tracked are consumer search, frequently asked questions and service and support.

Distinct Categories of e-Commerce (cont’d)
Peer to Peer (C2C) exchanges involve transactions between and among consumers. These can include third party involvement, as in the case of the auction website Ebay. Examples: Owners.com, Craiglist, Monster Consumer to Business (C2B) involves when consumers band together to present themselves as a buyer in group. Example:

Exhibit 1.2: Convergence of e-Commerce Categories
Business originating from… Business Consumers Publishers order paper supplies from paper companies Consumers aggregate to bulk purchase from Amazon Business Amazon orders from publishers And Selling to… Consumers buy thousands of Harry Potter books from Amazon Consumers Consumers resell copies on eBay

Strategy Making in a Rapidly Changing Environment
How can a company faced with the changing online environment set a strategy? Classical Strategic planning This begins with the specification of the mission and vision of the firm. A careful balance of internal and external analysis leads to a choice of strategy for the company as a whole called “corporate strategy”. Strategies that relate to specific divisions within a company are termed as “business-unit strategies”.

Exhibit 1.3: Classic Framework for Strategy Management
Mission Goals Internal (Company) Analysis External Analysis Strategy Formulation Corporate Business-unit Functional Operating Implementation Control and Monitoring

New Views of e-Commerce Strategy
Speed of change and adaptation must be figured into the classical strategic management equation.

New Views of e-Commerce Strategy (cont’d)
Sense and respond paradigm: It provided an approach to strategic thinking that was intuitive, actionable and easy to implement. It made companies focus on listening in a new manner to customers to reduce the high levels of uncertainty. Drawbacks: Its very reactive and the starting point is always the customer. This is more appropriate for traditional offline companies.

New Views of e-Commerce Strategy (cont’d)
Strategy as rules: Focus on “simple rules” rather than complex strategic planning exercises. Simple rules help the senior e-commerce manager recognize positive (or negative) situations and react accordingly.

The Three Approaches to Strategy
Position approach: “Where should we be vs. our competition?” Resources approach: “what resources should we possess?” Simple rules approach: “What processes should we follow?”

Exhibit 1.4:Three Approaches to Strategy
Simple Rules Position Resources Strategic Logic Establish position Leverage resources Pursue opportunities Identify an attractive market Locate a defensible position Fortify and defend Establish a vision Build resources Leverage across markets Jump into the confusion Keep moving Seize opportunities Finish strong Strategic Steps Strategic Question Where should we be? What should we be? How should we proceed? Unique, valuable position with tightly integrated activity system Unique, valuable, inimitable resources Key processes and unique simple rules Source of Advantage Slowly changing, well-structured markets Moderately changing, well structured markets Rapidly changing, ambiguous markets Works Best In Duration of Advantage Sustained Sustained Unpredictable It will be too difficult to alter position as conditions change Company will be too slow to build new resources as conditions change Managers will be too tentative in executing on promising opportunities Risk Performance Goal Profitability Long-term dominance Growth

Factors of Consumer Behavior in the Online Environment
The 2 key factors that are of paramount importance in the online environment are: Customization: This refers to the personalization of communications between users and a website. Interactivity: is defined as the user’s ability to conduct two-way communications. This includes use to user and firm to user communication.

Exhibit 1.5: A Comprehensive Framework
Media Infrastructure Technology Infrastructure e-Commerce Strategy Capital Infrastructure Public Policy

The Strategy Formulation Process
There are six interrelated, sequential decisions to strategy: Framing the Market Opportunity Business Model Customer Interface Market Communication and Branding Implementation Metrics

Exhibit 1.6: e-Commerce Strategy
Framing the Market Opportunity Market Communication and Branding Business Model Customer Interface Implementation Metrics

The Context of Strategy Formulation: The Four Infrastructures
Technology infrastructure: This is both an enabler and driver of change.The hardware backbone of computers, routers, servers, fiber optics, cables, modems, etc. provide half of the technology equation.The other half includes the software and communication standards including the core protocols for the www. Capital Infrastructure: Deals with getting the money to launch new businesses and finding the right people to build the business plan and seek funding sources.

The Context of Strategy Formulation: The Four Infrastructures (cont’d)
Media infrastructure: The e-commerce managers must make choices about the types of media employed(e.g., print, audio , video), the nature of the media and editorial policy(including style, content, look and feel). Public Policy Infrastructure: All the decisions related to strategy, technology, capital and media are influenced by laws and regulation, i.e., public policy decisions. It not only affects specific business but also direct and indirect competitors.

Roles and Responsibilities of a Senior e-Commerce Manager
Senior managers need to have the basic business skill set of traditional managers but must also incorporate new knowledge, skills and capabilities. The roles and responsibilities include: Cross Discipline, Integrative position: Entrepreneurship is at the heart of any online business.The manager should be able to make strategic decisions quickly and authoritatively. They should be trained in a variety of disciplines including marketing, logistics, accounting, and finance. They should also add two new disciplines to the mix: technology sophistication and media knowledge. They should also understand the role of mass communication in a media business.

Exhibit 1.7: Relevant Disciplines for a Senior e-Commerce Executive
Strategic Management Finance Marketing Entrepreneurship Operations and Logistics Accounting New Media Technology

Roles and Responsibilities of a Senior e-Commerce Manager (cont’d)
The day to day responsibilities of a senior e-commerce manager include: Provide vision for the online business. Set process and outcome goals by specifying clear performance targets. Formulate strategic direction and choice by making concrete choices- and associated tradeoffs- related to each phase of the e-commerce strategy process, including market opportunity, business model specification and design of the customer interface.

Exhibit 1.8: A Flow Diagram of the Strategic Responsibilities
Set Vision Establish Goals Formulate Strategy Drive Implementation Be Accountable for Performance

Roles and Responsibilities of a Senior e-Commerce Manager (cont’d)
Drive implementation: Strategy implementation is about making the right choices related to people, structure, systems and processes to execute the strategy. Accountable for performance: The senior manager is responsible for the performance of the organization.

Location of the Sr. Manager in the Organization
Line Executive: The senior manager may be a line executive who is responsible for the profit and loss of an online initiative. Staff Executive: A staff executive does not have formal profit and loss responsibility for a business. Their role is to support the efforts of the line executives in the execution of their strategy.

Exhibit 1.9: Where to Find Senior e-Commerce Managers Within Existing Bricks-and-Mortar Companies
Corporate Business Unit Stand-Alone Corporate site management Cross-business-unit integration site Report to general manager of business unit Separate business from corporate parent Line Executive Supports corporate-wide initiatives Supports and advises strategic business unit e-commerce initiatives Staff Executive

Key Challenges for Senior Leadership in Today’s Environment
Understanding Customer Evolution: The challenge here is to invest heavily in understanding the customer needs and invest in advance so that the launch of the innovation coincides exactly with the customer needs. Charting Changing Technology: The senior executive must be well schooled in the basic and emergent technologies. Picking the right technologies and investing ahead of the curve is a constant, high-stakes gamble for the senior management team.

Key Challenges for Senior Leadership in Today’s Environment (cont’d)
Balancing Irrational Exuberance and Irrational Doom: The executive must continually reassure that the business model makes sense, spell out the path to profitability and paint a vision that can rally all relevant stake holders, including partners, customers and employees. Integration of Offline and Online Activities: Customer- facing activities need to be made ready for the web. Identifying the Key Levers of Competitive Advantage: The best senior leaders are able to reallocate their resources and capabilities in anticipation of evolving competitive landscape.

Basic Technology of the Internet and e-Commerce Businesses
Chapter 2 Basic Technology of the Internet and e-Commerce Businesses McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Basic Technology of the Internet and e-Commerce Business
Questions answered in this Chapter: What is the Internet? What are four components of Joseph Carl Robnett Licklider’s original vision that make the Internet easy to use? What are the content types on the Web? How are websites created? What are the key similarities and differences between e-commerce and bricks-and-mortar selling in regard to location? How does e-commerce payment differ from bricks-and-mortar payment? What role does security play in e-commerce? What challenges exist in e-commerce fulfillment?

Early Networks Internet’s beginnings can be traced back to memos written in 1962 by MIT’s Joseph Carl Robnett Licklider outlining the galactic networking concept Great advances were made in network technology in 1960s To connect computers and permit transfer of information locally, many organizations installed Local Area Networks LAN technology was limited by geographical distance To allow computer and networks separated by larger geographical distance to communicate ARPA (Advanced Research Projects Agency) developed a Wide Area Network (WAN) called the ARPANET

What is the Internet? Internet Protocol (IP):
Software that sets the rules for data transfer over a network Transmission Control Protocol (TCP): Software that ensures the safe and reliable transfer of the data

What is the Internet? The internet is a collection of wires, protocols and hardware that allows the electronic transmission of data over TCP/IP Any data can be transferred over the net, e.g., , faxes,video,voice & web pages Technically www (web) and the net are not the same.The web is an application for the net

How the Internet Works Characteristics that allow shared access of data in a network : Unique identification of each computer on the network Internet is a network of millions of computers and thousands of networks intertwined together. Thus it was important that each computer can be uniquely identified by assigning a specific Internet Protocol(IP) address. e.g., 2. Human-friendly addressing Domain Name System(DNS) gave each computer on the network an address comprising an easily recognizable letters and words instead of an IP address. e.g.,

How the Internet Works (cont’d)
3. Packet Switching To remedy delays associated with unequally sized data transfers, instead of transferring files in their entirety, whole files are broken up into data packets before being transferred over the network. 4. Routing Routers are dedicated, special-purpose computers which serve as an intermediary between networks. They route packets efficiently through networks. Routers are building blocks of the internet.

How the Internet Works (cont’d)
5. Reliability and Transmission control Protocol IP software handles packet deliveries and TCP handles safe delivery of packages. 6. Standardization Without the TCP/IP standardization, there would have been many negative tradeoffs, such as inflexibility and increased functional and switching costs.

Functions of TCP/IP Prevents loss of data Checks packets
Eliminates duplicate packets Sends confirmation when the packet is received If confirmation is not received, then the packet is retransmitted Enables reliable and error-free communication over the net

Exhibit 2-1: Circuit-Switched Network
Reserver for connection between 1 and 7 Reserver for connection between 4 and 6 Reserver for connection between 3 and 8 Dedicated Physical Connections Computer 1 Computer 2 Computer 3 Computer 4 Computer 5 Computer 6 Computer 7 Computer 8 Computer 9 Computer 10

Exhibit 2-2: Packet-Switched Network
Computer 1 Computer 6 Computer 2 Computer 7 Shared transmission line with data broken into "packets" Computer 3 Node 1 to 7 4 to 6 1 to 7 3 to 8 4 to 6 1 to 7 3 to 8 Node Computer 8 Computer 4 Computer 9 Computer 5 Computer 10

How are Web Sites Created?
A Web page can be made by adding text-based codes called Hyper Text Markup Language (HTML) to a text file.Text editor allows to create WebPages and gives more flexibility and control over design and layout. 2. Document conversion tools enable existing documents and new documents to be created and posted with minimal investment in learning markup language. 3. Several web authoring tools are available; e.g., Microsoft FrontPage lets users add multimedia objects such as sound and animation to their web pages. 4. High-end Web authoring tools such as Dreamweaver and Adobe GoLive offer more powerful site creation and management features, and allow expanded features such as database integration to be built in a web site.

Exhibit 2-3: Browser View and Source View of a Web Page

What Web pages are made of
The entire Web is built upon three concepts: web pages (documents seen on the browser), links (connecting one web page to another), and servers (storing and transmitting the information to the browsers for display) No special software is required to create a web page Majority of pages are created using Hyper Text MarkUp Language(HTML)

Contents of the Web Links Forms Internal Anchor Links:
Internal anchors are used to connect with other locations within the same document. Page Links: Page links allow users to link to other web pages. Mail-to Links: Mail links are used to let users send feedback and questions directly to them. Forms Forms are basically web pages where the user can enter information on the fields provided on the page.Forms are useful in getting highly structured feedback.

Contents of the Web (cont’d)
Images The most supported image formats on the Web are Graphic Image Format (GIF) and Joint Picture Encoding Group(JPEG). Multimedia Web supports multimedia file type such as images, audio and video.

Capturing Content Capturing contents and compressing data Print Images
Printed images can be captured with low cost scanners and photos can be downloaded with digital video cameras. Audio Sounds can be captured, compressed and stored for use on the web. Video Video capture cards allow users to capture the analog video output of camcorders, VCRs and DVD players.

Web Browsers Browsers make the retrieval process transparent
Uniform Resource Locator (URL): Tells the browser several things about how to access the desired content: The transmission protocol to access the content. e.g., Hyper Text Transfer Protocol for Web Pages, File Transfer Protocol (FTP) for transmission of files and the extended S-HTTP for a higher degree of security. 2. The name of the computer where the content can be found 3. The directory on the computer where content is stored and the name of the file containing the content.

Exhibit 2-5: Components of a URL
The name of the computer being accessed (could also use this computer’s IP address, which is ) The name of the file you want to view Indicates browser should use HyperText Transfer Protocol for server access The directory that contains the file you want to view Source: Adapted from Douglas Comer, The Internet Book, 3rd. Ed. (New Jersey: Prentice Hall, 2000), 203.

Exhibit 2-4:The First Graphical Web Browser (1993 version running on a NeXT PC)

Placement: Bricks-and-Mortar
When deciding on a store location, a company must consider many factors including: Geographic desirability Nearby stores, Number of customers accommodated Attributes of the space itself Competition When choosing a location, merchants prefer to set up stores where there is little competition for customers Convenience In addition to considering convenience for customers, merchants also consider how convenient a location is for themselves

Placement: e-Commerce
Location It is important that the website is highly visible and easily found. Factors that facilitate this are: Placement of links to the website Multiple domain names Partnerships with websites Use of search engines Competition The location and visibility of competitive websites is a factor is deciding the location of an e-commerce location Convenience Some e-commerce locations offer more convenience to the merchant than others, sites like Amazon zShops and Yahoo function as large online malls

Merchandise and Audience Size: Bricks-and-Mortar
Store Size: There are two issues related to size What type of items the store sells—the size of the merchandise will influence the size of the store The number of customers who will be shopping in the store at once—more customers per hour requires a larger space

Merchandise and Audience Size: e-Commerce
Store Size Just as Bricks-and-Mortar stores consider parking spaces, aisle width, etc., e-commerce stores need enough bandwidth, processing power, and data storage capacity to provide proper service to their customers Bandwidth: Is the amount of data that can be sent through a connection at once Processing Power: Is the amount of data that can be processed by a website at a given time. Three factors influence the amount of processing power needed Product breath Number of transactions Level of interactivity Data Storage Capacity: Online businesses collect and store huge amounts of customer data such as demographics, purchase patterns, billing histories, and click streams

Presentation: Bricks-and-Mortar
Store Layout Store layout often speaks volumes about the image a store wishes to project and the type of customers it wishes to retain. As a result, marketers and merchants often pay great attention to how their merchandise is presented Customer Service Customer service is a necessity for a successful merchant and great service often enables merchants to charge premiums for their products

Presentation: e-Commerce
Store Layout Online presentation encompasses all customer-facing aspects of the store. User Interface Ensure your customers see what you want them to see. Know your customer Online Customer service The lack of direct interaction between customer and the purchasing environment is addressed using: The Web and FAQs Chat Discussion Groups

Payment: Bricks-and-Mortar
Cash Issues with cash: Theft Cash Fees Credit Cards Issues with credit cards Fraud Fees

Payment: e-Commerce Cashless Society Credit Cards
Issues with credit cards Card-Not-Present Transactions Higher Fraud Rates Higher Fees Security

Security: Bricks-and-Mortar
Overt and Covert Cameras To monitor both shoplifting and shrinkage Alarms and Security Tags Stores can use alarms to monitor entry and exit activity during off-hours Place security tags on high-value items Security Guards To monitor both in-store activity and off-hours activity

Security: e-Commerce Technologically Complex
Because selling products on the Web is so dependent on technology, significant technological expertise is required to secure an e-commerce site Many More Potential Attackers Because the Internet allows a website to be accessed by a worldwide base of customers, it also allows it to be accessed by a worldwide base of hackers and criminals Much More Potential Damage Because an e-commerce website is functionally the equivalent of a large single store, the scale of crimes is far larger than for any single outlet of a chain of physical stores

e-Commerce Security Technology
Several technologies can be employed to help reduce the risk to companies and their customers when completing e-commerce transactions Passwords: Identify who is trying to access a website or part of a website Encryption: Encodes and decodes information transmitted over the Internet Public Key Infrastructure: Encryption software uses pieces of additional software called keys to ensure that only the creators and the intended recipients can access it

Exhibit 2-6: Digital Certificate Transmission in e-Commerce
Trusted third-party certificate provider 1. Digital certificate / public key and private key sent to server (when server is initially set up) Web server with private key 2. Copy of public key is sent to customer’s PC. Customer accepts this certificate to create SSL pipe between user’s PC and server Customer’s PC Encrypted Credit Card Information ****************** 4. Certificate used to encrypt data Credit Card Information VISA ****************** 3. Encrypted “tunnel” created 5. Encrypted data sent to server via internet 7. Server stores and processes credit card data Note: Step 3 indicates the creation of an SSL encrypted “tunnel” for data to pass through. Steps 4 through 7 show what happens behind the scenes in SSL. 6. Private key used to decrypt data Internet Credit Card Information VISA ****************** Encrypted Credit Card Information ****************** = non-SSL transmission = SSL transmission

Securing Companies from External Attack
Screening Routers Can screen packets and determine, not only, whether they can forward a packet, but also, whether they should forward it Proxy Servers Their primary purpose is to forward packets on behalf of PCs on a company’s internal network to the Internet Firewalls Is essentially a computer (or specialized appliance) that sits between the Internet and anything a company wants to protect (such as a Web server or internal network)

Exhibit 2-7: Digital Signature Authentication
Trusted third-party certificate provider Web server with private key 1. Digital certificate / public key sent to customer Customer’s PC 5. User is presented with digital signature information. If user accepts certificate, SSL tunnel is created. Digital Signature ABC Corp. ************ Encrypted Digital Signature ****** ************ Digital Signature ABC Corp. ************ 3. Encrypted signature sent Encrypted Digital Signature ****** ************ 4. Public key / certificate used to decrypt digital signature 2. Private key encrypts digital signature document Internet

Fulfillment: Bricks-and-Mortar
Includes all steps necessary to distribute the company’s products. Examples: Wal-Mart: the creation of distribution network of regional warehouses, trucks, and retail stores Fingerhut: the building of relationships with suppliers and creation of a system to deliver purchased items to customers

Fulfillment: e-Commerce
Issues Facing e-commerce fulfillment: Customer Demand for Transparency Many Activities and Parties Multiple systems Capacity Utilization

Exhibit 2-8: Fulfillment — Integrating Multiple Partners, Technologies, and Systems
Order Processing Systems Potential Partners Payment processing Security Database systems Order entry Banks Payment processors Customers Procurement Picking / Pricing Systems Potential Partners Systems Potential Partners Inventory management Purchasing systems Multiple suppliers Warehouse logistics Inventory management Security Multiple outsourced suppliers ESPs Internal Accounting Systems Returns Shipping Systems Potential Partners Systems Potential Partners Multiple shipping partners ESPs Multiple shipping partners ESPs Multiple tracking systems Return processing systems Multiple tracking systems Product Information exchange

Market Opportunity Analysis
Chapter 3 Market Opportunity Analysis McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Market Opportunity Analysis
Questions answered in this chapter: Is market-opportunity analysis different for online firms? What are the two generic “value types”? What is the framework for market opportunity analysis? How do you identify unmet and/or underserved needs? How does a company identify the specific customers it will pursue?

Market Opportunity Analysis (cont’d)
Questions answered in this chapter: How do you assess advantage relative to competitors? What resources does the company need in order to deliver the benefits of the offering? How do you assess readiness of the technology needed to deliver an offering? How do you specify opportunity in concrete terms? How do you assess the attractiveness of an opportunity?

Unique Market Opportunity Analysis for Online Firms
The opportunity analysis in the marketspace in the networked economy is unique as compared to the traditional sectors for the following reasons: Competition occurs across industry boundaries rather than within industry boundaries. Competition occurs between alliances of companies rather than between individual companies. Competitive developments and responses are occurring at an unprecedented speed.

Unique Market Opportunity Analysis for Online Firms (cont’d)
Unique ways to bring value to consumers and change behavior Industry Value Chains and Value Systems are rapidly being reconfigured

Two Generic Value Types
The first step is broadly to identify the business arena in which the new business will participate. We need to understand some key terms before we get into the 2 value types: Value Chain: Businesses are made up of discrete collections of individual and organizational activities that work together to create and deliver customer benefits via products and services.These integrated services describe a value chain. Value System: A value system is an interconnection of processes and activities within and among firms that creates benefits for intermediaries and end consumers.

Two Generic Value Types (cont’d)
Firms should look at the value system with a lens that yields ideas about new business possibilities. Specifically a firm looks for the following types of values to be introduced. Trapped Value: New economy companies have unlocked trapped value by: Creating more efficient markets. Creating more efficient value systems. Enabling ease of Access. Disrupting current pricing power.

Two Generic Value Types (cont’d)
New-to-the-World Value: In addition to reconfiguring existing value chains, new-economy companies can create new-to-the-world benefits. These can enhance an existing offering or be the basis for creating a new offering. Companies can do it in 5 generic ways: Customize offerings Radically extend reach and access Build community Enable collaboration Introduce new-to-the-world functionality or experience

Exhibit 3.1: Car Manufacture and Sales Value System
Sourcing Processing Sales Etc. Raw Material Manufacture Sourcing Design Manufacture Etc. Component Design Marketing Manufacture Etc Assembly Marketing Inventory Sales Etc. Distribution Parts Inventory Training Servicing Etc. Maintenance Purchasing Inventory Sales Etc. Used Resale Autobytel.com New and used car purchasing Financing comparison and purchase Real-time insurance quotes Wholesale anchors Service tracking Collect Research Request Dealer Quote Finance Make Sale Source Warranty, Insurance Quotes Track Vehicle Service Publish Classified Ads

What is the Market Opportunity Analysis Framework?
The framework consists of seven initial investigative stages of idea creation. Identify Unmet and/or Underserved Customer Needs The starting point for opportunity identification is often someone with a belief about a value system that can be reinvented or transformed. Uncover opportunity nucleus: The company can define the opportunity to increase customer satisfaction or create a new, highly valued customer experience.

What is the Market Opportunity Analysis Framework? (cont’d)
Identify the Specific Customers a Company Will Pursue: Identifying and prioritizing the customer leads to a preliminary understanding of the potential the company could seek to serve. Access Advantage Relative to Competition: Reveals the structure of the industry and market, key competitors in the marketspace, and the firm’s relative advantage to each of the key players.

Access the Company’s Resources to Deliver the Offering: The company should examine the distinct capabilities and activities it could bring to the offering to achieve advantage, either through its own resources or those of potential partner companies. Access Market Readiness of Technology: Reveals the readiness of a particular technology, as well as any alternative technologies, on which the manager anticipates deploying the firm’s offering.

Specify Opportunity in Concrete Terms: Identify the distinct benefits the company would bring to the offering to achieve advantage and win in the market. Assess Opportunity Attractiveness: The company must assess the market’s financial, technological and competitive situations.

Exhibit 3.2: Framework for Market Opportunity
Identify the Unmet and/or Underserved Customer Need Identify the Specific Customers a Company Will Pursue Assess Advantage Relative to Competition Assess the Company’s Resources to Deliver the Offering Assess Market Readiness of Technology Specify Opportunity in Concrete Terms Assess Opportunity Attractiveness

Exhibit 3-3: Four Key Environments and the “Sweet Spot” for Market Opportunity
CUSTOMER COMPANY “Sweet Spot” TECHNOLOGY COMPETITION

How Do We Identify Unmet and/or Underserved Needs?
We need to consider the following: Customer decision process: The customer decision process maps the activities and choices customers make in accessing a specific experience within value systems. The following questions will help structure the process: What are the steps that the typical customer goes through? Who gets involved and what role does he or she play? Where does the process take place? How much time does the overall process take? How much time is associated with individual steps? Does the customer move through the entire process at once or does he or she take breaks?

How Do We Identify Unmet and/or Underserved Needs? (cont’d)
What choices do customers do not consider? What choices are they unaware of? Which customers are not participating in this customer decision process for a specific value system? Why not?

Revealing unmet or underserved needs: The following questions should be considered: What is the ideal experience the customer wishes to receive both functionally and emotionally?How does it vary step-by step in the activity? How closely does the actual experience compare to the customer’s view of the ideal? What are the key frustration points? What compensating behaviors do we observe (i.e., what actions does the customer engage in to overcome these frustrations)?

Does the experience customers seek vary according to their environment? What are the customer beliefs and associations about carrying out this activity? How do they view their relative competence and role? How positively or negatively do they view the current set of company offerings? What barriers block some or all participation by potential customers? What are the online opportunities to enhance or transform the customers‘ experience?

Exhibit 3-4: Consumer Buying Process Tree for Book Purchase
Problem Recognition Gift Interested in Author/Subject Matter Need for Activity/Class Information Gathering Read Reviews Search for Availability Review Contents Prepurchase Evaluation Price Quality Availability Fits Needs Purchase Purchase Decision Purchase Online Purchase Offline Satisfaction Arrived on Time Good Quality of Contents Easy Buying Experience Postpurchase Loyalty High Percentage of Consumers’ Book Purchases Repeat Purchases

Identify Specific Customers
Segmentation is the process of grouping customers based on their similarities. Approaches to Market Segmentation: Geographic: Country, city, size, density, ISP domain, etc. Demographic: For individuals, the demographic approach includes grouping by age, gender, occupation, ethnicity, income, family status, life stage, internet connectivity and browser type. Firmographic: Number of employees, company size.

Identify Specific Customers (cont’d)
Behavioral: Online & offline shopping behavior, web usage, website loyalty, prior purchases, etc. Occasion: Routine occasion, special occasion, time, location, event, trigger, etc. Psychographic: Lifestyle, personality, affinity, etc. Benefits: Convenience, economy, quality, ease of use, speed, information, selection, etc.

Exhibit 3-5: Segmentation Approaches
Segmentation Type Description Examples - Variables

Actionable Segmentation: Segmentation must be consistent with how a company can got to market, and it must be able to be sized and described. Actionable segments meet the following criteria: The segments are easy to identify The segments can be readily reached The segments can be described in terms of their growth, size, profile, and attractiveness

Meaningful Segmentation: Segmentation must help describe and begin to explain why customers behave in a specific way. Meaningful segments meet the following criteria: Customers within a segment behave similarly while customers across segments behave in different ways It provides some insight into customer’s motivations It corresponds with how customers currently buy or use the product or service It correlates to differences in profitability or cost to serve The segments and/or their differences are large enough to warrant a different set of actions by a company

Assess Relative Advantage
Direct Competitors: Firms that offer products or services that are close substitutes for each other. Indirect Competitors: Firms that are reaching and attracting the same customers or are developing a technology, platform, or offering that might compete with your offering. Indirect Competitors include two categories of companies: Substitute Producers—Companies that produce products and services that perform the same function. Adjacent Competitors—Do not currently offer products and services that are direct substitutes, but they have the potential to quickly do so.

Assess Relative Advantage (cont’d)
Competitor Mapping to Selected Segments: To assess competitive intensity managers need to map out where current competitor companies are participating and determine their effectiveness in delivering benefits to the target customer. This analysis will help the company do the following: Demarcate underserved areas in the market Identify the companies it will compete against Spot companies that could be potential collaborators

Exhibit 3-6: Competitor Profiling for Kodak
Direct Competitor Indirect Competitor Not a competitor Kodak Canon Fuji Shutterfly Snapfish/ MotoPhoto Yahoo Purchase Camera Purchase Accessories Purchase Film Look for Picture-Taking Advice Digitally Manipulate Pictures Download and Choose Pictures to Print Print and Receive Pictures Share Pictures Store Pictures on CD Ofoto

Exhibit 3-7: Competitor Mapping to Selected Segments for Kodak
Target Segments Kodak Canon Snapfish High performance level Medium performance level Low performance level

Assess the Resources of the Company to Deliver the Offering
Company Resources: The management team should assess whether or not it can identify at least 3 or 4 resources that it can leverage successfully into the selected online space.The team will already have a strong understanding of the following: The selected value system in which the company will be participating. The key stages of the target’s customer decision process and the benefits sought/value trapped at each stage. The target customer segments.

Assess the Resources of the Company to Deliver the Offering (cont’d)
Resource System: Is a discrete collection of individual and organizational activities and assets that together create organizational capabilities to serve customer needs. The resources can be classified into the following three groupings: Customer-facing: Include brand name, well trained sales force, and multiple distribution channels. Internal: Associated with the company’s internal operations. Examples: technology, product development, staff Upstream: Associated with the company’s relationship to its suppliers.

Assess the Resources of the Company to Deliver the Offering (cont’d)
Partners: Partnering is an effective alternative to building or acquiring a capability to fill a gap. Potential partners can be grouped into two categories: Complementary Partners—These partners provide offerings that are complementary to those of another company. Capability Partners—These give and receive value from partnering with another company.

Assessing Market Readiness of Technology
Technology Vulnerability: The management team should assess the opportunity’s vulnerability to technology trends, both the penetration of enabling technologies and the effect of new technologies on the value proposition. Technology Adoption—Questions to help assess this area: Is there sufficient penetration of the technologies (e.g., cable or DSL modems) that enables the customer to take advantage of or participate in the offering? What penetration is necessary to make the offering financially viable? When is the minimum penetration likely to be met? Is there an introductory version that could be upgraded as technology penetration increases?

Assessing Market Readiness of Technology (cont’d)
Impact of New Technologies—Questions to help assess this area: What new technologies could radically alter the economics of delivering an offering or require adjustment of the actual features and functionality of an offering? How likely is it that your target population or competitors will use these technologies?

Specify the Opportunity in Concrete Terms
Opportunity Story: The management team should create an outline of the business plan that specifies the opportunity in concrete terms. The opportunity story should: Briefly describe the target segment(s) within the value system Articulate the high-level value proposition Spell out the expected elements of customer benefits Identify the critical capabilities and resources needed to deliver the customer benefits

Specify the Opportunity in Concrete Terms (cont’d)
Lay out the critical “reasons to believe” that the identified capabilities and resources will be a source of relative advantage over the competition Categorize the critical capabilities (and supporting resources) as in-house, build, buy, or collaborate Describe how the company will monetize the opportunity Provide an initial sense of the magnitude of the financial opportunity for the company

Assessing Opportunity Attractiveness
Opportunity Attractiveness: Based on a performance estimate of long-term profitability in the particular industry, as well as the firm’s relative competitive position. The manager can determine the character and magnitude of the opportunity through examining the following : Level of unmet need and the magnitude of unconstrained opportunity. Level of interaction between major customer segments Likely rate of growth Size/volume of the market Level of profitability

Assessing Opportunity Attractiveness (cont’d)
Customer and Market Dynamics: Five factors to consider: Unconstrained Opportunity- Amount of white space that is still apparent in the marketspace. Segment Interaction- Level of reinforcing activity that generates more purchase and usage Growth Rate- The percentage of annual growth of the underlying customer market. Market Size- The dollar value of all the sales generated in a given market Profitability- The profit margin that can be realized in the market

Exhibit 3-8: Priceline.com Overall Opportunity Assessment

Exhibit 3.9: MarketWatch.com: Unmet and Underserved Needs
Process Steps Unmet and Underserved Needs News constantly updated around the clock Real-time quotes Comprehensive chart data View Current Business and Financial News Read Analysis / Commentary Learn About Investing Education on investing options and strategies Plan Investment Strategy Personalized investment tools Place Stock Order* Track Portfolio Performance Comprehensive portfolio tracking Tax Reporting

Exhibit 3.10: MarketWatch.com’s Customers and Needs
The customer decision process reveals three sets of interconnected unmet and underserved needs. Licensee Needs Brand-name content Modularized content Seamless integration Reliable delivery Advertiser Needs Highly trafficked site Attractive demographics Broad ad placement options Multiple ad formats (e.g., banners, audio, video) Measurable results Opportunity Nucleus Individual Needs High-quality reliable reporting Focused reporting with moderate depth Timely market information Pleasing user experience

Exhibit 3.11: MarketWatch.com Licensing Segments
Targeted Companies Ameritrade Datek E*Trade Charles Schwab Morgan Stanley UBS PaineWebber Motley Fool The New York Times Financial Times Brokerages Diversified Financial Institutions Financial Publishers Licensing Segments Targeted Companies

Ex. 3.12: MarketWatch.com Competition: Map to Target
Yahoo Finance MSN Money CNNfn Reporting Technology Dimensions of Comparison Brand Recognition

Ex. 3.13 MarketWatch.com Opportunity Story
The MarketWatch.com Opportunity Story Target Segment Value Proposition Customer Benefits Critical Resources Reasons to Believe Resource Sourcing How to Monetize Opportunity Magnitude Consumer Affluent seekers of financial news and investing Highest-quality reporting Broad set of investing tools One-stop shopping for financial news needs In-house reporting team CBS Expensive to duplicate writing team Only one CBS Reporters in-house CBS Large target audience critical for advertising success Medium Advertiser Auto Brokers Consumer products Highly attractive audience Effective placements Improved results of online advertising campaigns Sophisticated publishing platform Strong sales team Table stakes for continued survival In-house Enhanced placements and formats Medium–large Licensee Brokers Financial institutions and publishers Broad suite of products to complement own offerings Broadened offerings on own site at reduced cost Sophisticated publishing platform and delivery tools Table stakes for continued survival In-house Develop and support multiple content modules to license Large

Ex. 3.14 MarketWatch.com Opportunity Assessment
Positive Factor Neutral Factor Negative Factor

Business Models Chapter 4 McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 4: Business Models
Questions answered in this chapter: What are the four components of an online business model? Do firms compete on value propositions or value clusters? What are the approaches to developing an online offering, whether the business is providing a product, service, or information? What is a successful, unique resource system? What are the characteristics of good resource systems? What are the revenue sources available to firms?

Exhibit 4-1: Components of a Business Model
Value Cluster Online Offering Resource System Financial Model

Value Propositions and Value Clusters
Value Proposition-requires management to specify three things: Target segment Focal customer benefits Key resource that give market advantage Value Cluster- value proposition consisting of a cluster of composed of three parts: Choice of target customer segments Particular focal combination of customer-driven benefits Rationale for why this firm and its partners can deliver the value cluster in a significantly better way than competitors

Value Propositions and Value Clusters (cont’d)
Choice of Segments Market size and growth rates Unmet or insufficiently met customer needs Weak or nonexistent competitors Choice of Focal Customer Benefits Single-benefit approach Multiple-benefit approach Choice of Unique and Differentiating Capabilities Tangible assets Intangible assets Capabilities of the organization

Quality of a Value Proposition or Cluster
Customer Criteria. Do target customers understand the proposition or cluster? Is it relevant to their needs? Is it believable? Is it perceived as unique or indistinguishable from other propositions or clusters? Will it provoke action on the part of the target customer?

Company Criteria. Will the organization “rally around” the proposition or cluster? Does the company have the resources or capabilities to own this cluster? Will it block or facilitate the eventual move to additional vertical markets?

Competitive Criteria. Are other competitors trying to hold a similar proposition or cluster? Can current or future competitors match this cluster? How easy is it for future competitors to match this cluster?

The Online Offering Scope of the Offering
Category-Specific Dominance-Companies that focus exclusively on one product category, such as flowers. Cross-Category Dominance- The extension of product offerings from a single category to additional product categories, such as Amazon.com.

Exhibit 4-2: Customer Decision Process — Flower Example
Disposal Loyalty Satisfaction Purchase Decision Evaluation of Alternatives Information Search Problem Recognition PREPURCHASE PURCHASE POSTPURCHASE

Exhibit 4-3: Egg Diagram for 1-800-Flowers.com
Gift reminder service Holiday specials Everyday celebration suggestions Special occasion suggestions Ideas and Information “Care and handling” “Do it yourself” Special events and educational workshops held at stores Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Bestsellers Flower / Gift Decision Process Need Recognition Product Offering Gift Recommendations Education on Flowers and Decoration Search for Ideas and Offerings Birthday Gift Central Gift by occasion Gift by price Monthly gift clubs Corporate gift services Post-Sales Support Order receipt Q&A chat FAQ Customer service inquiry form Post-Sales Support and Perks Evaluation of Alternatives Product price Product picture Product description Delivery information Delivery availability Perks Miles earned with flower purchases Free gifts Discounts at AOL & BN.com with flower purchases Member specials Message Selection Purchase Decision Shopping basket E-commerce transaction Special shopping features Delivery outside U.S. 1-800-lasfloras.com Physical cards in gifts a bouquet Source: Adapted from Mohanbir Sawhney, “Making New Markets,” Business 2.0 (May 1999): 116–21.

What Is a Successful Resource System?
Modifications to the activity system logic for the online marketplace Shift from physical world to virtual and back to physical world Shift from a supply-side focus to a demand-side focus Shift from resources to benefits Shift from single to multifirm systems

Specifying a Resource System
Step 1: Identify core benefits in the value cluster Step 2: Identify resources that relate to each benefit Step 3: Identify to what degree the firm can deliver each benefit Step 4: Identify partners who can complete resources

Exhibit 4-4: 1-800-Flowers.com Resource System
Strong Distribution Network Online Gift Center Broad Assortment of Gifts High Quality of Flowers Popular Website Integrated Partner Offers Core Benefits Customer Service Widespread Easy Access Multiple Contact Points Technology Strong Brand Name Wide Reach to Customers = Core Benefits =Resources

Criteria to Assess the Quality of a Resource System
Uniqueness of the system Links between resources and benefits Links among resources in the system Links among resources Links between virtual world and physical world business systems Sustainable advantage

Exhibit 4-5 : Online/Offline Egg Diagram for 1-800-flowers.com
Prompts on toll free number recording Suggestions from CSRs* in stores and via phone Special events and educational workshops held at stores Prompts on toll free number recording Suggestions from CSRs* in stores and via phone Brochure Gift reminder service Holiday specials Everyday celebrations suggestions Special occasion suggestions Off-line Product Offering Ideas and Information “Care and handling” “Do it yourself” Floral ideas Garden ideas Home ideas Gift ideas Gourmet ideas Store locator Recommendations by budget Best sellers Flower / Gift Decision Process Need Recognition On-line Product Offering Gift Recommendations Education on Flowers and Decoration Search For Ideas and Offerings Gift guru Favorite gifts Gift frequency Gift impossible Gift baskets Corporate gift services Suggestions from CSRs in stores via phone Brochure Post-Sales Support In-store customer service Customer servifce on toll-free number Order receipt eQ&A online customer service FAQ Customer service inquiry form Post Sales Support and Perks Evaluation of Alternatives Product price Product picture Product description Delivery information Delivery availability Information from CSRs in store and via phone Brochure Perks In-store specials Specials offered via phone Miles earned with flower purchases Free gifts Discounts at AOL & BN with flower purchases Member specials Message Selection Purchase Decision Shopping basket E commerce transaction Special shopping features Delivery outside U.S. 1-800-lasfloras.com Gizmo fully-animated greeting cards Physical cards in gifts Select card in-store Select card via phone Purchase in-store Purchase via phone *CSR = Customer service representative

The Role of Partnerships
Portal agreements (AOL, Yahoo, MSN, etc.) Anchor tenant agreements (exclusive partnerships) Promotion agreements (cross industry promotions such as frequent-flier miles, telephone discount rates, gift certificates, etc.)

Revenue Models Advertising- Earning revenue through the selling of ads (banner or interstitial), site sponsorships, event underwriting, or other forms of communication Product, Service, or Information Sales- Income generated from the sale of goods on the site Transaction- Revenue accrued from charging a fee or taking a portion of the transaction sum Subscription- Revenue generated through subscriber fees for magazines, newspapers, or other information/service businesses License Fees- Revenue generated from licensing of content

Online Business Models
Metamarket Switchboard Model Traditional and Reverse Auction Models Freshest-Information Model Highest-Quality Model Widest-Assortment Model Lowest-Price Model Most-Personalized Model

Exhibit 4-6: Summary of Online Business Models

Marketwatch.com Business Model
Value Cluster Target segments (savvy investors, “seekers”, “dabblers”) Key benefits (up-to-the-minute information; original, in-depth analysis; personal-finance tools; multiple points of access) Supportive rationale (experienced editorial staff, multiple forms of media, CBS News and Financial Times brand names)

Marketwatch.com Business Model (cont’d)
Supportive Rationale Experienced editorial staff with financial expertise Infrastructure allowing access from multiple forms of media Credibility through its association with CBS News

Exhibit 4-7: MarketWatch.com Egg Diagram
Planning Tools Sharebuilder Payment Calculator Home Price Check Best Credit Card Rates Insurance QuickQuote Learn Getting Started Investor’s Primer IPO Basics Financial Term Glossary Breaking News Online News Watch Alerts Real-time Headlines Hotstock Tracker Marketwatch Live eSignal Radio Contribution to Westwood One Television CBS MarketWatch Weekend Contributions To: CBS Early Show CBS Evening News CBS NewsPath Personal Finance Process Learn About Personal Finance Plan Investment Strategy Stay Updated on the Latest News and Figures Develop Insight Invest Track Investments Track Investments Portfolio View Portfolio Analyzer Portfolio Allocation Portfolio Tracker Market Figures Futures and Options Futures Contracts After-Hours Futures Bonds Bellwether Bonds Report Funds Fund Profile Fund Charts Stocks Interactive Charting Historical Charts Global Markets Key Rate Snapshot International Indexes Non-Us Stocks US Markets Market Monitor Major Indexes Dollar Volume Leaders Invest Sponsorships by Online Brokerages Datek Online Fidelity Investments National Discount Brokers Ameritrade Cybertrader Scottrade Broker Decision Center Develop Insight Third-Party Sources Market Guide Hoover’s Online Multex Annual Reports Club INVESTools Over 250,000 Investment Research Reports Community Private People Watch Hot Discussions Occasional Polls Commentary Thom Calandra’s Stockwatch Bambi Francisco’s Net Sense Bezderick on Bonds (Many other commentary columns) eNewsletters

Resource System CBS News Financial Times Marketwatch.com BigCharts.com Content partners (Hoovers, Zacks, INVESTools, etc.) Distribution partners (Yahoo, AOL, Quicken, etc.)

Exhibit 4-8: MarketWatch.com Resource System
International Presence Distribution Partnerships Up-to-the-Minute Information Partnerships with Content Providers Multiple Points of Access Available Infrastructure Credible Analysis and Personal Finance Tools Association with CBS Experienced Editorial Staff CORE BENEFITS =Core Benefits =Resources

Revenue model Advertising revenue (37% in 2001) Licensing revenue (52% in 2001) Other revenue, subscription, etc. (6% in 2001) Value model (best information) Growth model Advanced portfolio-tracking tools International markets Services to address expanded trading hours Expand reach to wireless devices Expand TV and radio shows to more stations

Exhibit 4-9: Partners Give / Get Matrix

Exhibit 4-10: MarketWatch.com’s Revenue Distribution

Strategy Formulation: Customer Interface
Chapter 5 Strategy Formulation: Customer Interface McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5: Strategy Formulation: Customer Interface
Questions Answered in this Chapter: What are the seven design elements of the customer interface? What determines the look-and-feel of the design? What are the three content classifications? Why be concerned with community? What are the two ways in which websites can achieve customization? What types of communication can a firm maintain with its customer base? How does a firm connect with other businesses? What commerce features help websites perform financial transactions?

Introduction The customer interface is the virtual representation of a firm's chosen value proposition Seven design elements of the customer interface (7Cs) Context Content Community Customization Communication Connection Commerce

Exhibit 5.1: The 7Cs of Customer Interface
Context Site’s layout and design Content Text, pictures, sound, and video that webpages contain Commerce Site’s capabilities to enable commercial transactions Community The ways sites enable user-to-user communication Connection Degree site is linked to other sites Customization Site’s ability to self-tailor to different users or to allow users to personalize the site Communication The ways sites enable site-to-user communication or two-way communication

Exhibit 5.2: Fit and Reinforcement of the 7Cs
Business Model Individually Supporting Fit Context Content Community Customization Communication Connection Commerce Consistent Reinforcement

What Determines the Look-and-Feel of the Design?
Context The context of a website captures its aesthetics and functional look-and-feel Dimensions of Context Function Refers to the organization and accessibility of information Section Breakdown- is the way the site is organized into subcomponents Linking Structure- enables users to move easily between sections Navigation Tools- facilitate how the user moves through the site Speed- is measured by the time needed to display a page on a user’s screen Reliability- how often a site experiences “downtime” Platform Independence- is measured by how well the website can run on multiple platforms, including old versions of Web browsers Media Accessibility- the ability of a site to download to various media platforms

Context (cont’d) Context Classifications
Aesthetics Refers to the visual characteristics of a site Color Scheme- refers to the colors used throughout the site Visual Themes- help to tell the story portrayed across the site Context Classifications Aesthetically Dominant: Emphasis is on the look-and-feel of the site. This type of site makes heavy use of visual elements Functionally Dominant: Emphasis is on the display of textual information. This type of site limits the visual design to a minimum Integrated: Balance of form and function. These sites have a clear and appealing theme that support the underlying graphics

Exhibit 5.3: Form vs. Function -The Design Context Frontier
Integrated High Aesthetically Dominant Frontier is gradually moving outward as technology advances Low Functionally Dominant Low High FUNCTION

Exhibit 5.4: Aesthetically Dominant example—KMGI.com

Exhibit 5-5: Functional Dominant—Brint.com

Exhibit 5-6: Integrated Example—Patagonia.com

Content: Deciding What Information to Include
The Content of a website refers to all the digital information on the site Dimensions of Content Offering Mix: The content of a site can include products, information, services, or a mix of these three Appeal Mix: The Company's value proposition is projected in the promotional and communications messages of a site Multimedia Mix: Refers to the choices of media including text, audio, image, video and graphics Timeliness Mix: The information presented on a site is time-sensitive Current Content - Highly time-sensitive information with very short shelf life Reference Content - less time-sensitive information with longer shelf life

Content Classifications
Content (cont’d) Content Classifications Product Dominant: Encompasses store sites that primarily sell physical goods Superstore - One-stop shop offering a wide range of goods in multiple product categories Category Killer - Sites offering a comprehensive selection of products and services but only within a specific category Specialty Store - Stores offering exceptional quality and exclusivity in single or multiple categories of products Information Dominant: Encompasses store sites that focus heavily on information Service Dominant: Encompasses store sites that focus on the services offered, often for a fee

Exhibit 5-7: A Framework to Understand Content Classifications
Multiple Superstore NUMBER OF PRODUCT CATEGORIES Specialty Store Category Killer Single Narrow Broad DEPTH OF PRODUCT LINE

Exhibit 5-8: Category Killer Example—PetSmart

Exhibit 5-9: Specialty Store—Frontgate.com

Exhibit 5-10: Information-Dominant Example—Fast Company

Exhibit 5-11: Service Dominant Example—PlasticsNet

Five components determine the shape of online communities:
What Makes A Community? Community includes a feeling of membership in a group along with a strong sense of involvement and shared common interests Five components determine the shape of online communities: Characteristics Member Motivation Member Participation Member Benefits Interaction Tools

Characteristics The more evolved the community the more likely it is to have these six characteristics Cohesion- the community develops a group identity Effectiveness- the group has impact on members’ lives Help- members feel comfortable asking for and receiving help from other members Relationships- interaction between individuals leads to friendships Language- members develop a specialized language and/or abbreviations with unique meaning within the community Self-regulation- the group sets rules for its own interaction and develops a system for policing itself

Exhibit 5-12: Communities—Elements, Types, and Benefits
Why members are motivated to join the community How members participate in the community Community Characteristics Interaction Tools Cohesion Effectiveness Help Relationships Language Self-regulation Member Benefits Need fulfillment Inclusion Mutual influence Shared experiences/ information

Community Classifications
Nonexistant- sites that have no community offer no way for users to interact with one another, on either a one-to-one basis or one-to-many basis Limited- sites that offer features such as reading and posting information, stories, or opinions Strong- sites that offer interactive community functions such as chat rooms and message boards

Exhibit 5-13: Limited Community Example—Gillette Women’s Cancer Connection

Exhibit 5-14: Strong Community Example—Bolt.com

Customization: Creating an Individualized Website
Customization refers to a site's ability to tailor itself to each user or to be tailored by the user Dimensions of Customization Personalization: The user initiates and manages the customization process Tailoring: Software dynamically publishes unique versions of the site to address specific user's interests, habits and needs more appropriately

Customization (Cont’d)
Commonly used customization features: accounts: Users can send and receive from the site, using a free, unique address Content and layout configuration: Users can design their own homepage, within limits, by choosing background colors, layout design, and content sources Storage: Users can store , URLs, favorite content, or items they want to buy Agents: Computer programs can perform simple tasks upon request, such as notifying a user via when a product is in stock

Exhibit 5-15: Personalization by User Example—MyLook.com

Exhibit 5-16: Tailoring Example—Amazon Homepage for Two Users

Communication: Keeping in Touch with Users
Communication refers to the dialogue between a site and its users Dimensions of Communication Broadcast: One-way information exchange from organization to user. Broadcast communication can be in the form of mass mailing, FAQ, newsletters, content-update reminders and broadcast events Interactive: Two-way communication between the organization and a user. Interactive communication can be in the form of e-commerce dialogue, customer service and user input

Communication Archetypes
One-to-Many, Non-Responding User: Site messages are announcements that users receive without needing to respond One-to-Many, Responding User: Site messages are invitations to users to submit their comments and responses One-to-One, Non-Responding User: User receives personalized messages to address specific interests or needs without a need to respond One-to-One, Responding User: User responds to personalized messages sent by the site

Exhibit 5-17: One-to-One, Live Interaction Example—LivePerson.com

Connection: Linking with Other Websites
Connection is the degree to which a given site is able to link to other sites Dimensions of Connection Outside Links: Links that take the user completely outside the home site and into a third-party site Framed Links: Links that take the user to a third-party site that open in the same browser window and that are framed by the home site in some way Pop-Up Windows: Links that open up the new site in another browser window while the original website stays in the background Outsourced Content: Content that comes from an outside supplier

Exhibit 5-18: Outsourced Content Example—Real.com

Connections Classifications
Destination Site: Provides almost exclusively site-generated content with very few links to other sites Hub Site: Provides a combination of site-generated content and selective links to sites of related interests Portal Site: Consists almost exclusively of links to a large number of other sites

Exhibit 5-19: Destination Site—NYTimes.com

Exhibit 5-20: Hub Example —Industry Central

Exhibit 5-21: Portal Site Example—Yahoo

Commerce: Enabling Financial Transactions
Commerce refers to the sale of goods, products or services on the site. Dimensions of Commerce Functional tools that are the commerce-enabling features of a website Registration Orders Through Affiliates Shopping Cart Configuration Technology Security Order Tracking Credit-Card Approval Delivery Options One-Click Shopping

Commerce (cont’d) Commerce Classifications:
Low: These websites have the ability to process transactions, but with few of the tools that enable e-commerce Medium: Some websites have no need for all the commerce bells and whistles and contain financial transactions as a necessary feature but not as their main purpose High: These websites are fully equipped with all or almost all the functional tools that enable e-commerce

Exhibit 5-22: Map of 7Cs Framework
Context Aesthetically dominant Functionally dominant Integrated Content Product-dominant Information-dominant Service- dominant Community Nonexistent Limited Strong Customization Generic Moderately customized Highly customized Communication One-to-many, nonresponding user One-to-many, responding user One-to-one, nonresponding user One-to-one, responding user Connection Destination Hub Portal Commerce Low Medium High

Exhibit 5-23: Foot Locker (www.footlocker.com)
Context Aesthetically dominant Functionally dominant Integrated Content Product-dominant Information-dominant Service-dominant Community Limited Strong Customization Generic Moderately customized Highly customized Communication One-to-many, nonresponding user One-to-many, responding user One-to-one, nonresponding user One-to-one, responding user Connection Destination Hub Portal Commerce Low Medium High Nonexistent

Exhibit 5-24: Cool Running (www.coolrunning.com)
Context Aesthetically dominant Functionally dominant Integrated Content Product-dominant Information-dominant Service-dominant Community Nonexistent Limited Strong Customization Generic Moderately customized Highl Communication One-to-many, responding user One-to-one, nonresponding user Connection Destination Hub Portal Commerce Low Medium High Functionally dominant Information -dominant Strong Highly Customized One-to-many Nonresponding user One-to-one Responding user Hub Low

Exhibit 5-25: MarketWatch.com (www.cbs.marketwatch.com)
Context Aesthetically dominant Integrated Content Product-dominant Service-dominant Community Nonexistent Limited Strong Customization Generic Highly customized Communication One-to-many, responding user One-to-one, nonresponding user One-to-one, responding user Connection Destination Hub Portal Commerce Low Medium High Functionally Dominant Information -dominant Strong Moderately customized One-to-many Nonresponding user Strong Low

Exhibit 5-26: CBS MarketWatch.com Homepage

Market Communications and Branding
Chapter 6 Market Communications and Branding McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 6: Market Communications and Branding
Questions answered in this chapter: What are the four categories of market communications? What constitutes a good brand? What is a 10-step branding process? How does online branding compare between American Airlines and Continental Airlines? What are the arguments for and against leveraging an offline brand into the online environment?

Integrating Communications and Branding
Branding is about consumer’s perception of the offering—how it performs, how it looks, how it makes one feel, and what messages it sends Market communications represent customers’ interaction with the brand and, more generally, mass-marketing approaches In the offline world, market communications tend to be one-way, from the firm to the customer In the online world, market communications become much more interactive (two-way)

The Customer Decision Process and Market Communications
Decision stages of the buying process: Brand awareness and product consideration can be communicated through television ads, general interest magazines, web banners Product preference can be fostered through niche magazines and company websites Purchase decisions can be triggered by point-of-sale promotions, direct marketing, daily specials, sweepstakes, and first-time order incentives Brand loyalty can be developed through product experience, buyer’s clubs, alerts, newsletters

Exhibit 6-1: Evolution of Customer Buying Process
Awareness Consideration Preference Purchase Loyalty Buying Process Television ads General interest magazines Buttons Banners Sponsorships Television ads General interest magazines Banners Niche magazines Collateral Microsites Brochureware Website Point-of sale promotions Direct marketing Daily specials Sweepstakes First-time order incentives Product experience Buyers’ clubs alerts Newsletters Traditional Market Communication Web Market Communication Source: Forrester Research, Monitor Analysis

What are the Four Categories of Market Communications?
Market communications refers to all the points of contact that the firm has with its customers: General online communications Personalized online communications Traditional mass media communications Direct communications

Exhibit 6-2: Framework for Marketing Communications
Direct Personalized Individualized Audience Focus Traditional Mass Marketing General Online Approaches Broad Offline Online Communications Media

Exhibit 6-3: The Four Categories of Communications
Direct Personalized Personalized permission Personalized recommendations Personalized advertisements Personalized webpages Personalized e-commerce Salesforce Direct mail Telemarketing Customer service reps Traditional Mass Marketing General Online Approaches Television Radio Print Billboards Banner ads Viral marketing Portal sponsorship/exclusive agreements Associate programs Online and offline partnerships Customer information Online transactions

The Four Categories of Communications
General online communications Banner ads are box-like, graphical ads displaying a simple message designed to entice viewers to click the ad Unsolicited advertising (extensively used by Cyber Promotions) Viral marketing occurs when awareness about company-developed products, services, or information is passed from user to user Sponsorship and exclusive partner agreements expand brand and product exposure Affiliate programs refers to arrangements where a particular site directs a user to an e-commerce site receiving a commission on sales generated by that user

The Four Categories of Communications (cont’d)
Personalized online communications. The manner in which transactions occur on the Web provides e-commerce companies with detailed information on their customers and gives the opportunity to create one-to-one marketing relationships Personalized Permission involves customers volunteering information regarding their on-line interests and preferences in exchange for some offered benefit Personalized recommendations entail specific merchandise recommendations for each user based on past purchases, site pages viewed, and survey information that the user has provided Personalized advertisements provide a customer with dynamically updated personalized ads Many portals and e-commerce sites allow users to create their own personalized web pages, encouraging users to return more often and increasing the user’s familiarity with the site

Traditional mass media communications Television. Many online companies find that television, while expensive, can provide a critical exposure to large audiences and generate explosive growth in customer base (Monster.com) Radio. In 1999, Priceline.com management allocated two-thirds of its $60 million marketing budget to radio and claimed that it was the most effective medium for reaching potential customers

Direct communications Sales representatives. When properly managed, the Web can lead to the increased effectiveness of sales representatives, rather than making them obsolete Direct marketing. With the new information gained online, e-commerce companies are able to better target and customize conventional direct marketing mailings

What is a “Good” Brand According to the American Marketing Association, a brand is “name, term, sign, symbol, or design, or a combination of them intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of competition” A good brand provides positive consumer responses and benefits both target customers and the firm

Exhibit 6-4: What Is a Good Brand?
Mix of offline and online advertising Emphasizes advantages to AAdvantage memberships, including mileage points and online services Marketing Communications “Wrap-Arounds” Superior service AAdvantage frequent-flyer club Award-winning Admirals Club lounges Comfortable chairs Portable defibrillators on every flight Core Product / Service Safe, on-time transportation from A to B Brand Prestige

A Simple Conceptual Model of Brand Equity
Brand equity is “a set of assets (and liabilities) linked to a brand’s name and symbol that add to the value provided by a product or service to a firm and/or that firm’s customers”

A Simple Conceptual Model of Brand Equity
A brand has three components: Core product/service “Wrap-around” Marketing communications Consumer responses can take two broad forms: Brand awareness (depth, breadth) Brand associations (strength, valence, uniqueness) Consumer benefits may include the increased confidence in the purchase decision, loyalty to the brand, and satisfaction with the experience Firm benefits translate into top-line revenue growth, increased margins, and lower marketing costs

Exhibit 6-5: A Simple Conceptual Model of Brand Equity
A good brand... … provides positive consumer responses... … and benefits both target customers and the firm BRAND AWARENESS Depth Breadth CUSTOMER BENEFITS Confidence Loyalty Satisfaction Market Communication “Wrap-Arounds” Core Product / Service BRAND ASSOCIATIONS Strength Relevant Consistent Valence Uniqueness Memorable Distinctive FIRM BENEFITS Reduce marketing costs Increased margins Opportunity for brand extensions Source: Kevin Lane Keller, Strategic Brand Management (Upper Saddle River, NJ: Prentice-Hall, Inc., 1998), David Aaker, Building Strong Brands (New York: The Free Press, 1996), market2customer Analysis, Marketspace Analysis

Types of Brands Pure offline and online brands
Classic offline brands include the Gap, UPS, and Disney New online brands include Amazon, Yahoo, and Priceline Blurring of the distinction Brands such as Yahoo were established online but use offline promotional activities to grow brand awareness Brands such as E*Trade are traditional brands, but they are extensions of the online brands—and thus a mixture of the two Brands such as Egghead.com have completely shifted from an offline brand to a purely online brand Brands such as WingspanBank were established in the virtual world but by a traditional brand Brands such as Schwab have successfully bridged the gap between online and offline activities Brands such as Ragu were established offline but use online promotion to grow brand awareness

Exhibit 6-6: Types of Brands
Traditional Brands Online Brands The product / service with which the brand is associated was established offline in the bricks-and-mortar world Examples: Gap UPS Dell J.Crew McDonald’s Office Depot Ragu Coca-Cola Disney The product / service with which the brand is associated was established in the online world Examples: Amazon Yahoo ZDNet AOL Priceline CDNow Excite E*Trade

Exhibit 6-7: Brand Presence
Mix of Promotional Activities Offline Online Online Brands E*Trade Egghead E*Trade Financial ATM Product Establishment Wingspan bank Bank One Schwab Ragu Traditional Brands Source: Monitor Analysis

Exhibit 6-8: Building an Online Brand
1. Clearly define the brand audience. 2. Understand the customer. 3. Identify key leverage points in customer experience. 4. Continually monitor competitors. 5. Design compelling and complete brand intent. 6. Execute with integrity. 7. Be consistent over time. 8. Establish feedback systems. 9. Be opportunistic. 10. Invest and be patient. Value Cluster Integrated Campaign

Exhibit 6-9: Similarities and Differences Between Offline Vs
Exhibit 6-9: Similarities and Differences Between Offline Vs. Online Branding

Exhibit 6-9: Similarities and Differences Between Offline Vs
Exhibit 6-9: Similarities and Differences Between Offline Vs. Online Branding (cont.)

Exhibit 6-10: Cases of Successful Online Branding Efforts

Branding Choices A firm’s online branding choices depend upon its communications objectives Brand creation. The objective may be to build a new-to-the-world brand name Sales leads. The company may decide that the Internet will be used to facilitate the sales-lead process Store traffic. The principal objective for some sites may be to increase store traffic Product trial. A fourth objective may be trial usage of the product Product sales. The company can also measure the success of a campaign based upon the actual increase in product or service sales Brand reinforcement. Finally, it is possible that the communications effort is focused on reinforcing a brand image that is already widely accepted in the marketplace

Exhibit 6-11: Online Branding Choices
Brand Reinforce-ment Broad Vs. Focused (Specific Products / Services) Brand Association Brand Awareness Firm Benefits Customer Benefits Product Sales Sales Leads Brand Creation Product Trial Store Traffic What value do you want to derive from your online presence? What part of brand equity do you want to build? What product / service are you offering them? Value Objective Component of Brand Equity Product Scope Target Audience Broad Vs. Focused (Specific Segments) Who do we want to target? Source: Forrester Research, Monitor Analysis

Case Study: American Airlines
Overview of American Airlines’ online branding efforts First to have a service-oriented website (May 1995) First to launch an service of discounted fares, Net SAAver Fares (March 1996) First to offer real-time flight information (Spring 1996) First to offer flight information on competitors (Spring 1996) First to offer airline reservations online (June 1996) First to offer paperless upgrade coupons and stickers (Spring 1997) First to send confirmation of itinerary and ticket purchase (Fall 1997) First to offer high personalization for consumers (June 1998) First airline to partner with AOL to create AOL AAdvantage Rewards Program (Fall 2000)

Exhibit 6-12: American Airlines Website

Exhibit 6-13: American Airlines—Assessment of Key Branding Elements
Continental CV CV CVc = very low = low = moderate = high = very high

Exhibit 6-14: American Airlines—Assessment of Key Brand Attributes
Continental = very low = low = moderate = high = very high

Case Study: Monster.com
Overview of Monster.com’s branding efforts and achievements Launched in 1994 as the 454th website in the world Monster.com has over 50% of the online-recruitment ad market Revenue increased from $6.9 million in 1996 to $133.5 million in 1999 The site’s traffic—averaging 3.6 million unique visitors in January 2000—translates into more than 5% of all U.S. Internet users At the end of 2000, Monster.com had 7.2 million resumes on file and more than 273,000 registered recruiters In February 1999, Monster.com’s Super Bowl TV ads generated 2.2million searches, a 450% traffic increase in one week To further its branding efforts, Monster.com signed alliances with Yahoo and a $100 million four-year agreement with AOL to be its exclusive career-information provider

Exhibit 6-15: Monster’s Homepage

Exhibit 6-16: Assessment of Key Branding Elements
Monster.com HotJobs.com

Exhibit 6-17: Assessment of Key Brand Attributes
Monster.com HotJobs.com

Case Study: MarketWatch.com
Overview of MarketWatch.com branding efforts General online approaches MarketWatch.com advertises on sites with broad reach, such as Yahoo, Lycos, and Excite MarketWatch.com is a recommended link on the CBS site and the sites of CBS partners MarketWatch.com is the premier provider of business and financial news for AOL’s Personal Finance channel, with links on the AOL site leading to MarketWatch.com MarketWatch.com has a content-licensing agreement with online brokers such as E*Trade and Fidelity.com In addition to agreements with other parties, MarketWatch.com offers the majority of its content and tools for free, encouraging users to explore the site and to return to it regularly

Case Study: MarketWatch.com (cont’d)
Overview of MarketWatch.com branding efforts Traditional mass marketing media MarketWatch.com features its own weekly show CBS MarketWatch Weekend MarketWatch.com provides content for popular CBS News programs such as the Early Show, CBS Evening News and CBS NewsPath MarketWatch.com contributes content that is aired through the Westwood One radio syndication company across the country (154 stations, including the top 10 markets in the nation , with a reach of 11.5 million unduplicated listeners each week) MarketWatch.com provides financial content to newspapers, such as the Daily News Express

Exhibit 6-18: MarketWatch.com Marketing Communications
Traditional Mass Marketing Television Advertising on CBS Mentions and scrolls during CBS shows CBS MarketWatch Weekend Contributions to CBS NewsPath Outdoor Advertising Outdoor placards Bus advertisements in target cities Radio Contributions to Westwood One Network Spots during NFL radio broadcasts Mentions on CBS-owned and operated radio stations Print Limited ads in trade journals Conferences Participation in online finance, online journalism, and Internet-related conferences General Approaches Advertising on heavily-trafficked websites (e.g., Yahoo, AOL) Licensing content to industry-leading financial organizations (e.g., Wall Street Journal Interactive) Strategic distribution relationships (e.g. Yahoo, AOL, Quicken.com) Advertising on CBS site and other CBS Internet partners (e.g., CBS SportsLine, CBS HealthWatch) Advertisements on targeted sites (e.g. other online financial sites) Free information onsite Personalized Permission marketing s sent to groups from opt-in lists Direct Individualized Audience Focus Broad Offline Online Communication Needs

Exhibit 6-19: Assessment of Key Branding Elements for MarketWatch.com
Key Elements Rating Rationale Clearly Define the Brand Audience Three target groups cover a wide range of the population: savvy investors, financial information seekers, and “dabblers” (users with little financial knowledge) Understand the Customer Understands the different needs of savvy investors versus less sophisticated investors and provides offerings accordingly Identify Key Leverage Points in Customer Experience Focuses primarily on providing breaking news and analysis, rather than enabling investors to make transactions Has developed a community that shares knowledge and encourages frequent returns to the site Continually Monitor Competitors Continuously tracks studies on demographics, behavior, and brand awareness of its users versus competition Design Compelling and Complete Brand Intent Message of “Get the Story Behind the Numbers” captures most of the value offered to users—relevant and in-depth financial information and analysis; it does not fully capture the tools and education that the site offers Execute with Integrity The message of the CBS MarketWatch.com brand is trustworthiness; its credibility is enhanced by the association with the CBS News brand name and its staff of over 70 experienced journalists and editors Be Consistent Over Time Initial branding message was “Your eye on the market” but was switched to “Get the story behind the numbers” in 1999; the new message was designed to appeal to a broader user group Establish Feedback Systems Rigorously tested site and message effectiveness with focus groups halfway through the new marketing message campaign, at a time when the market was in turmoil; results were highly positive Be Opportunistic Establishing CBS MarketWatch brand over a number of different media, including Web, TV, radio, print, and wireless Invest and Be Patient Investing a large percentage of the company budget to sales and marketing activities—patiently waiting to become profitable, even with a market that currently demands profitability = Very Low = Low = Moderate = High = Very High

Exhibit 6-20: Assessment of Key Brand Attributes for MarketWatch.com
Key Attributes Rating Rationale Relevant Directly addresses the needs of different user groups. For savvy investors: provides real-time quotes, in-depth analysis and tools. For financial information seekers and users new to financial concepts: provides headline news and analysis as well as education tools. Distinct Brand message “Get the story behind the numbers” is distinct from competitor messages. It focuses on the unique MarketWatch.com capability of providing new-to-the-world, relevant, in-depth content. Consistent The initial brand message was “Your eye on the market.” This changed to “Get the story behind the numbers.” The intent was to appeal to a wider group of users, shifting the focus toward less sophisticated investors and people new to financial information. The main offering message of providing quality market analysis has remained relatively consistent. Memorable The MarketWatch.com brand message is highly memorable. Early on this was aided by memorable TV advertisements, which started with a market result and traced it back to the unlikely events that led to it. As a result of that campaign, the CBS MarketWatch brand rose 10 points in aided awareness in one year. = Very Low = Low = Moderate = High = Very High

Implementation Chapter 7 McGraw-Hill/Irwin

Chapter 7: Implementation
Key questions answered in this chapter: What factors are involved in successful strategy implementation? What are the implementation challenges for online firms? What human-assets issues must firms be concerned with? What are the different types of processes that firms must develop? What are the advantages of the two types of hybrid organizational structures? What systems might online firms be concerned with? What kind of culture is best for e-commerce companies? Why are partnerships so prevalent for online firms?

Exhibit 7-1: Framework for Implementation
Human Assets Partnerships Processes Business Model Organizational Structure Leadership Systems Culture

Why Does Implementation Matter?
Inappropriate strategy can be partially offset by proper implementation, but poor implementation will usually result in a company performing poorly in the marketplace

Exhibit 7–2: Why Does Implementation Matter?
Strategy Appropriate Inappropriate Success All that can be done to assure success has been done. Roulette Good execution will either mitigate poor strategy or hasten failure because strategy is not sound. Good Trouble Poor execution hampers good strategy. Managers may never become aware of strategic soundness because of execution inadequacies. Failure Bad strategy is difficult to diagnose because it is masked by poor execution. Two things are wrong, making problems more difficult to fix. Poor Source: Modified version of materials in Thomas V. Bonoma, The Marketing Edge (New York: The Free Press, 1985).

Implementation Challenges for Online Firms
Six implementation challenges of online firms: 1. Higher visibility to errors Internet firms are closely monitored by the media, thus mistakes become magnified 2. Lower switching costs It costs a consumer very little to switch from one site to another (click of the mouse) 3. More dynamic competitive environment Low barriers to entry result in opportunities for competitors and new entrants, when implementation is poorly executed

Implementation Challenges for Online Firms (cont’d)
4. More fluid organizational boundaries Increases contact between partnering organizations, but elevates the complexity of the interactions 5. More dynamic market environment Companies must implement quickly in order to adjust to the changing marketplace 6. More complex linkages Increased linkages result in a more bureaucratic process, thus slowing the decision process

Exhibit 7-3: Challenges of Online Implementation
Customer Driven Organization Driven Lower switching barriers = Increased importance of good implementation More complex linkages = Increased complexity of implementation More visibility of errors = Stronger competitive implications of errors More fluid organizational boundaries = Increased complexity of implementation More dynamic competitive environment = Increased complexity of implementation Organization Driven Customer Driven

Implementation Mistakes Made by Companies
Six “silent killers” of implementation Top-down or laissez-faire senior management style Unclear strategy and conflicting priorities Ineffective senior management team Poor vertical communication Poor coordination across functions, business, or borders Inadequate down-the-line leadership skills and development

Human Assets Recruitment Selection Development Retention
Refers to the formal task of searching for the right employees Selection Is the process of making hiring decisions and formal job offers Development Providing the employee a professional development plan to accentuate individual strengths and improve on weaknesses Retention Constantly evaluating and “ranking” employees to ensure the company provides the best work environment and best total compensation packages

Processes Patterns of interaction, coordination, communication, and decision-making that employees use to standardize how work is done. These must be configured by online firms during implementation: Resource-allocation processes Human resources management processes Manufacturing and distribution processes Payment and billing processes Customer support/handling processes

Online and Offline Integration
Types of Hybrid organizations: 1. Single-Organization: Advantages Flexibility between channels Consistent integration of online and offline customer service Managing a consistent brand People- employees have option of learning broader set of skills and capabilities Taxes Valuation Systems

Online and Offline Integration (cont’d)
2. Dual-organization: Advantages Coordination and cooperation processes License to cannibalize People- two separate organizations for recruiting Allocations Sales Tax exemption for Online sales

Exhibit 7-4: Single Organization versus Dual Organization
Company CEO CEO of company Online CEO Offline CEO Company strategy Human assets Operations IT infrastructure Processes Culture Online and offline partnerships Online strategy Human assets Operations IT infrastructure Processes Culture Partnerships Offline strategy Human assets Operations IT infrastructure Processes Culture Partnerships

Four Types of Online Supply Chains
1.Business-to-Consumer(B2C) E-tailer has significant flexibility in its supply chains One advantage is online retailers do not have to have the physical product in stock Four types of B2C supply-chain models: A. Stock-it-yourself B. Outsource warehousing C. Drop shipping D. Fulfillment intermediaries

Online Supply Chains (cont’d)
2. Business-to-Business(B2B) Estimated to be 3 to 10 times larger than the B2C market Advantages include: lower input prices, reduced inventory, reduced transaction costs, faster delivery, and better customer service 3. Consumer-to-Business(C2B) Organize consumers together to create group-buying power in order to reduce costs 4. Consumer-to-Consumer (C2C) Firm facilitates person-to-person interaction, e.g., Ebay

Exhibit 7-5: Four Types of Supply Chains Found Online
B2C - Business to Consumer B2B - Business to Business Stock it yourself. Outsource warehousing Drop shipping Fulfillment intermediaries Customer centric Vertical hubs C2C - Consumer to Consumer C2B - Consumer to Business Much like a vertical hub (many websites facilitate customer-to-customer sales) Provides a forum for buyers and sellers to meet and trade directly A global marketplace with a large and interested trading company Individual consumers place bids with businesses (such as Priceline) and businesses decide whether to sell

Exhibit 7-6: Generic Organizational Culture Types
External Entrepreneurial Adaptive - Unbounded by rules and precedents - Willing to take risks - Flexible - Innovative - Proactively identifies issues - Good at planning and setting goals - Responsive to market changes - Outcome oriented Commitment Bureaucratic - Emphasizes internal cohesion, participation, teamwork, and loyalty - Emphasizes stability, established routines, and formal authority Internal Low High Specificity

Leadership The Roles of Company Leadership
Responsible for building the capacities needed for strategy implementation Designing structures and systems Setting roles and responsibilities Allocating resources Assigning managers

Leadership (cont’d) The Role of Top Leadership Think strategically
Communicate persuasively Act decisively Demonstrate ethical behavior and strong character Build a sense of momentum for their firm

Leadership (cont’d) Important Abilities for Management Teams of Online Companies Ability to keep the CEO in check Ability to communicate the vision of the company Experience in startups, online businesses, or catalog businesses Experience in technology roles

Exhibit 7-7: Partnership Attributes
Weak Link Exchanges Cross-Promotion License Agreements Research and Development Joint-Product Offerings Outsourcing Functional Strategic

Getting Things Done: Integrative Resource System
Principle 1: Execution Is Led by Senior Management—Not the Troops Principle 2: Hold People Accountable for Meeting the Numbers Principle 3: It Is Not Just About the Numbers; It Is Also About the Process Principle 4: Continuous Improvement Is Still Relevant and Important Principle 5: The Customer Is the Starting Point Principle 6: Hire and Develop the “Doers”

Metrics Chapter 8 McGraw-Hill/Irwin

Chapter 8: Metrics Questions answered in this chapter:
Why should senior managers be concerned about metrics? How can the health of online firms be assessed? What are the steps to implement the Performance Dashboard? What external sources of metrics information can firms use to chart their progress?

Why Senior Managers Should Be Concerned About Metrics
Five ways in which metrics can have a positive effect on the growth and vitality of the organization: Help define the Business Model. Help communicate strategy. Help track Performance. Help increase accountability. Help Align Objectives.

Current Challenges to Specifying Metrics for Online Businesses
Reasons why some firms have not made an explicit commitment to metrics: Companies’ strategies change rapidly. Measurement is Resource Intensive. Soft Metrics are not valued by the investment community. Meaningful metrics change on Internet time.

Assessing the Health of Online Firms
The Balanced Scorecard: Introduced by Kaplan and Norton in response to their perception that managers overwhelmingly focus on short term financial performance. They argued that firms must balance their financial perspective by analyzing other domains of the business,including internal business processes and customer responses. They introduced 4 categories of metrics:Financial, Customer, Internal Business Systems, and Learning and Growth.

Assessing the Health of Online Firms (cont’d)
Financial Metrics: They are designed to assess the financial performance of the company. Typical financial measures include revenue, revenue growth, gross margins, operating income, net margin, earnings per share and cash flow. Customer Metrics: Customer metrics are intended to assess the management of customer relationships by the firm. These measures typically focus on a set of core measurements, including market share, customer acquisition, satisfaction, and customer profitability.

Exhibit 8-1: The Balanced Scorecard – Strategy Into Operational Terms
FINANCIAL To succeed financially, how should we appear to our shareholders? CUSTOMER To succeed financially, how should we appear to our shareholders? INTERNAL BUSINESS PROCESS To satisfy our shareholders and customers, what businesses must we excel at? Vision and Strategy LEARNING AND GROWTH To succeed financially, how should we appear to our shareholders? Source: Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review 74 (January-February, 1996): 76.

Assessing the Health of Online Firms (cont’d)
Internal Business Process Metrics: These focus on operations inside the company. Kaplan and Norton divided them into three groups: Innovation Operations Postsale service Learning and Growth Metrics: These broadly cover employee, information systems, and motivation metrics.

Limitations of the Balanced Scorecard
No clear definition of strategy or business models. Unclear location of organizational capabilities or resources in the framework. Unclear where partnerships reside in the framework.

Exhibit 8-2: The Performance Dashboard
Market Opportunity Business Model Customer Branding and Marketing Strategy Implementation Metrics Market Opportunity Business Model Branding and Marketing Implementation Customer

The Performance Dashboard
The Performance Dashboard is intended to reflect the health of a business. We first address the limitations of the Balanced Scorecard through features of the Performance Dashboard. The Strategy Framework drives the necessary metrics. Resources are featured in the resource system of the business model. Partnerships are featured in the resource system of the business model.

Components of the Performance Dashboard
The Performance Dashboard is composed of five categories of metrics: Market Opportunity Metrics: Market opportunity metrics assess the degree to which the firm can accurately gauge the market opportunity. Generic indicators include the ability of the firm to include the most attractive segments, the ability of the firm to understand and map the competitors’ strategy evolution and the ability of the firm to track the evolution of target segment needs.

Components of the Performance Dashboard (cont’d)
Business Model Metrics: Business model metrics capture the subcomponents of the business model: the value proposition, egg diagram, resource system, and financial metrics. Value proposition or Cluster Benefits: The value proposition is composed of three parts: target segment, benefits offered, and capabilities that drive the benefits. Metrics for this assessment would focus on customer perceptions of the benefits that a given site offers relative to competitors.

Online Offering Metrics: Metrics should reflect the entire decision process from prepurchase to post purchase. Offering metrics focus more on the nuts-and-bolts features, attributes and functionality of the site. Resource System Metrics: The resource system is based on the benefits offered to consumers. From these benefits, the firm would analyze the capabilities that are necessary to supply the benefits. Financial Metrics: Captures the revenues, costs, profits, and balance-sheet metrics of the firm

Marketing and Branding Metrics Marketing and Branding Metrics: These focus on marketing communications and branding effectiveness. Implementation Metrics Implementation Metrics: These focus on the effectiveness of a company’s human resources program as well as its processes, organizational structure, systems (including information, incentives, and rewards), coordination mechanisms, culture and management style, and technology systems.

Customer Metrics Customer Interface Metrics: Measures the customer’s experience with the technology interface; that is, the customer’s response to the 7C’s of the interface. Customer Outcome Metrics: This captures output metrics such as overall costs of satisfaction, average order size, and customer profitability.

Exhibit 8-3: Life Cycle of a Company
STARTUP/ BETA CUSTOMER ACQUISITION MONETIZATION MATURITY 6 Months- 1 Year 1 Year - 2 Years 2 Years - 5 years > 5 Years Strategy Develop a platform for rapid growth by building a strong team and creating a flexible site. Build market share as quickly as possible by aggressively spending on partnerships and promotion. Increase revenues and customer lock-in by developing new revenue streams. Control costs and optimize marketing expenditures to achieve profitable growth. * At time of writing (February 2001)

Implementing the Performance Dashboard
Step One: Articulate Business Strategy Step Two: Translate the Strategy into Desired Outcomes Step Three: Choose Metrics Step Four: Link Metrics to Leading and Lagging Indicators Step Five: Calculate Current and target Performance

Exhibit 8-4: Blueprint for the Performance Dashboard
Step One: Articulate business strategy Step Two: Translate strategy into desired outcomes Step Three: Choose metrics Step Four: Link metrics to leading and lagging indicators Step Five: Calculate current and target performance Market Opportunity Opportunity size? Competitive environment? Market Opportunity Market size and growth Average age and income Competitor concentration Business Model Unique value proposition? Capabilities vs. competition? Business Model Customer-perceived benefits Exclusive partnerships More invested in technology vs. competition For each metric, determine the metrics that it affects and that affect it Map the linked set of metrics, indicating leading and lagging indicators Ensure that there is a balance between leading and lagging indicators For each metric, calculate current level of performance Determine target level required to meet outcomes described in Step Two Ensure that targets are consistent Marketing How to develop brand? Marketing Customer brand awareness Define goals and value proposition Develop resource system required to deliver the strategy Implementation System uptime percentage Number of IT staff Percent of inaccurate orders Implementation How to go to market? Customer How to acquire customers? How will customers change? What is customer experience? Customer Market share Purchases per year Success rate Service request frequency

Exhibit 8-5: Metrics for Seamless Online / Offline Customer Purchase Process
AWARENESS Awareness of online offering vs. offline offering Perceived benefits of Web vs. offline offering KNOWLEDGE Prepurchase Available offering information online vs. offline Currency of information online vs. offline EVALUATION OF ALTERNATIVES PURCHASE Security and privacy associated with purchasing online vs. offline Purchase SATISFACTION Response time online vs. offline Customer loyalty and incentive programs online vs. offline LOYALTY Postpurchase DISPOSAL Exchange policies online vs. offline

Exhibit 8-6: Metrics for Seamless Internal Business Processes and Operations
Ability to open accounts online and offline Ability to access accounts online and offline Integrated customer databases Information Sharing Seamless order processing Seamless order tracking Integrated inventory systems Fulfillment Systems

External Sources of Metrics Information
Firms are likely to track their value proposition versus competition, customer satisfaction with the site, site usability and financial outcomes. Online Information: Market Research: Online market research firms collect primarily customer data through online surveys or customer submissions. Analyst Reports: Analyst reports are data sources that blend primary market data on a particular topic with an analyst’s view of the market. Financial Information: These data sources principally provide statutory filings of financial information on particular companies or aggregated financial data across industries. The data collected generally includes income statement, balance sheet and statement of cash flow information.

Exhibit 8-7: BizRate—QVC

Exhibit 8-8: Forrester

Exhibit 8-9: Mapping Internet Research Onto the Performance Dashboard
Financial Information Market Research Analyst Market Implementation Customer Financial

Marketwatch.com Metrics Application
Step one: Articulate the Marketwatch.com Strategy Value proposition: “To be a leading Web-based provider of comprehensive, real-time business news, financial programming and analytic tools.” Marketwatch.com Offer: The aim is to deliver three key benefits to users: real-time information, comprehensive and in-depth analysis and tools and multimedia access. Resource System: Consists of three layers. Core benefits delivered to users as described in the company’s offer. Capabilities that must be in place to deliver the core benefits. The activities and resources that need to be retained to deliver these capabilities.

Exhibit 8-10: MarketWatch.com Strategy
“To be a leading provider of comprehensive, real-time business news, financial programming, and analytic tools.” 1. Value Proposition 3. Resource System 2. Marketspace Offering

Marketwatch.com Metrics(cont’d)
Steps Two and Three: Translate Strategy into Outcomes and Metrics. An effective way is by asking key questions for each of the five categories. Market Opportunity: Is the opportunity significant? How intense is the competition? Business Model: How unique is the Markwetwatch.com value proposition relative to competitors? Are the Marketwatch.com resources and Partnerships significantly better than competition’s? How sustainable is the Marketwatch.com’s value proposition relative to the competition’s? Will MarketWatch.com be able to maintain profitability?

Exhibit 8-11: MarketWatch.com Desired Outcome Summary
Market Opportunity Significant opportunity Moderate degree of competition Implementation Business Model Best-in-class IT infrastructure Better value proposition than competitors Better capabilities than competitors Revenue and profit Strategy Marketing and Branding Customer Better brand awareness than competition User acquisition User online behavior User satisfaction and loyalty

Marketing and Branding: How effective and efficient is the Marketwatch.com’s marketing efforts at attracting new users? How is the MarketWatch.com brand perceived in the market? Implementation: Does Marketwatch.com have an infrastructure that enables it to reliably distribute financial content across multiple platforms?

Customer: What is the perception of the online user experience? How satisfied and loyal is the user base?

Step Four: Link Metrics to leading and Lagging indicators. The fundamental question is “How do we link the metrics to each other?” Knowledge of this interrelation will help management understand which groups of leading indicators it needs to focus on in order to achieve its target performance on lagging indicators. A unique value proposition that is marketed successfully will lead to creation of a strong brand and high brand awareness among users. This will stimulate usage which will lead to an increase in ad revenue because there will be more users viewing more pages resulting in profitability.

Exhibit 8-12: Leading/Lagging Indicators for MarketWatch.com
Market Opportunity Business Model Implementation and Branding Customer Interface Financial Competition underserving market Unique value proposition Build brand Brand awareness Usage Ad revenue Satisfaction and loyalty Attractive segments that company can serve well Attractive offering to users Develop improved offering to users Other revenue sources Profit System reliability Leverage capabilities to deliver offering Invest in IT infrastructure Optimized system costs

Step Five- Calculate Current and Target Performance. A successful strategy needs to be implemented by setting targets and taking actions to reach those targets. In many cases, the target performance is to become the best performer in a metric.

Exhibit 8-13: MarketWatch.com Best-in-Class Metrics
Source: comScore Media Metrix

Website Development Process
Chapter 9 Website Development Process McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 9: Website Development Process
Questions answered in this chapter: What are the steps involved in building a website? How is the user experience definition created? What is the architecture design process? What is the implementation process? What is involved in the test process? What factors are involved in launching a website?

Website Development Process
The goal of website development is to present functionality and content through some type of visual interface.

Three External Forces That Shape This Goal:
Time: What is the deadline for this project? Is the deadline flexible or nonnegotiable? Can the site be phased in over time, or do all of the desired features have to be built immediately? Budget: How much money has been allocated to the project, and how was that number derived? Is there enough in the budget to hire additional staff if the deadline is too tight? Can the project be outsourced in part or entirety? Resources: Does the organization have the right mix of skills internally to deliver the project as specified? Does it have enough of each type of skill given the timetable that has been laid out? Are these resources available, or could the resources needed be pulled off another project—and what is the relative importance of this project to the organization versus the other project?

Exhibit 9-1: Process for Building a Website
Strategy Formulation User Experience Definition Architecture Design Process Implementation Test/Fix Launch

Process for Building a Website from Scratch
Important aspects that need to be known or in place: A well defined set of business objectives for the site Executive support A general definition of the audience segments A clearly articulated project plan A succinct definition and description of the relevant branding systems A competitive analysis for the industry and the product/service offered by the site a budget development resources a steering committee of senior stakeholders and executives

Process for Building a Site from Scratch (cont’d)
User Experience: refers to how a user perceives and interprets the website Functional Specification: provides a highly detailed guide to what every page on the website does Change-management Process: a framework for identifying problems within the project (e.g., software bugs or a change in site requirements), prioritizing these problems, assigning the task of resolving these problems, and tracking the progress of the tasks until all problems are resolved Project Plan: Lays out the checkpoints, milestones, and resources that are expected to be required to move the project forward to completion

Process for Building a Site from Scratch (cont’d)
Discipline Areas key to successful site development include: Business Strategy Functional/subject-matter expertise Information architecture Content development/writing Visual design Interface design Technical architecture Database administration Data modeling Technical development Quality assurance team lead Quality assurance testing

Exhibit 9-2: Project Plan

User Experience Identification
By developing the online offering through: Identifying the scope of the offering Identifying the customer decision process Mapping the offering to this decision process The following can be defined: User types: The discrete types of users who will use the site User intentions: What tasks users want to accomplish when they visit the site User personas: Fictitious, archetypal examples of real users that allow the development team to focus on the collective core needs of the users within a group Use case: Describes how a user and a system interact to accomplish a specific goal, typically a step-by-step guide describing all the actions that the user takes, and what the system does in return

Exhibit 9-3: User Profile
Personal Profile Age: 20 Education: 4 years of high school Car: Saturn SC1 Shops at: Old Navy, Starbucks, Abercrombie and Fitch, Gap, Newbury Comics, Tower Records Occupation Job: Full-Time Student Company Size N/A Company Industry: Typical Task on Acme.com: Product Research and Purchase Familiarity with Acme: Somewhat familiar: Cindy has seen Acme's adds, and a few of her friends have computers from Acme. Usage Scenario Description: Cindy needs a computer, but is uncertain as to what her options are—she is a bit afraid of the whole process, to be honest. Her parents have agreed to buy her a computer, but have told her that she needs to do the research. Reason for choosing to work with Acme: Recommendations from her friends, cool-looking computers, good price, and Acme appears to be an easy, no-pressure company to buy from—a company that will take care of her. Desired Experience: Cindy wants to be able to research her computer options, understand the pros and cons, and buy a computer. But, she wants to buy a computer that is at least as cool as her friends‘ computers, so she would like to be able to make a case to her parents for a slightly better computer than what she might actually need. When she decides what to buy, she would like to understand the financing options available to her. Key Points: User Profile: Cindy the College Student

Exhibit 9-4: Intentions Matrix

Exhibit 9-5: Functional Matrix vs. Functional Specification
Functional Matrix Purpose: Define project scope, used to build project plan Communication with executives, project team, any external contractors Track enhancements as they are discovered during development Plan future release functionality—by priority

Exhibit 9-5: Functional Matrix vs. Functional Specification (cont’d)
Functional Specification Purpose: Provide detailed design of system processes and pages Provide details of the life cycle of different objects (search, payments, etc.) Defines the details of each page (list of fields on a page, their validation requirements, their data sources) Defines all actions on each page (save shopping cart, send , update account, checkout)

Architecture Design Process
At this point the team needs to generate the next set of important documents: The Site Map: Typically a hierarchical view of the proposed website and encompasses all the primary pages, or templates, to be developed. Allows the development team to logically group content into content areas and to understand how different content types relate and link to one another The challenge is to develop a navigation system that is meaningful to the user and also fits within the visual design of the site Page Schematics: Simple drawings or diagrams that serve as a conceptual layout for what each page on the site will look like The schematic provides the team with a way to brainstorm how and where certain functionality and content will appear on a particular page

Exhibit 9-6: Sample Site Map

Exhibit 9-7: Page Schematic

Technical Discovery The technology vision is strongly informed and structured by many elements, including the following: The business objectives for the site User persona Existing technology Internal skill set User intentions Time and budget Traffic Uptime requirements Security requirements

Technology Discovery (cont’d)
The technology summary document should detail the following: Existing corporate systems, including relevant back-end systems and databases How the proposed site differs from those of the company’s competitors Conceptual technical architecture to support the site An analysis of and recommendations for the software components to be used during the development process

Experience Definition and Architecture Design Outputs
At this point, the development team should be able to create the following outputs: User experience and functional definition document User type definition document User intentions definition document User persona definition document Functionality matrix Content matrix Use cases Site map Page schematics

Implementation Validation Finalize the visual design of the site
Create a functioning prototype

Implementation (cont’d)
Build Phase The building process boils down to some very simple steps: Design the technical infrastructure Design the technical components so that they will be both flexible and extensible Build the components (both visual and functional) that will make up the website Integrate those components so that they work together as expected Test those components, both individually and after they have been integrated Refine the system and components based on these tests Launch the website

Development Environment Deciding which language should be used is guided by a number of factors: Available skills Portability Scalability/enterprise features Cost

Page Design Unique pages: are pages that have a design that is different from any other page on the site Template pages: the design and layout of these pages are repeated more than once, usually on a section of the site that has multiple pages of similar content (e.g., press releases)

Interface Development The choice of which technologies to implement within an interface is difficult because not all pages require the same set of functionality or deliver the same type of information The success of an interface is determined by whether its users are successful in getting the information they need and understanding the information that is presented to them

Application Development The application development is shaped by the functionality matrix and the functional specification The team creates modules that meet all the capabilities the website needs to have

Test/Fix Steps in the testing process: Unit testing
Integration testing Systems testing Load testing

Exhibit 9-8: Number of Bugs Over Testing Days

Launch Basic issues that need to be solved before launching a site:
A hosting facility/ISP must be selected The servers must be built and tested The connectivity of the site must be tested The security of the overall system must be audited

Site Architecture Chapter 10 McGraw-Hill/Irwin

Chapter 10: Site Architecture
Questions answered by this chapter: What is logical architecture? What are the factors involved in choosing a logical architecture? What is the presentation layer? What is the business logic layer? What is the data layer? What are the factors involved in choosing a physical architecture?

Logical vs. Physical Architecture
Logical Architecture Attempts to define the system in terms of its software components and the desired functionality of those components Physical Architecture Defines the hardware and third-party software needed to host and maintain a website

Logical Architecture Four main logical models have evolved over the years: Mainframe: systems are built around a single, monolithic computer that is shared by all users on the system Client/Server: a central server is used to store information that is accessed and acted upon by any number of client machines connected to the server through a network

Exhibit 10-1: Mainframe Architecture
Dumb Terminals (no CPU) Single Mainframe Computer

Exhibit 10-2: Client/Server Architecture
PC Workstations Single Central Server

Logical Architecture (cont’d)
N-Tier: compartmentalizes different functions of a system into modules that interact with one another Distributed: is a system of servers, loosely coupled across a dispersed network, that work together to deliver a website

Exhibit 10-3: N-Tier Architecture
PCs with Web Browsers Presentation Layer Business Logic Layer Data Layer

Exhibit 10-4: Distributed Architecture
External Payment Processing PCs with Web Browsers External Link Three-Tier System Internal Link Internal Inventory System

Choosing an Architecture
A number of factors can influence this decision, they can include: Functionality: refers to the functions that a system must implement Flexibility and Adaptability: refer to the ability of a system to adapt to changes in its function Scalability: refers to the ability of a system to be extended to handle a greater load, usually as a result of an increase in the user base Performance: is the perceived speed of a system, often measured by the user as response time Maintenance: refers to the monitoring and updating of a system

Exhibit 10-5: CNN Homepage (August 23, 2001, and September 11, 2001)
CNN.com Homepage August 23, 2001 CNN.com Homepage September 11, 2001

Choosing an Architecture (cont’d)
Required Skills: refers to the skills needed to design, build, and maintain a system Security: refers to the ability of a system to prevent illegal or inappropriate use of its data and to deter hackers Reliability: refers to the amount of time a system can be expected to be available to users Metrics: are the measurements and data needed by the company to understand the operation of a system Cost: is the amount of money spent to design, build, and maintain a system Time: refers to the number of people/hours, as well as total time period, needed to develop a system

Exhibit 10-6: Three-Tier Architecture
Presentation Web Server Payment User/Admin Content Business Logic Modules Data Database

The Data Layer The main function of the data layer is to provide fast, reliable access to data needed to run a system Additionally, the data layer is responsible for maintaining information about the relationships between data

Types of Databases Flat-File: are single computer files that store all of the information for a system Relational: data are stored in a series of tables, each table stores a discrete piece of data for the system Object Oriented: encapsulates all data into different types of objects

Choosing a Database To choose the right database several factors must be weighed: Load/Storage Capacity Type of Data Speed Cost Reliability

The Business-Logic Layer
The business-logic layer is responsible for implementing the basic rules of the system according to the operating rules of the business This layer is often divided into a number of submodules, each handling different aspects of the system

The Presentation Layer
The presentation layer is responsible for all communications with the user’s computer The most common ways to present data to site users are: HTML Third-party Plug-ins Homegrown Plug-ins

Exhibit 10-7: E! Online Plug-Ins
Macromedia Flash Plug-In Microsoft Media Player Plug-In

External Systems Kinds of systems most often connected with a companies site include: CRM Payment Processing Shipping Fulfillment Inventory Financial Human Resources B2B Exchanges Outside Suppliers

Physical Architecture
Hardware When choosing hardware, a number of factors must be considered: Platform Power Hosting

Hosting Alternatives Free: Shared Server: Dedicated Server:
Hosts offering free service (ex., geocities.yahoo.com) Good for very simple sites (personal homepages) Shared Server: Many websites are placed on the same Web server Good for small businesses looking for increased capabilities Dedicated Server: Website is allocated its own dedicated server Good for larger websites

Hosting Alternatives Co-located Server: In-house:
Offers companies the most control over the hardware running the site Customer owns server and is only paying for bandwidth and a physical space for the server In-house: Good for companies with adequate resources (Global 1000 companies) Sites need 24-hr dedicated personnel, power backup, security maintenance, and redundancy

Hosting for Large Websites
Most large websites are hosted by third-party facilities The main service offered by these companies is reliability Typical service offerings from third party companies include: Redundant Internet Connections Backup Power Physical Security Server Management Services Offsite backup Storage

Chapter 11: Human and Financial Capital
Questions answered in this chapter: What is a startup? What are the different sources of human capital that can play a role in a startup business? What are the typical sources of funding for an early-stage startup business? What elements are needed for a successful pitch to investors? How is the value of a startup determined? What are the factors involved in negotiating with investors? What is an initial public offering? What process must an entrepreneur undertake to successfully complete and IPO?

Exhibit 11-1: Venture Capital — Market Size, 1995-2001
Source: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q Results: US Report.

Defining a Startup A startup is a business that is in the process of developing the underlying infrastructure needed to support future growth A startup is a business engaging in the the following three basic processes: Developing and refining the offering and strategy to go to market Obtaining initial funding to begin operations Building a capable management team to handle operations

Exhibit 11-2: Startup Business Investment Stages
Early Stage Expansion Stage Later Stage Seed Stage Startup First-Stage Second-Stage Mezzanine Bridge Financing Stages Validate the business concept (e.g. build prototype, develop business plan, conduct market research) Build management team and complete product development Expand production, marketing, or sales capabilities Provide working capital once shipping products or providing services Fuel substantial growth (typically provided to business that are at least break even) Prepare for initial public offering, usually planned in the next 6 months to a year Investment Purpose Type of Investors Angel investors Traditional VC Consulting firms Online VC firms Incubators Angel investors Traditional VC Consulting firms Incubators Traditional VC Corporations Traditional VC Corporations Traditional VC Corporations Buyout firms Investment banks Traditional VC Corporations Buyout firms Investment banks Source: Gold Book of Venture Capital Firms, Bob Zider, “How Venture Capital Works,” Harvard Business Review

Relationship between Human and Financial Capital
Human and financial capital resources can influence the business planning process and, in turn, be influenced by the business plan Human capital resources may include entrepreneurs, management team, strategic advisors and partners, and logistical advisors and partners Sources for financial capital include debt financing and equity financing

Exhibit 11-3: The Relationship Between Human and Financial Capital
Human Capital Financial Capital Entrepreneur Bootstrapping Angels Venture Capital Corporate Ventures Equity Holding Company Business Planning Process Management Team Strategic Advisors & Partners Debt Trade Credit Commercial Bank Loans Logistical Advisors & Partners

Elements of a Solid Business Planning Process
The major elements of a business planning process include the following: Defining the value proposition Framing the market opportunity Detailing how to reach customers Developing an implementation plan Evaluating potential external influences Articulating the revenue model Identifying needed people Calculating preliminary financial projections Establishing critical milestones Summarizing the advantage

Human Capital The role of human capital in a startup business is especially critical because, for a time, it is the only resource available When investors consider funding an early-stage company, they assess its human capital Who is the entrepreneur? Does she have the drive to see this business through? Who is on the management team? Will they be able to execute? The human capital attracts the financial capital

Characteristics of Successful Entrepreneurs
Key characteristics common to successful entrepreneurs include the following: Keenly Observant. Entrepreneurs are those who are able to make observations about the needs of industries, markets, and everyday life and find the best way to meet these needs Willingness to take risks. Entrepreneurs are willing to leave stable jobs and guaranteed salaries for their enterprises Drive. The entrepreneur’s personal drive is especially important in the early stages, when his enthusiasm spurs the drive of other employees Flexibility. The ability to adapt and react quickly are especially important in the fast-changing Internet environment Vision. The most successful entrepreneurs are not driven by money, but by a vision or a passion consistently pursued

The Trials and Tribulations of the Entrepreneur
From the outset, the entrepreneur is faced with reconciling several difficult paradoxes: Being visionary vs. being realistic. The entrepreneur is faced with the challenge of coming up with unique ideas that are grounded in reality Generating quick returns vs. investing in the future. The entrepreneur is challenged with staying the course to build the organization while meeting the demands of the investors who are needed to build the organization in the first place Optimism vs. pragmatism. While optimism is an essential motivating force, it must be balanced with the pragmatism to evaluate potential weaknesses of the business

The Entrepreneur and the Idea
Some of the most common types of business ideas include the following: Introduce a new product (new software—MP3) Introduce a new service (overnight delivery—FedEx) Improve an existing model of business (selling books on the Internet—Amazon.com)

The Management Team The core team consists of individuals essential to the early formative days of the startup who will fill the following three roles: Technology specialist: is the person who understands the specific mechanics of how the product works, how it is manufactured, and how it can be utilized Sales and marketing specialist: is the person with an in-depth understanding of the startup’s customer Execution specialist: is the person who keeps everything in perspective in the startup’s development making the vision for the business a reality

The Management Team (cont’d)
Extended management team can be created on an as-needed basis, depending on how quickly the startup is growing Chief operating officer Chief financial officer VP of marketing VP of sales VP of business development Chief people officer

Strategic Advisors and Partners
Strategic advisors and partners provide the startup with strategic direction, advice, and in many instances credibility for the organization as a whole Advisory board members serve as an outsourced resource to fill a particular need and may receive stock options in exchange for their expertise The board of directors consists of individuals who will be responsible for the well-being of the company, as well as holding the management team accountable for its actions when the business formalizes operations A strategic association is the agreement of two entities to work together and exchange expertise in areas where they lack core competencies A strategic alliance is a legally binding contractual agreement to share resources on a project for a particular timeframe

Logistical Advisors and Partners
Logistical advisors and partners differ from the strategic advisors and partners in that they are more involved in the day-to-day operations of the business Necessary logistical advisors and partners include certified public accountants (CPA) and legal counsel Supporting logistical advisors and partners serve as outsourced, human-capital leverage for the startup and may include intermediaries, consultants, and incubators

Financial Capital Sources of debt financing (commercial banks, trade credit) Sources of equity financing (bootstrapping, venture-capital) Strategic investors are concerned how a certain business compliments their current activities (exposure to cutting-edge technology or business model, collaboration in research and development for a product, etc.) Financial investors are concerned with return on investment (ROI), internal rate of return, cost of capital, and return on equity

Debt Financing Trade credit is credit extended to a business by its suppliers. It is an interest-free loan covering the time period from when supplies are delivered to when the invoice is due Suppliers typically offer trade credit to buyers with an established track record of making prompt payments Hidden interest rate cost Commercial bank loan is, typically, an installment loan in which the business borrows a certain amount of money for a specified period with either a fixed or variable interest rate Commercial banks evaluate a business’ loan application by assessing the likelihood of loan repayment Bank loans can be relatively difficult to obtain, especially for early-stage businesses with little collateral and no positive cash flow

Equity Financing: Bootstrapping
Bootstrapping is the art of using personal resources to finance the early stages of a startup Bootstrapping may include taking a personal loan, mortgaging a home, using credit cards or savings accounts Bootstrapping provides the most viable option for the entrepreneur when the startup is in the earliest stages of business, especially during the stages that involve proving the business concept Bootstrapping allows the entrepreneur to control the company and refine his business strategy without pressure from outside investors The disadvantage of bootstrapping is that it is unlikely to provide sufficient cash for a good business concept to grow quickly beyond the earliest stages

Equity Financing: Venture Capital
Venture-capital firms are usually private partnerships or closely held corporations that raise money from a group of private investors A venture-capital firm typically invests $250,000 to $10 million in a business in exchange for a 30 to 40 percent equity stake and a seat on the board of directors In addition to receiving cash, the entrepreneur receives guidance for building the startup Venture capitalists, typically, charge management fees on the order of 1 to 5 percent of the capital investment in a startup A venture-capital firm seeks opportunities that will return 10 times the original investment within five years, but realizes that each investment is a gamble and that only 10 percent are likely to succeed The biggest disadvantage of venture capital funding is the source’s concern with the bottom line

Exhibit 11-5: Venture Capital Investments—Breakdown by Stage
$BB Source: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q Results: US Report.

Exhibit 11-6: Top 10 Venture Capital Dealmakers in 2001
New Enterprise Associates Baltimore, Md. 82 Intel Capital Chandler, Ariz. 72 J.P. Morgan Partners New York, N.Y. 69 Bessemer Venture Partners Wellesley Hills, Mass. 68 Austin Ventures Austin, Texas 62 U.S. Venture Partners Menlo Park, Calif 61 Warburg Pincus 53 St. Paul Venture Capital Eden Prairie, Minn. 52 Technology Crossover Ventures (TCV) Palo Alto, Calif. 49 Mobius Venture Capital Mountain View, Calif. 47 [i] Source: Data from PricewaterhouseCoopers, MoneyTree Survey: Full Year & Q Results: US Report.

Equity Financing: “Angels”
“Angels” are wealthy individuals who invest personal capital in startups in exchange for equity or sometimes a seat on the board of directors Its critical for the entrepreneur to develop a network of individuals within the industry to gain introductions to potential financiers because “angels” seldom look at unsolicited business plans Business plans are evaluated based on the quality of the management team, market potential for the business idea, and the track record of the entrepreneur Typically, “angels” are more flexible in accepting changes in the original business plan if it is necessary “Angels” tend to be more involved in the day-to-day” operations of startups

Equity Financing: Corporate Ventures
Large corporations sometimes set up venture funds as a subsidiary that can make investments on behalf of the parent company, referred to as either corporate venture or “direct investors” Corporate-venture funds invest in complimentary business for primarily strategic reasons In exchange for cash, capital ventures seek an equity stake in the company and access to the company’s technology or product Established corporations can offer the operational expertise as well as the credibility and visibility that come from associating with an established high-profile parent Because the investments are strategic rather than financial, the pricing of deals with corporations tends to favor the entrepreneur more than deals with venture-capital firms

The Business Plan A business plan should provide the following information to a potential investor Description of the product or service that will be offered and the value proposition for the customer Summary of the size and nature of the market opportunity Explanation of the revenue model Profiles of the management team, advisory board, and board of director members describing specific relevant skills and expertise Clear articulation of the startup’s core competencies and sustainable competitive advantage Summary of financials and financing needs

Valuation Valuation is the art/science of trying to determine the worth of a company Methods used in valuing a company The Comparables Method Determine the worth of a company by comparing it to other similar companies The companies should be similar with respect to industry focus, income statement ratios, location, relations with suppliers, customer base, potential growth, growth rate and capital structure This method assumes that similar companies exist and that the information for comparison is available

Valuation (Cont’d) The Financial Performance Method
Uses a company’s earnings (or potential earnings) to project future cash flows and applies a discount rate to determine the Present Value (PV) of those cash flows The Discounted Cash Flow (DCF) is determined from Proforma Income Statements – Projections about the company’s future income statements are made based on growth assumptions for cost and revenues Free Cash Flow – The amount of cash the company will have at its disposal is estimated based on the proforma income statement Terminal Value – The expected value of the company at the end of the projected period is estimated. A discount rate is then applied to this value to estimate the present value of the company

Valuation (Cont’d) The Venture Capital Method
VC’s use a hybrid valuation method, looking at both comparables and free cash flows To compensate for their high risk investments, VC’s apply a very large discount rate to estimate the company’s present value To compensate for future dilution, VC’s require a higher percentage ownership (for a given investment) based on an estimated retention ratio This valuation method is necessarily subjective

Exhibit 11-7: Typical Discount Rates by Funding State
Startup 50% to 70% First Stage 40% to 60% Second Stage 35% to 50% Third Stage 30% to 50% Fourth Stage 30% to 40% IPO 25%-35% Source: Data from James L. Plummer, QED Report on Venture Capital Financial Analysis (QED Research, Palo Alto, CA), 1987

Negotiations Principles for Entrepreneurs Term Sheet
Investors want to know two things: What is the opportunity and why is this management team the best to pull it off Guidelines for pitching an investment opportunity Know the audience Keep the presentation concise Talk about the management team Term Sheet A Term Sheet is a non-binding description of the proposed deal between the financier and the entrepreneur The Term Sheet is analogous to a Letter of Intent (LOI) or Memorandum of Understanding (MOU)

Negotiations (Cont’d)
Securities Types of Securities: The type of securities chosen by the company and the investor reflect the risk/reward appetite Zero Coupon Bonds - Upon maturity of this security, the investor redeems the initial investment and interest at a predetermined rate. This type of security provides ultimate protection to the investor Convertible Debentures – These securities are loans that are ‘converted’ into common stock (equity). The investor is considered to be a creditor until the company is past its high-risk stage Preferred Stock – This is the most commonly used security with VCs Convertible Preferred Redeemable Preferred Participating Convertible Preferred

Negotiations (Cont’d)
Rights and Privileges of Investors Common rights that investors demand are Right of First Refusal – Investor has the right to meet any offer of outside financing in future investment rounds Preemptive Right – Investor has the right to maintain his percentage of ownership by investing additional funds in future investment rounds Redemption Rights – Investor has the right to achieve liquidity if the company has not been sold or undergone IPO within a predetermined time period Registration Rights – Investor has the right to demand that shares be registered, forcing the company into liquidity (public offering) Covenants – Terms designed to ensure that the money provided by the investor is used in a manner that is consistent with the agreement between the entrepreneur and investor Antidilution Provisions – Provisions that protect the investor from dilution in ownership that might occur in future round of financing

Exhibit 11-8: Pre- and Post-Money Valuations Made Easy
Cumulative Round of Financing Amount invested this round % Received this round VC’s Share Founder’s Share Implied Valuation (Post Money) Seed-stage Round $1,000,000 40% 40% 60% $2,500,000 First Round $4,000,000 20% 52% 48% $20,000,000 Second Round $15,000,000 20% 62% 38% $75,000,000

Exhibit 11-9: Venture-Backed IPOs, 1995-2001
Number of IPOs Source: Data from VentureOne research.

Exit (The Path to Liquidity)
Initial Public Offering (IPO) Determining the Right Time for an IPO Asses if the company is ready for an IPO Asses if the market is ready to accept their offering The IPO Process Selection of Underwriters – The underwriters are the bankers that will arrange for the purchase of stock for a commission Preparation of Registration Statement for SEC – Create prospectus outlining the company’s business and financial fundamentals Distribution of Preliminary Prospectus - or ‘Red Herring’ Preparation for and Completion of the Road Show – The company’s offering is presented directly to potential investors The Incorporation of SEC comments into the Registration Segment Agreement on a final share price and number of shares to be offered Close of the offering and distribution of the final prospectus

Exhibit 11-10: IPO Pros and Cons
Provides founders and shareholders with liquidity (although not immediate liquidity because of lock out periods, signals to the market, etc.) IPOs are expensive and time-consuming. An unfavorable market (something that the company can not control or predict) might necessitate pulling the IPO at the last second Provides capital to fuel expansion and growth within the company Strict SEC reporting requirements Possibility of attracting and retaining employees at lower than market rates because of granting of stock options and promise of eventual liquidity Pressure to product quarterly numbers for analysts The price of the company’s shares should increase dramatically with an IPO, providing (at least paper) wealth to the founders and other shareholders Increased Officer and Director liability As long as the company is performing well, it can return to the market to raise additional cash Hostile takeover is possible The ability to use stock as currency Doesn’t necessarily provide a liquid market for all shareholders because of restrictions on trading the stock

Exit (Cont’d) Mergers and Acquisitions (M&A)
M&A can often achieve the same goals as IPO (e.g. liquidity and increased valuation) with lower potential risk In a Merger, two companies combine to achieve a financial and/or strategic objective, usually through the exchange of shares In an Acquisition, one company buys another, usually with cash and/or stock Analysts predict that M&A will become increasingly popular

Exhibit 11-11: Internet Mergers and Acquisitions in 2001
Number of Deals per Year Billions of dollars Year 2001 Source: Data from Webmergers.com database.

Media Transformation Chapter 12 McGraw-Hill/Irwin

Chapter 12: Media Transformation
Questions answered in this chapter: What is media convergence? What conditions make technological convergence possible? How have companies attempted to realize organizational convergence? How do new-media companies leverage traditional media channels? What are the barriers to organizational convergence?

Exhibit 12-1: Convergence of Digital Economy
Network and Media Convergence Print (Newspapers and magazines) Telephone DSL Television Digital Convergence Cable modem Radio Satellite Music Wireless Motion pictures

What is Media convergence?
The media infrastructure includes all of the communication companies and channels of communications such as radio, television, newspapers and magazines. Media convergence is the process by which different types of media content are evolving into a single media platform through the internet.

What conditions make media convergence possible?
The conversion of analog signals to digital signals has been one of the major steps in making media convergence possible. Some of the key factors are: Continued advances and decreasing cost of digital technology. Low Cost digital network infrastructure. Media Proliferation. Media-Usage Fragmentation in American households. Forecasted continued Media proliferation and media usage fragmentation.

Exhibit 12-2: Media Fragmentation, 1960s to 2010s
TV faces the worst audience fragmentation of all. Here, News Corp. tracks and forecasts the explosion of TV-viewing choices available in any given hour. Once there were three options; soon there will be more than 1,000. 1960s 1970s 1980s 1990s 2000s 2010s Most Americans watch the Big Three Networks every night. UHF stations bring more choices, and the fledging cable industry introduces a few new channels, including HBO and Turner’s TBS Superstation. The VCR becomes commonplace, letting consumers watch recorded shows and movies whenever they want. Cable explodes with new networks, including CNN and MTV. Direct-broadcast satellites (DBS) that offer hundreds of channels are introduced. Cable systems are slowly upgraded with more channels. Broadcasters may use the high-definition TV spectrum to launch more channels. Internet chat evolves into networked virtual-reality games, interactive movies, and other activities being hatched by MIT’s Media Lab and others. News Corp. forecasts 1,000 channels, now called “context windows.” Digital compression and two-way networks allow cable companies to offer even more channels and services. DBS services grow more entrenched. As TVs are linked to the Internet, new programming can be delivered. The result is 300 choices at any moment. Source: Data from Elizabeth Lesly Stevens, “The Entertainment Glut,” Business Week, 16 February 1998.

Exhibit 12-3: Penetration of Technologies Into US Households 1990 and 2001
Source: Data drawn from sales and penetration figures for technologies in New York Times 2002 Almanac.

Exhibit 12-4: Hours Spent per Year per Consumer per Media, 1992 - 2002

Media Economics Each form of media has its own economics and hence a different business model. The most commonly discussed media types are: Newspapers Magazines Books Broadcast Television Cable Television Radio Film Videos DVDs Music CDs Video Game Consoles, and MP3

Media Economics (cont’d)
Newspapers The top 4 newspapers in the United States at the end of 2000 were USA today, The Wall Street Journal, The New York Times and the Los Angeles Times with each of them having a daily circulation of 1 million or more. The average newspaper reader is older, well educated, and earns a relatively high income. Newspaper sales account only for a portion of a daily newspaper revenue with approximately 75% coming from advertisers. 45 % of the advertising comes from retail and classifieds and the balance comes from national advertising which represented national accounts such as financial services, airlines and hotels.

Magazines At the end of 2000, the top magazines were NRTA/AARP Bulletin, Modern Maturity, Reader’s Digest, and TV guide. Approximately 82% of all consumer magazines are sold through subscription; the remaining 18% are sold through retail outlets such as supermarkets and newsstands. Almost all magazines make money through a combination of circulation and advertising revenue. Many magazines have launched companion websites as a way to enhance subscriber benefits and to build home delivery circulation.

Media Economics(cont’d)
Books The popular subject areas are sociology, fiction, juvenile and technology. With the continued proliferation of the Internet, book publishers are looking at the possibility of going from “print and distribute” model to “distribute and print” model. Consulting firm Accenture predicts that e-books will be at $2.3 billion business by 2005, which represents one-tenth of the $2.3 billion book market.

Broadcast Television The three major U.S networks are: ABC, CBS, NBC, each having approximately 200 local television affiliates. On an average each network airs 90 hours of programming a week. Digital television, which offers lifelike picture and CD quality sound is considered to be the biggest broadcast innovation since color television was introduced in 1950s. Introduction of Digital Television(DTV) will increase the number of network channels offered in the future.

Cable Television RCA began to transmit programming to independent cable operators around the country, under the name HBO, who then relayed it to subscribers. The number of cable television subscribers has grown from 9.2 million in 1975 to 69.5 million in 2001. The cable channels make their revenue through a combination of advertising and subscription fees. The top six channels by the end of 2001 were: TBS Superstation, The Discovery Channel, TNT, ESPN, USA Network, and Fox Family Channel.

Radio Similar to broadcast television, radio generates nearly all of its revenue from advertising by delivering a select audience to advertisers. At the end of 2001, there were 13,058 radio stations on the air, approximately 78% of which were commercial stations. Film The motion picture industry earned an estimated $8.35 billion in 2001 with various studios releasing an average of 700 films per year. By 2000, average cost of movie making had tripled to $54.8 million, largely due to rising actor salaries, increased demand for special effects and other spiraling costs.

The other important forms of media are: Video DVDs Music CDs Video Game consoles, and MP3.

Digital Lifestyle Bill Gates (Microsoft Corp.) believes that the personal computer, the set-top box for interactive television, and the video-game console will all be important household devices Craig Barrett (Intel Corp.) thinks about an “extended PC era”, with consumers adopting PC accessories such as the digital camera, personal digital assistants (PDAs), and digital sound morphers Steve Jobs (Apple Computer, Inc.) envisions the PC as the home’s Internet portal, the digital hub, where consumers could edit their own movies or create customized CDs with easy-to-use interfaces Howard Stringer (Sony Corp.) believes that personal electronic devices—such as the PlayStation 2 video-game console—will be the future digital command centers for the home

Exhibit 12-5: The Digital Lifestyle in 2000 and 2010

Applications of Broadband Technology
Broadband technology is usually defined as having a connectivity speed exceeding 128 kilobits per second, significantly faster than the narrowband speeds of up to 53 kilobits per second achieved over regular telephone lines The increased use of broadband technology will allow for more applications—such as video-on-demand, multiplayer games, streaming of audio and video, and software distribution—to be offered over the Internet At the beginning of 2000, Nielsen//NetRatings estimated that only 5.1 million American households had access to broadband technology By the end of 2005, the Yankee Group projects more than 30 million Americans will have access to broadband

Internet Service Providers (ISPs)
National/international ISPs: America Online (AOL), EarthLink, Microsoft Network (MSN) Regional ISPs: BellSouth, NYNEX, Pacific Bell Local ISPs: Access Internet Communications in Cupertino, CA; Montana Communications Network in Bozeman, MO By the middle of July1999, there were an estimated 6,000 ISPs in North America In December 2000, AOL was the largest ISP in the United States with more than 29 million members, followed by EarthLink, MSN, AT&T, and NetZero

Exhibit 12-6: Connection Type Among Those With Home Internet Access in 2001
Source: Data from U.S. Department of Commerce, Economics and Statistics Administration, A Nation Online: How Americans are Expanding Their Use of the Internet, February 2002.

Digital Subscriber Line (DSL)
DSL allows for high-speed connections over existing copper telephone wires DSL requires special “modems” on each end of the connection, in the user’s home and at the telephone company’s central office DSL “modems” send and receive all data as digital data—no translation to analog signal ever takes place—allowing for faster data transmission DSL divides the phone lines into several channels which enables to talk on the phone and use the Internet simultaneously—all over a single phone line DLS “modems” must be within about 3 mile distance from each other Data transmission speed over a DSL line is about 1.5 Mbps

Cable Modem With the use of special modem, the Internet can be accessed over some cable TV systems through the existing coaxial cable that carries TV signals By replacing the coaxial copper with fiber-optic lines, cable operators could improve signal reliability and reception quality, increase channel capacity, and support the introduction of two-way interactive services Cable modems send and receive data at speeds of 2 to 3 megabits per second

Exhibit 12-7: Internet Connection Speeds
3 to 4 megabits per second 1.5 megabits per second 128 kilobits per second 56 kilobits per second

Satellite Transmission
Types of satellites used: geostationary (22,000 miles above the earth), medium earth orbit (1,000 to 10,000 miles), low earth orbit (500 to 1,000 miles) Require sophisticated subscriber antennas Downstream access at speeds up to 1 Mbps Upstream access is available only by modem or other landline connections through ISPs

Gateway to the Internet
Devices that are likely to serve as the household command center include the personal computer, video-game console, and interactive TV set-top box Currently, the PC is the primary gateway for most people to access the Internet At the end of 2000… Approximately 55 million U.S. households (53%) had personal computers Approximately 35 million U.S. households (34%) had Internet access There were approximately 62 million individual Internet users in the U.S.

Video-Game Consoles PlayStation 2 is a video-game console with the potential to access a wide range of broadband services on the Internet In addition to being a video-game player, PlayStation 2 could function as a SC and DVD player With their Play Stations, users should be able to bank, shop, and through a television set, as well as download, store, and replay digital music and video from the Web In addition to a hard drive, the PlayStation 2 has built-in “firewall” ports, which will allow it to transfer data from camcorders, digital cameras, and other PC peripheral devices in the future

Percent of US households
Exhibit 12-8: Percent of US Households with a Computer and Internet Access, Percent of US households Computer Internet access Source: Data drawn from U.S. Department of Commerce, Economics and Statistics Administration, A Nation Online: How Americans are Expanding Their Use of the Internet, February 2002.

Interactive Television
Currently, AOL and Microsoft offer basic interactive TV services that allow users to access , chat, and surf the Internet with a set-top box and dial-up modem while watching TV Forrester Research projects that by 2005, 40 million households will have access to digital set-top boxes, almost an eightfold increase from the 4.9 million households that had access to set-top boxes at the end of 1999 In addition to interactivity, video-on-demand will become more widely available, whereby consumers can choose to watch any movie or television show at any time and can even pause in the middle of it

Media Usage Fragmentation
Forecasters see mobile wireless technology as one of the fastest-growing alternatives to PCs for accessing the Web, especially when it is used as an “electronic wallet” or to check on stock quotes, which requires relatively low bandwidth Palm-size computers as well as cell phones are now enabled to receive wireless data through the Internet Wireless Web technology will be less likely to take off in the United States, where 55 percent of the population accessed the Internet through desktop computers, compared to 25 percent in Japan Only 32 percent of all Americans have cell phones, compared to 45 percent in Japan, and 65 percent in Finland

Exhibit 12-9: AOL Time Warner Synergies

Public Policy Chapter 13 McGraw-Hill/Irwin

Chapter 13. Public Policy Questions Answered in this Chapter:
How is the Internet currently regulated? What are the challenges the Internet has brought to regulation? What are the main regulation issues on the Internet today?

Introduction Overview Regulation challenges posed by the internet:
Countries must decide how to regulate, how much to regulate, and who should regulate the Internet within their boundaries and with other countries Governments are trying to regulate the Internet without hurting their economies, but also without infringing on the rights of citizens and existing business So far, few laws intended to regulate the Internet have been passed Regulation challenges posed by the internet: Access (physical layer) Taxation (business-logic layer) Privacy/security (business-logic layer) Copyright (content layer) Free Speech (content layer)

Exhibit 13-1: Elements of Internet Regulation
Physical level Access regulations Content level Copyright Free speech Government agency actions Court cases Laws Business logic or code level Taxation Privacy & security

The Digital Divide The gap between the people who are on the Internet and the people who are not on the Internet. The digital divide is closing across educational levels and race, but it remains significant among low income households and individuals over the age of 65. The significance of the digital divide will become more prevalent as the Internet becomes a more prominent component of society.

Exhibit 13-2: Access—Notable Regulatory Events
Communications Act (1934) Carterfone Decision (1968) FCC First Computer Inquiry (1971) Breakup of AT&T ( ) European Memo of Understanding on Unified Wireless Standard (1987) Telecommunications Act (1996) AT&T v. Portland (1998)

Exhibit 13-3: Effect of Sales Tax on Online Purchasing
Percent of Respondents Source: UCLA Internet Report 2001: Surveying the Digital Future

Taxation Overview Current Status
The existing tax system for offline stores is extremely complex e-commerce companies benefit from current tax laws in two ways: They attract customers who do not want to pay taxes They do not have to pay the high costs associated with collecting sales tax Current Status The Internet Tax Freedom Act (enacted in 1998) restricts changes to current laws and limits new taxes from being imposed on e-commerce purchases Offline stores have begun to protest that their online competitors do not have to charge sales tax as they do Governments are generally against extending the tax moratorium because of the lost tax revenue

Exhibit 13-4: Effect of Sales Tax on Consumers
Percent of Consumers Who Are Affected by Sales Tax Source: Jupiter Communications, as cited in The Industry Standard, “Execs Say No Net Taxes”, July 3, 2001.

Taxation (Cont’d) Proposed Legislation Impact
The House Committee studying the problem recommended that the Internet Tax Freedom Act be extended until 2005 Whether or not that occurs remains to be seen Impact Preliminary evidence suggests that the Internet sales tax would have minimal impact on consumption The biggest impact would be felt by those States who stand to loose considerable amounts of money if sales tax law is not passed

Exhibit 13 -5: Sales Tax Losses – Top Ten States

Exhibit 13-6: Taxation & Commerce —Notable Regulatory Events
Internet Tax Freedom Act (1998) Uniform Electronic Transactions Act, UETA (1999) 2000/31/EC, EC Directive on Electronic Commerce (2000) Electronic Signatures in Global and National Commerce Act, e-Sign (2000) Uniform Computer Information Transactions Act, UCITA (2000) EU Internet V.A.T. Directive (2002)

Privacy Overview Current Status
The Code of Fair Information Practices, drafted by the Nixon administration, was never enacted The government originally expected the industry to regulate itself, but dot-coms are using their customer databases as tradable assets Current Status So far, only the Children’s Online Privacy Protection Act (COPPA) has been passed States have the latitude to enact tough financial privacy laws The public is overwhelmingly concerned about privacy on the internet Privacy advocates are unsatisfied with the government’s lack of involvement, while Internet executives worry that strict privacy regulations could mean the end of the Internet

Privacy (Cont’d) Proposed Legislation Impact
Over 100 bills regarding privacy on the Internet are currently in Congress Proposed legislation ranges from requiring websites to have a ‘clear’ privacy policy to requiring websites to obtain permission from visitors (opt-in) before collecting any personal data Impact While many Internet companies fear government regulation, they might actually suffer more if the government does not get involved Government privacy regulation will have an impact on how Internet companies generate revenue

Exhibit 13-7 : Private Activities Americans Do Online
N/A N/A Source: The America Online / Roper Starch Worldwide Adult 2000 Cyberstudy

Exhibit 13-8: Privacy and Security —Notable Regulatory Events
European Parliament Directive 95/46/EC on personal data (1995) Child Online Privacy Protection Act, COPPA (1998) UK Data Protection Act (2002) USA Patriot Act (2001) Children’s Internet Protection Act, CIPA (2001) Gramm-Leach-Bliley Act (2000) Implementation of US Safe Harbor Provisions (2000)

Copyright Overview Current Status
Copyright law has been the biggest and most immediate challenge for Internet businesses and consumers Copyright is intended to strike a balance between protecting a creator’s work and letting the public use it. It is NOT intended to give ownership to the creator Current Status Three main aspects of copyright laws affect the Internet: The Copyright Act of Gives owner of the copyright the ability to replicate & distribute the work The Fair Use Doctrine - Gives the public the right to fair use of the work The Digital Millennium Copyright Act Prohibits the circumvention of copyright protection system Protects ISPs from being liable if subscribers infringe copyright laws

Copyright (Cont’d) Proposed Legislation Impact
Since courts have generally sided with copyright holders, much of the proposed legislation is intended to protect the Internet users Impact The impact of copyright law on the Internet has yet to be fully felt Studies suggest that record companies would be hurt, rather than helped, by file-swapping sites

Exhibit 13-9: Copyright— Notable Regulatory Events
World Intellectual Property Organization Treaty presented to UN (1996) (35 countries, including U.S., ratified treaty as of March 2002) Digital Millennium Copyright Act, DMCA (1998) Universal City Studios, Inc., et. al. v. Corley (2001) Court-ordered shutdown of Napster (2002)

Free Speech Overview Current Status
Free speech is one of the most protected rights is the U.S. Individuals must face the consequences of how their opinions are received by others The lack of borders makes it difficult to determine whose free speech rules to use Current Status Courts use the offline free speech test for Internet free speech issues: Is the speech a direct, credible threat against a specific target, or a direct incitement to imminent illegal action? People must first sue the ISP for the identities of offenders before they can sue the offenders themselves Web filters to restrict access to inappropriate sites are being criticized by freedom of speech activists

Free Speech (Cont’d) Proposed Legislation Impact
Courts will determine not only who can sue whom for slanderous remarks, but also when ISPs have to disclose the names of their users Impact Freedom of speech legislation will have a chilling effect on people who feel that they can be taken to court for what they say on the Internet On the other hand, if people are not held responsible for what they say, it will have a detrimental effect on the perceived veracity of the Internet content In contrast to Newspaper journalists, Internet journalists often publish stories without getting confirmation on the accuracy of the story

Exhibit 13-10: Free Speech— Notable Regulatory Events
Reno v. ACLU, CDA Case (1997) Yahoo, Inc., v. La Ligue Contre le Racisme, et. al. (2001) Ashcroft v. Free Speech Coalition (2002) Ascroft v. ACLU (2002)

Framework for e-Commerce

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