WP3: E-business Model Roadmap. Deliverable 3.1 (Revised):

Transcription

1 WP3 E-Business Model Roadmap Deliverable 3.1 (Revised): E-Factors Report Part 1: Overview, and Current Trends on E-Business Models Work Package Work Package Leader Task Leader Task Contributors Thematic Priority Editors Document Status Classification WP3: E-business Model Roadmap RC- AUEB (Greece) University of Jyväskylä (Finland) All partners Date May 2003 Keywords Abstract ELTRUN Research Centre, (AUEB, Greece) INSEAD (France) Erasmus University (The Netherlands) Norwegian School of Economics and Business (NHH, Norway) University of Manchester Institute of Science and Technology (UMIST, UK) University of Jyväskylä (Finland) Final Version (Following Reviewers Recommendations) Public e-business models, thematic priorities, technical factors, individual factors, organisational factors, industry factors, societal factors. This document contains work of the third work package of e-factors project, and includes results of work directed towards the identification of thematic priority areas and factors influencing e-business model adoption. The aim of this report is to provide a comprehensive overview of factors influencing this adoption process, divided under five subcategories (thematic priorities): Technical, Individual, Organisational, Industrial and Societal. EUROPEAN COMMISSION IST PROGRAMME IST Contract Start Date: Contract Termination Date: WP3 Deliverable E-FACTORS

2 TABLE OF CONTENTS 1 EXECUTIVE SUMMARY INTRODUCTION DELIVERABLE STRUCTURE E-BUSINESS MODELS: CURRENT TRENDS DEFINING E-BUSINESS: E-BUSINESS VS. E-COMMERCE BUSINESS MODEL VS. BUSINESS STRATEGY ESSENCE OF BUSINESS MODELS DEFINING THE CONCEPT OF BUSINESS MODEL THE E-FACTORS PERSPECTIVE ON E-BUSINESS MODELS DEFINITION E- BUSINESS MODELS TYPOLOGIES, TAXONOMIES AND FRAMEWORKS COMPONENTS OF A BUSINESS MODEL REVENUE MODELS CONCLUSIONS ON CURRENT TRENDS IN E-BUSINESS MODELS THE E-FACTORS FRAMEWORK INTRODUCTION THE FRAMEWORK METHOD OF WORK TECHNICAL / TECHNOLOGICAL THEMATIC PRIORITY LIST OF TECHNICAL/TECHNOLOGICAL FACTORS IDENTIFIED CRITICAL TECHNICAL ISSUES IN ELECTRONIC COMMERCE EXAMPLES FROM CLUSTERED PROJECTS SUMMARY INDIVIDUAL THEMATIC PRIORITY INTRODUCTION PRELIMINARY LIST OF FACTORS THEORETICAL BACKGROUND OF FACTORS UPDATED LIST OF FACTORS SUMMARY ORGANIZATIONAL THEMATIC PRIORITY INITIAL LIST OF ORGANIZATIONAL E-FACTORS THEORETICAL BACKGROUND OF ORGANIZATIONAL E-FACTORS ORGANIZATIONAL E-FACTORS IN CATEGORIES ORGANIZATIONAL E-FACTORS EXAMPLES FROM CLUSTERED PROJECTS SUMMARY INDUSTRY / INDUSTRIAL THEMATIC PRIORITY BACKGROUND OF INDUSTRY E-FACTORS EXAMPLES FROM CLUSTERED PROJECTS SUMMARY SOCIETAL THEMATIC PRIORITY INITIAL LIST OF SOCIETAL E-FACTORS THEORETICAL BACKGROUND ENHANCED VERSION OF SOCIETAL E-FACTORS THE SOCIETAL E-FACTORS IN THE CLUSTERED PROJECTS SUMMARY INTERRELATIONS BETWEEN THEMATIC PRIORITIES WP3 - Deliverable E-FACTORS

3 10.1 TECHNICAL < > INDIVIDUAL TECHNICAL < > ORGANISATIONAL TECHNICAL < > INDUSTRY TECHNICAL < > SOCIETAL INDIVIDUAL < > ORGANIZATIONAL INDIVIDUAL < > INDUSTRY INDIVIDUAL < > SOCIETAL ORGANISATIONAL < > INDUSTRY ORGANIZATIONAL < > SOCIETAL INDUSTRY < > SOCIETAL FUTURE TRENDS AND VISION OF E-BUSINESS MODELS CONCLUSIONS REFERENCES AND BIBLIOGRAPHY APPENDICES APPENDIX 1: GLOSSARY APPENDIX 2: CLUSTERED IST PROJECTS APPENDIX 3: TABLE OF INTERRELATIONSHIPS OF E-FACTORS CATEGORIES FOR ALL THEMATIC AREAS WP3 - Deliverable E-FACTORS

4 1 EXECUTIVE SUMMARY This deliverable is a compendium of experiences from current IST projects that are clustered in e-factors. It identifies current trends in e-business models and relates these to existing theory in the area. The deliverable acts as a consolidating framework for the e-factors project. The fragmented e-business knowledge from the clustered projects is brought together to develop a roadmap for future research. This deliverable will form a basis for the implementation of e-business case studies in Work Package 4. This initial version of an e-factors business model framework is focused on summarising the key factors that influence e-business model adoption. The factors in the framework are those found to have an impact on e-business model adoption in Europe at five levels. We refer to these levels as thematic areas. They are: technology, individual, organisation, industry and society. In developing this first version of the e-factors framework, the aim has been first to gather existing primary scientific knowledge on e-business models and their adoption as relevant to the multi-linguistic, multi-cultural context of diverse European markets. Second, we critically evaluate the temporal dimension of the value propositions and strategies espoused. This consolidation and critical evaluation supports the integration of European e-business model knowledge (from the clustered projects) and the derivation of a roadmap to guide further studies and trials. From the literature review of e-business model taxonomies the most important aspects are as follows: Business model definitions: In the business literature the definitions for business models are often based on different views of the key components defining a business model. Some of the most quoted definitions for business model are the definitions given by Magretta (2002), Amitt & Zott (2001) and Afuah & Tucci (2001). Business models rarely remain stable but evolve with changes in the environment and infrastructure of a company. A review of e- business models and their main components are included in this report to provide a basis for understanding and evaluating the diversity of e-business models. E-business model taxonomies: An e-business model taxonomy is a presentation of different of e-business formats, classified by one or more dimensions. A business model framework is a way to classify, organise or describe business models according to a set of principle dimensions. When evaluating taxonomies with respect to e-business model adoption factors, some taxonomies are clearly more suitable for identifying key factors that influence e-business model adoption for case evaluation (one of the objectives of this project). The taxonomies presented by Timmers (1999), Tapscott et al. (2000) and Rappa (2000) were found to be the most suitable and are emphasised in this deliverable. These taxonomies provide detailed yet different perspectives; Timmers (1999) emphasises innovation and functional integration, Tapscott et al. (2000) highlights collaborative business models and Rappa (2000) argues that the differentiating factor is the source of revenue (or revenue streams). In Europe, the enterprise is often treated as an integral part of society, and hence in this report we have revealed key exogenous factors of the business models, that are important in that they are beyond the control of an individual enterprise, but are shaped by policy makers. We suggest an expanded view that encompasses broader contexts while taking into account industrial and societal, and individual (consumers) factors. WP3 - Deliverable E-FACTORS

5 Revenue models in e-business: The concept of a business model usually includes a description of the way in which a company positions itself in the value chain. E-business models can include many different revenue models (source of income for the firm). A revenue model can therefore describe the way (how and where) in which the company actually gets its income, and the way in which the chosen business model enables revenue generation, which are often multiple. E-factors: E-factors are in this report classified as factors that promote or inhibit the successful performance of a given e-business model. Within this report, we have identified the key factors that influence e-business model adoption. We have considered factors that influence e-business models as inhibitors or accelerators for certain types of e-business and depending on the current situational/contextual factors. These factors need to be abstracted to broader categories, so that the actual instances of the individual factors can be mapped in different situations and so that the temporal evolution of the factors can be tracked to distinguish between success and failure. Main barriers and inhibitors for e-business adoption: The deliverable highlights major barriers and inhibitors of e-business. Some of the most common barriers are the cost of implementation, security concerns, perceived customer readiness, lack of knowledge of IT and e-business, lack of executive support and concerns regarding the reliability of technology. It is important to remember, that many of the key barriers or inhibitors for e-business adoption may at the same time be barriers for some companies, whilst acting as accelerators for others. The E-Factors perspective on e-business models definition: A model is an abstraction of a complex reality. It defines a set of entities their roles and their relationships. It can even define some qualitative or quantitative values of those entities. More specifically, a business model implies a set of entities in a commercial venture and portrays them in the context of two distinct set of factors, endogenous, that embrace factors that lie in the control of individual enterprises such as organizational, technical and individual factors, and exogenous, that include factors beyond the control of individual enterprises, such as industrial and societal factors that in some cases are defined by policy makers. An e-business model is, thus, defined as an Internet-enabled business model. Results from the identification of factors influencing e-business model adoption can be grouped by thematic priority area as follows: Technology: Technological factors, together with organisational factors, are the most commonly recognised and analysed part of the e-business model adoption process. Technological factors are more or less externally indicated, and the company itself must consider them as factors in different business models which are closely dictated by external factors, like the state of technological development, user preferences and expectations, competitive environment etc. In e-business the main technical/technological concern for the company is to be able to ensure the overall functionality of its web services, and to make sure that the abilities (functionality) of the technological infrastructure is conjoined with the customer needs and with other environmental factors (competition, IT-infrastructure of the region etc.). The main areas of WP3 - Deliverable E-FACTORS

6 technological factors that have been identified are based on the identification of the key technological change drivers in e-business. These key factors include for example; Interoperability and interconnectivity, ERP- and CRM systems, system integration, security and electronic identification (e.g. payment methods), the aspect of commitments, IT-system scalability, and transaction processing. Whilst these factors are primarily technological in nature, the technology thematic priority also includes factors concerning ideas of how technology should be developed, promoted, learned, used and applied. Individual: The individual thematic priority could be considered as something that integrates or links all of the thematic priorities. The individual (person) will adopt innovative technologies or will provide the measure for identifying social or organisational cohesion. In other words, the individual thematic priority forms the core of the thematic network. The thematic network can be perceived as a web of interdependent components. The individual thematic priority deals with the individual on a micro level and provides valuable insight into the mental processes that influence an individual s decision-making. However, these mental processes are not easy to decipher. It is not surprising therefore, that literature lacks a coherent and comprehensive map of an individual s behavioural patterns in respect to technology acceptance and adoption as well as ebusiness acceptance and adoption. Some of the most important factors affecting the latter are arguably the propensity to trust, individual differences (cognitive and physical) as well as an individual s background, environment and past experience. Organization: The adoption of and successful performance of e-business models is inherently associated with the ways in which single business firms or value networks of collaborating firms conduct business. Organization as a thematic priority must be interpreted as intra- as well as interorganizational. The adoption and subsequent performance of business models for e-business require much more than just jumping on the latest technologies. An enterprise needs to consider or reconsider what kind of business they are in, what products and services to sell, how they should serve the market or particular customer segments of the market, how they should organize their business processes, how the enterprise should be organized and managed, and how they could exploit new and promising virtual partnerships. A particular business model in a particular context may fail for a number of reasons. Our main categories of organizational e- factors stem from such a list of reasons of business model failure. The seven factor categories that we have identified are as follows: Products and services; Markets and customers; Efficiency; Management and structure; Organizational culture; Resources and capabilities; and Partnerships. Potential interrelations with other thematic priorities are briefly introduced and relevant practical examples from the clustered projects are provided. Industry: Adoption of e-business models is influenced by industry structure and vice versa. However, not every industry faces the same changes in structure due to e-business. The amount of Internet usage within an industry branch or sector is not only reflected in the nature of the product (eg. digitised products such as music, books and software are easier to sell and distribute over the Internet) but also on consumer tastes and habits. The latter can often differ across different market environments and across time through the evolution of industrial structures, markets and consumer orientations. In general we see a WP3 - Deliverable E-FACTORS

7 trend where the boundaries of industries as we know them (eg. the telecoms industry, retail, finance, media, entertainment, publishing) are blurring and networks of organisations, so called value webs, are replacing individual business units. Increasingly, within new business models, organisations from different industries collaborate in partnerships to deliver customised products and services. Information & Communications Technologies (ICT) are enablers such value webs. With respect to the impact of e-business models on industry dynamics, organisations face a number of developments. On the demand side (towards suppliers) procurement via the Internet provides more power to buying organisations. It also provides suppliers access to more customers. The rise of digital markets leads to customised products and high differentiation. E-business models can lead to disintermediation from the supply side (suppliers do business directly with customers) as well as the demand side (customers do business directly with suppliers). Market power is shifting towards the demand side (customers), because market transparency is increasing and switching costs are decreasing (your competitor is one mouse click away). Competition often leads to lower prices. Through broader geographical markets, competition is becoming global. The open character of Internet applications and the lower barriers to entry lead to a further increase in competition by substitute products and services and new actors and intermediaries (reintermediation), which often come from other industries. Society: Societal factors, that is, factors related to the general context influencing the shape and adoption of e- business models in practice, have (as with the individual) not been adequately addressed in the literature. We argue that developing models for conducting e-business is not simply about the adoption of new technologies. It also concerns changes in work practices, in customer/supplier relationships, in the way products are delivered to consumers, in marketing practices and changes in staff skills needed to support e-business. As new e-business models lead to new business practices these affect the behaviour of individuals, and society as a whole, towards new business practices and innovative products. New business models are expected to influence peoples everyday life as much as they will affect work and employment. Thorough examination of this thematic priority aims to provide a holistic understanding of e-factors by acknowledging the dynamic capabilities that emerge from new business models and including in this study factors that affect people and their environment: societal issues on the whole. Consequently, societal aspects of current e-business models are presented here as a crucial element in achieving sustainable adoption of research and development influencing the shape and adoption of e-business models in practice. The societal e-factors identified in the course of our analysis have been grouped in the following categories: factors related to region/geography, culture, legal/regulatory/policy, economic, ethical & professional factors, as well as factors related to social capital/social networks and social structure. These factors influence, directly or indirectly, the way in which e-business models are perceived, implemented and evaluated. Following the identification and theoretical validation of these factors, instances are provided, where the role of these factors has been demonstrated, drawing examples from the projects clustered in the e-factors project as well as other relevant business cases. WP3 - Deliverable E-FACTORS

8 2 INTRODUCTION E-Factors is a project funded by the European Commission under the Information Society Technologies Program (IST ). The project is a thematic network dedicated to bringing together universities, research centres and practitioners with a common objective: To determine factors of broad and sustainable adoption of new business models based on e-business practices and research expertise across Europe. The E-factors network will actively seek to transfer skills and experiences with a view to identifying strategic implications in the implementation of e-business models and to disseminate this knowledge across Europe. E- Factors is scheduled to cover a period of 18 months. The work plan of E-Factors has been structured around 6 Work-Packages (WP), as depicted in the following figure. This report presents the results of the third work package, which includes all preliminary work directed towards the identification of thematic priority areas for e-business model adoption. Specifically, the aim of this report is to deal with the concept of e-business model adoption and identify factors influencing the adoption process of organisations planning and implementing new e-business models. The analytical synthesis will be backed up by examples illustrating the manifestation of e-factors from the projects clustered in the e-factors network. The results will also be used as an input for the fourth work package, that will examine a number of best practice cases on e-business models drawn from the participants experiences and expertise. Figure 2.1: E-factors work packages The starting point for this report is the realization that at present there is no comprehensive, in-depth understanding of the factors influencing e-business model adoption. Most of the presently published adoption models mainly emphasise or focus on two key elements of business model adoption: organizational and technological factors. However, as it has become evident along the early years of ecommerce and mcommerce, the techno-organisational view is not enough. Many companies emphasise the importance of finding a right business model for specific market segments, in specific market areas with proper attention to localisation of services for different cultural contexts. Therefore, there is an evident need to have special probably a broader look into the e-business models in Europe. WP3 - Deliverable E-FACTORS

9 Against this backdrop, in this report we try to give a wider perspective on the entirety of factors influencing e-business model adoption and also emphasise often neglected elements: societal, individual and industrial elements, and factors within these elements from the view of e-business. These five elements are included in this study as thematic priority areas of e-business model adoption. Models also often concentrate on business functions solely, with too little emphasis on both structural and change processes; within what sort of time frame the change has taken place, and how widely it has dispersed geographically - the latter being important in European context with multiple cultures and languages. We present a model, that contemplates all these aspects and try to present some key interrelations/ interdependencies between these different thematic areas. This kind of wider comprehension of this area will help companies, communities and researchers to better understand the complex phenomenon of e-business model adoption and especially to recognize the fundamental factors influencing this process. The content of this report will also be used as a framework/starting point for the case evaluations to be made in the e-factors Work Package Four. Identified thematic priority areas, that constitute key change drivers for effective adoption of e-business models include: Thematic Priorities 1. Technical 2. Individual 3. Organizational 4. Industry 5. Societal 2.1 Deliverable Structure The deliverable is structured as follows. Chapter 2 introduces the overall aim of the project and the role of the current deliverable within it. Chapter 3 presents a review of the current trends on e-business models, with an emphasis on current definitions, taxonomies and components of these models. The chapter also discusses trends and the role of business models in relation to business strategy, thus setting the scene for introducing e-factors, the factors influencing the adoption of e-business models. Chapter 4 presents the central proposition of this deliverable, which argues for the holistic presentation of e-factors, taking into account five thematic priorities: technical, individual, organisational, industry and societal. Furthermore, this chapter explains how this framework formed the basis for compiling this deliverable and details the method of work followed by the consortium in this respect. Chapters 5 9 present each thematic priority in turn, showing which e-factors are relevant in each case and how these factors emerged from previous academic or industrial research. Clearly, the thematic priorities are not independent. Chapter 10 explicates the interrelations between thematic priorities with reference to specific factors that can be considered from several thematic angles. Chapter 11 presents the E-Factors perspective on the future trends of e-business models. Chapter 12 presents the conclusions of the deliverable, which forms the basis for the next stages of the project, in particular the articulation of case studies illustrating the importance of e-factors (in WP4) and actionable policy WP3 - Deliverable E-FACTORS

10 directions for improved adoption of successful e-business models (in WP5). Chapter 13 presents the references and bibliography supporting the work presented in this deliverable. Finally, Chapter 14 presents the appendices that are structured as follows, Appendix 1 presents the glossary of the most important terms that are found in this deliverable, Appendix 2 presents a short description of the clustered IST projects that participate in the E-Factors project, with the view to facilitate a better understanding of these projects and their relevant research and furthermore to offer an insight of the way that each clustered project addresses the five thematic priorities and Appendix 3 presents a table of interrelationships of e-factors categories of all thematic areas. WP3 - Deliverable E-FACTORS

11 3 E-BUSINESS MODELS: CURRENT TRENDS This chapter contains a review of the e-business models literature. The aim is to answer the following questions related to the current trends of e-business models: - How can e-business be defined? - Which is the difference between e-business and e-commerce? - Which is the concept of a business model? - Which is the difference between business model and business strategy? - Which is the essence of a business model? - What does a business model cover? - Which are the existing classifications of e-business models? - Which are the components of a business model? - Which are the revenue models and value drivers of e-business The objective of this review of e-business models and factors closely associated with them is made to provide essential information for appreciation and evaluation of the complex nature of present day e- business model taxonomies. 3.1 Defining e-business: E-business vs. E-commerce For the purpose of this project, we have adopted a definition for the term e-business, as it is quite widely referred in the academic literature. This means that we make a clear separation with terms e-business and e- commerce. In this project, we especially emphasise the next two definitions for e-business. Electronic business (e-business) is any process that a business organisation conducts over a computer-mediated network. Business organisations include any for-profit, governmental, or non-profit entity (US Census Bureau). Electronic business (e-business): All electronically mediated information exchange, both within an organisation and with external stakeholders supporting the range of business processes (Chaffey 2002) With business processes we refer especially to such key process as buying and selling and communications with customers and business partners (B-to-B and B-to-C). Furthermore, we also include into e-business process, communications with employees (B-to-E). More specifically, we look at e-business especially from the enterprise point of view; an e-business model is therefore considered as a way, tool or strategy for conducting profitable business. Term e-commerce in this context can be defined as a more narrow subset of e-business, referring to transactional view of the term commerce as the execution of legally valid business transactions ( e-commerce is buying and selling over digital media Kalakota & Robinson 1999), or as it is defined in dictionaries that is the exchange and distribution of goods; or trade (especially between companies or countries). In contrast the term business is defined in dictionaries as "commercial enterprise; buying and selling; trade; or commerce (a more extensive view to business transactions and e.g. processes connected to it). WP3 - Deliverable E-FACTORS

12 A kind of debate exists amongst the academic world and the business consultants about the separation of these two terms. Some emphasise a view that the term e-commerce covers the entire world of electronically handled organisational activities that support the firms all exchanges in the marketplace, including the information systems infrastructure of the enterprise (e.g. Rayport & Jaworski, 2001 c.f. Laudon & Traver, 2002). Others on the other hand argue that term e-business is the one covering the entire world of internal and external electronically based activities, including e-commerce as a subset of term e-business. (Kalakota & Robinson, 2001 c.f. Laudon & Traver 2002). As a debate between these two terms exists with different meanings assigned both in the literature and in the spoken language - it is important to make a clear separation between these two terms, and how we have used them in this report. From our point of view a clear and up to date separation between these two terms comes from Chaffey (Chaffey 2002). According to whom e-business refers to all electronically mediated information exchange, both within an organisation and with external stakeholders supporting the range of business processes In contrast he defines e-commerce as All electronically mediated information exchanges between an organisation and its external stakeholders. This way he separates e-commerce and e-business more or less by the direction of activities. According to Chaffey e-business management is aimed at enhancing the competitiveness of an organisation by deploying innovative information and communications technology throughout the organisation and beyond, through links to partners and customers. He also states e-business involves looking at how electronic communications can be used to enhance all aspects of an organisation s supply chain management (internal and external process management). In contrast, Chaffey defines E-commerce as all electronic transactions between organisations and stakeholders whether they are financial transactions or exchanges of information or other services. By separating e-business and e-commerce this way, he clearly surpasses some widely used definitions, by not including only the buying and selling of goods in his e-commerce definition, but also including transaction of information and other services between different parties in a supply chain. This way he implies that e-commerce is not restricted to actual buying and selling of products, but also other aspects, such as pre-sale and post sales activities within the supply chain are included. This kind of broader definition of e-commerce is also supported by many other practitioners, e.g. Zwass (1998); e-commerce is the sharing of business information, maintaining business relationships, and conducting business transactions by means of telecommunications networks. (Zwass, 1998 c.f. Chaffey 2002) As stated above, also in this kind of separation, the term e-commerce is a subset of e-business as term e- commerce lacks the aspect of internal processes (processes within the company). This distinction/ separation between these terms comes more eminent, when referring to the definition of e-business by The Department of Trade and Industry (UK): When a business has fully integrated information and communications technologies (ICT s) into its operation, potentially redesigning its business processes around ICT or completely reinventing its business WP3 - Deliverable E-FACTORS

13 model e-business, is understood to be the integration of all these activities with the internal processes of business through ICT. (DTI, 2000 c.f. Chaffey, 2002) Following from this discussion, the project threats e-business as a term broader to e-commerce, in accordance with the predominant view in the academic and business literature. 3.2 Business model vs. Business Strategy In the literature, the concepts of business model and business strategy are often mixed and therefore an explicit distinction between these two concepts is needed. As pointed out by Elliot (2002), business model specify the relationships between different participants in a commercial venture, the benefits and costs to each and the flows of revenue. Business strategies, on the other hand, specify how a business model can be applied to the market to differentiate the firm from its competitors (Elliot, 2002, p. 7). In a recent article in Harvard Business Review, Magretta (2002) contends that...the concept of business model fell out of fashion nearly as quickly as the.com appendage itself. According to Magretta, however,...a good business model remains essential to every successful organization, whether it s a new venture or an established player. Like Elliot, Magretta holds that a business model is different from a business strategy in that the latter factor is a critical dimension of performance: competition. How can a business organization do better than its rivals? How is a business organization going to do better by being different? This is what (competitive) strategy is all about. Moreover, according to Osterwalder & Pigneur (2002) business models can be seen as the missing link between strategy and business processes or in other words the linkage between the planning and the implementation level of a business environment since a business model as indicated by the authors represents the architectural level of the business logic triangle as that can be seen in the figure 3.1.1in the next page. Planning level Strategy ICT pressure Architectural level Business Model e-business opportunities & change Implmentation level Business Processes e-business process adaptation Figure 3.1.1: Business Logic Triangle (Osterwalder & Pigneur, 2002). WP3 - Deliverable E-FACTORS

14 According to the authors the strategy - planning level is perceived to be the level where a company defines and formulates its objectives and goals whereas the business processes implementation level involves the appreciation and implementation of this information. Therefore, in this context a business model is the conceptual and architectural implementation (blueprint) of a business strategy and represents the foundation for the implementation of business processes and information systems. These three levels are relevant to the work of the current project. This deliverable analyses the notion of e-business models extensively, based on current knowledge, and identifies within a framework of five thematic priorities relevant e-factors. These are used, in subsequent Work Packages, to illustrate how a successful transition to the implementation level can be attained. 3.3 Essence of Business Models While business model specify the relationships between different participants in a commercial venture, the benefits and costs to each and the flows of revenue, business strategie specify how a business model can be applied to the market to differentiate the firm from its competitors (Elliot, 2002) as discussed in the previous section. Consistent with this view, Osterwalder et al. (2002) hold that business models can be seen as the missing link between strategy and business processes or - in other words - the linkage between the planning and the implementation level of a business environment (cf. figure 3.1.1). Hence, a business model could be seen as the conceptual and architectural implementation (blueprint) of a business strategy and represents the foundation for the implementation of business processes and information systems. The concept of a business model does not go far back. In fact, as pointed out by Earle & Keen (2000, pp ), business model is a relatively new phrase, closely linked to the recent Internet or e-business hype: The phrase is everywhere now you can hardly find any issue of a business magazine or an Internet publication that doesn t use it somewhere. This is a very recent development. Previously, the articles would have used the word strategy. Business model has replaced strategy as the focus of discussion because strategy is defined within the givens of business the givens of industry, customer base and behavior, channels, pricing and marketing. There are no givens now. To pursue a strategy and execute it superbly when it s based on a flawed business model is to be efficiently ineffective. In general terms, a business model describes how a business plans to make money. If well formulated, a firm s business model gives it a competitive advantage in its industry, enabling the firm to earn greater profits than its competitors. Whether implicit or explicit in the firm s actions, a business model should include answers to a number of questions: What value to offer customers, which customers to provide the value to, how to price the value, who to charge for it, what strategies to undertake in providing the value, how to provide that value, and how to sustain any advantage from providing the value (Afuah & Tucci, 2001, p. 45). And further: They (business models) are designed to make money for their owners long term For a firm to keep making money, it must keep offering customers something that they value and that competitors cannot offer The business model is the statement of basics, the company s direction along the value path (op.cit., pp. 48, 62; also cf. Porter, 1991). Thus, the concept of a business model is closely related to but not fully synonymous to strategy. In particular, the business model concept emphasizes value creation, i.e., how to create value (benefits) to investors WP3 - Deliverable E-FACTORS

15 and other stakeholders, including customers. Managers can use business models to capture the essence of an e-business initiative, combining the elements of the five ways to represent a business strategy, form, processes, value chain, and core competencies and the flows of revenue (Weill & Vitale, 2001, p. 33). Indeed, management theory in general and strategic management theory in particular have been preoccupied with business conduct and the value impacts thereof for many years. Strategy researchers such as Igor Ansoff, Derek Abell, and Michael Porter have emphasized value creation aspects of strategy formation and implementation. As such, the business model construct builds on ideas advocated by the main theoretical frameworks of strategic management research. Michael Porter s value chain framework is perhaps among the most cited pieces of management research ever (Porter, 1985). This model is in itself a reinvention and reformulation of practical management thinking from the early 1950s. Clearly, the notion of the business model draws on arguments that are central to the value chain concept, in particular ideas associated with business activities (processes) and multiple sources of value at the firm level (cost leadership and differentiation). Much like business model formulation, value chain analysis (VCA) is a method for decomposing the firm into strategically important activities and then understanding their impact on cost and value. It explores the primary activities of the firm, i.e., those activities that have a direct impact on value creation, as well as support activities, i.e., activities that affect value only through their impact on the performance of the primary activities. While the overall value creating logic of the value chain, with its generic categories of activities (inbound logistics, operations, outbound logistics, marketing and sales, and service), is valid in all industries, the specific strategically important activities may vary from industry to industry (Porter, 1985). This view has been contested by Stabell & Fjeldstad (1998). They suggest that the value chain is but one of three distinct generic value configurations, the other two being the value shop, i.e., modeling firms where value is created by mobilizing resources and activities to resolve a particular customer problem, and value network, i.e., modeling firms that create value by facilitating a network relationship between their customers. 1 VCA specifies how a business firm could or should maximize value creation, i.e., value of output minus costs incurred, one value chain step at a time, in order to arrive at a maximum margin, i.e., value in terms of what customers are willing to pay for the products or services provided minus costs accumulated throughout the value chain. A firm is profitable if the value it commands exceeds the costs involved in creating the product (Porter, 1985, p. 38). The close ties between the concepts of the value chain and the business model respectively are well documented in the literature, e.g., Magretta (2002), who argues that: a business model is a variation of the generic value chain underlying all businesses. However, the value chain is not the only theoretical foundation on which the business model concept is built. A business model could be seen as a method by which a firm builds and uses its resources (Afuah & Tucci, 2001). Thus, the business model concept builds on the resource-based view (RBV) of the firm (Wernerfelt, 1 A more thorough presentation of value configuration concept is provided in chapter 9. WP3 - Deliverable E-FACTORS

16 1984; Barney, 1991) and is consistent with the VRIO framework (e.g., Barney, 1997). The business model concept takes into consideration the ways in which resources can be valuable, e.g., by being difficult to imitate, less transferable, less substitutable, more complementary, or more productive in use. Alternatively, a business model describes the steps that are performed in order to complete transactions. Thus, the business model depicts the content, structure, and governance of transactions designed as to create value through the exploitation of business opportunities (Amit & Zott, 2001). As such, the business model concept builds on transaction cost economics (TCE), one of the main features of which is to focus on the efficiency of alternative governance structures that mediate transactions (Williamson, 1975; Clemons & Row, 1992). TCE considers transaction efficiency as a major source of value creation, as enhanced efficiency reduces costs. According to Weill & Vitale (2001), a business model is a description of the roles and relationships among a firm s consumers, customers, allies, and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants. This view of a business model has a wider scope than does the firm, since it spans activities across firms and industries to encompass the whole value creating system of the final product and service, i.e., all activities that collectively are engaged in providing the ultimate customer value (Parolini, 1999). The strategic network perspective has been fostered by the economics of information of electronic networks where the cost of gathering information, controlling, and coordinating transactions with other economic actors, has been significantly reduced (Malone et al., 1987). Moreover, networks emerge from disintegrated value chains (Evans & Wurster, 1997). Das & Teng (2000) have developed a resource-based theory of strategic alliances in which they suggest that the rationale for alliances is the value creation potential of firm resources that are pooled together. Hence, the business model concept draws on strategic network theory (SNT) by building on the view that unique combinations of interorganizational cooperative arrangements (e.g., strategic alliances, joint ventures) can create value (Doz & Hamel, 1998; Dyer & Singh, 1998). In summary, the concept of the business model is a relatively new phrase, stemming from the emergence of the Internet and e-business hype. It relates to the strategy concept, but the two concepts are clearly not fully synonymous. Business models theoretical foundation could be traced back to most strategic management theories, the value chain framework of which seems to be the most obvious. Also, RBV, TCE, and SNT constitute relevant theoretical foundations. 3.4 Defining the Concept of Business Model Why are we to synthesise a business model of our own? To answer this question we have to be more specific in what we mean by a business model. First, any model is an abstraction of 'reality'. It should define a set of entities and their relationships. It can even define some qualitative or quantitative values of the entities. Specifically, determined from a number of contemporary business models, a business model implies a set of entities that describe the fit of its resources and functions with the environment (an adaptive enterprise, price taker), or a mission/vision/strategy accomplishing organisation acting on the market accordingly (price maker). Thus, there is an in-built idea of a business model being a contingency model (i.e., finding an optimal mode of operation for a specific situation). The evolution of a business model is about changes in its WP3 - Deliverable E-FACTORS

17 environment and infrastructure. Some of the most quoted definitions of business model are the definitions by Magretta, Amitt & Zott and Afuah & Tucci, which we will present shortly. Let us first go through the state of the art of business model definitions, by listing some of the most cited definitions, as well as others which, emphasize alternative elements of a business model: Magretta (2002): A business model is a variation of the generic value chain underlying all businesses. A business model has two parts: (i) the business activities associated with making something (design, procurement, manufacturing, etc), and (ii) the business activities associated with selling something (customer identification, selling, transaction handling, distribution, delivery). Amit & Zott (2001): A business model depicts the content, structure, and governance of transactions designed as to create value through the exploitation of business opportunities. A business model includes the design of: - Transaction content: goods/services; resources/capabilities - Transaction structure: parties involved; linkages; sequencing; exchange mechanisms - Transaction governance: flow control. A business model describes the steps that are performed in order to complete transactions. Afuah & Tucci (2001): A business model is a method by which a firm builds and uses its resources. A business model consists of: - Components (eight listed in section 3.4) - Linkages between components - Dynamics (change; reinvention) Timmers (1999): A business model is an architecture for product, service and information flows, including a description of the various business actors and their roles; and a description of the sources of revenues; and a description of the potential benefits for the various business actors. Weill & Vitale (2001): A business model is a description of the roles and relationships among a firm s consumers, customers, allies, and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants. Elliot (2002): A business model specifies the relationships between different participants in a commercial venture, the benefits and costs to each and the flows of revenue. All business models seek to address a simple equation: profits = revenue costs. Mahadevan (2000): A business model is a unique blend of three streams that are critical to the business: (i) the value stream, which identifies the value proposition for the business partners and the buyers; (ii) the revenue stream, which is a plan for assuring revenue generation for the business; and (iii) the logistical stream, which addresses various issues related to the design of the supply chain for the business. Petrovic (2001): A business model describes the logic of a business system for creating value, that lies behind the actual processes. WP3 - Deliverable E-FACTORS

18 Applegate (2001): A business model is a description of a complex business that enables study of its structure, the relationships among structural elements, and how it will respond in the real world. Clearly, the concept of a business model means different things to different people. Generally speaking, a business model is a story that explains how an enterprise works (Magretta, 2002). It is a kind of value chain description, i.e., a description of all the activities or key business processes, the flows of products, services, and information associated with these processes. Furthermore, it describes all the actors participating in the business venture, including the roles and relationships as well as transactions completed between these actors. Competition and environmental conditions are normally not part of the business model. Hence, a business model is not synonymous with a business strategy as discussed earlier. Quite frequently, however, business models include value propositions and encompass revenue models (e.g., Elliot, 2002; Mahadevan, 2002). Some experts keep the revenue model separate from the business model (e.g., Amit & Zott, 2001). Definitions for business models listed above present an overall view of the complexity of business model definitions; while at the same time shed some light to this concept. It is not the aim of this deliverable to opt for one single definition of a business model or to provide an exhaustive list of business model definitions. The aforementioned definitions have their advantages, and from the view of evaluating factors influencing business model adoption the selection/adoption of only one single definition has not been seen as a meaningful approach to the subject. However, as we stated earlier, in Europe the situation is understood probably a little bit differently: More emphasis is put on the enterprise as being part of the society; on active business policy by regional, national, and European wide development agencies; on the interplay of businesses and educational institutions; and on institutionalised competitive constellations, in many cases due to the smaller than ideal national/regional home market. 3.5 The E-Factors perspective on e-business models definition A model is an abstraction of a complex reality. It defines a set of entities their roles and their relationships. It can even define some qualitative or quantitative values of those entities. More specifically, a business model implies a set of entities in a commercial venture and portrays them in the context of two distinct set of factors, endogenous, that embrace factors that lie in the control of individual enterprises such as organizational, technical and individual factors, and exogenous, that include factors beyond the control of individual enterprises, such as industrial and societal factors that in some cases are defined by policy makers. An e-business model is, thus, defined as an Internet-enabled business model. 3.6 E- Business Models Typologies, Taxonomies and Frameworks A business model typology or taxonomy is a way of classifying different types of business models. Typically, business model types are classified along one or more dimensions. A business model framework, on the other hand, is a way to classify, organise or describe business models according to a set of principles or ideas. While the former is concerned with mapping generic business models on one or more dimensions, the WP3 - Deliverable E-FACTORS

19 latter is more concerned with the components and linkages between components that constitute a business model. Some of the most commonly used classifications / taxonomies of e-business models: Timmers (1999) presents a business model typology (also adopted by Elliot, 2002). The mapping criteria or dimensions used by Timmers are the degree of innovation and functional integration. Timmers has identified the following eleven generic business models: - e-shop - e-procurement - e-mall - e-auction - value-chain service provider - virtual business community - collaboration platform - trust services - information brokerage - third-party marketplace - value-chain integrator These business models can be separated based on the degree of innovation and functional integration of the different models. This is shown in the figure below: Figure 3.3.1: Classification of Internet business models (Timmers, 1999) Tapscott et al. (2000) has divided e-business models into six subcategories; Agoras, Aggregations, Value- Chains, Alliances and Distributive Networks. Tapscott s taxonomy is based on the business networks creating a new kind of collaborative e-business (Business Webs). His ideas are in many ways interesting, and this classification can be used to describe e-business formats, that are strongly based on co-operative alliances (e.g. Intermediaries/Infomediaries): WP3 - Deliverable E-FACTORS

20 - Agora dynamic pricing (e.g., Yahoo; ebay) - Aggregation selection and convenience (e.g., Amazon; E*Trade) - Value Chain process integration (e.g., Cisco; Dell) - Alliance creativity (e.g., AOL; MP3) - Distributive Network allocation, distribution (e.g., Enron; UPS) Weill & Vitale (2001) introduce what they call atomic business models. They are presented in order, from the most potentially profitable to the least: - Direct to Customer Dell.com; Gap.com - Full-Service Provider Amazon.com; gesupply.com - Whole of Enterprise several business units; one interface with customers - Portals, Agents, Auctions, Aggregators, and Other Intermediaries - Shared Infrastructure - ABACUS - Virtual Community Motley Fool; The Well - Value Net Integrator 7-Eleven Japan; Cisco - Content Provider Reuters; CNN Applegate (2001) presents four digital business model categories: - Focused Distributor Models retailer; marketplace; aggregator; infomediary; exchange - Portal Models horizontal portals; vertical portals; affinity portals - Producer Models manufacturer; service provider; educator; advisor; information and news services; custom supplier - Infrastructure Provider Models a number of sub models, e.g. infrastructure portals One classification that has many interesting characteristics is Rappas (2000) taxonomy. He divides e- business models into nine categories: - Advertising - Affiliate - Brokerage - Community - Infomediary - Manufacturer - Merchant - Subscription - Utility This taxonomy is strongly based on the company s source of revenue. It provides a way to describe e- business cases in which a company has adopted a multi-model business format. This is of importance since many e-businesses do contain many forms of business within a single website (e.g. Internet Portals often have multiple revenue channels). WP3 - Deliverable E-FACTORS