Establishing An E Business

January 31, 2005 CITM360 – Week 4

Establishing an eBusinessCITM360 – Week 4

Steven A. Gedeon, PhD, MBA, PEng

January 31, 2005

This Week’s Agenda

• Strategy• Survivor Challenge • eBusiness Models• Building a Project Team and

Schedule• Elevator Pitches Prizes/Feedback• Interim Presentation Requirements

January 31, 2005

Strategy

A Strategy is the pattern or plan that integrates an organization’s major goals, policies, and actions into a cohesive whole. A well-formulated strategy helps to marshal and allocate an organization’s resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent competitors.

“The Strategy Process” by Mintzberg and Quinn

January 31, 2005

Strategy

• Every organization has one – even if it is not written down or is contradictory or poor

• Strategy is a Tool for integrating into a cohesive whole

• Strategy is a Synthesis of the Market Analysis to determine the Key Success Factors

• Strategy drives the Market, Technology, Organization, and Financial Plans

January 31, 2005

Strategy

CompetitiveStrategy

StakeholderValues

End UserExpectations

CompanyStrengths & Weaknesses

Opportunities&

Threats

InternalFactors

ExternalFactors

January 31, 2005

Strategic Analysis

This is all about analyzing the strength of the company’s position and understanding the important external factors that may influence that position.

Internal Analysis – knowing your strengths and weaknesses

• Will help you determine whether these opportunities are right for you

• Technological Skills• Leading Brands• Distribution channels• Customer Loyalty/Relationship• Production Quality• Scale • Management

• Absence of important skills• Weak brands• Poor access to distribution• Low customer retention• Unreliable product/service• Management

• Strategic Partners• Changing customer tastes• Technological advances• Change in population age-

structure• New distribution channels

•Competitor Initiatives•Changing customer tastes•Closing of geographic markets•Technological advances•New distribution channels

External Analysis – opportunities and threats

• May reveal strategic opportunities

Positive Negative

January 31, 2005

Strategic Analysis

Porter’s Five Forces Analysis - a technique for identifying the forces which affect the level of competition in an industry

• Threat of entry• Threat of substitution• Bargaining power of buyers• Bargaining power of

suppliers• Rivalry among current

competitors

January 31, 2005

Strategic Analysis

Threat of Entry - Depends on barriers:

Economies of scale – need to come in large

Product differentiation – established firms have brand identification and customer loyalties

Capital requirements

Switching costs – one time switching costs facing the buyer – retraining, new equipment…

Access to distribution channels

Intellectual Property and patents

Threat of Substitution

All firms in an industry are competing with industries producing substitute products

Substitutes limit potential returns

Bargaining Power of Customers

Customers can force prices down, playing competitors against each other

Customers can easily move downstream to create a more complete solution

Bargaining Power of Suppliers

Suppliers can exert bargaining power by threatening to raise prices or reduce quality.

Suppliers can move upstream to create a more complete solution

Suppliers are powerful if:

Only 1 or a couple of suppliers for industry

January 31, 2005

Strategic Analysis – Intensity of rivalry

The intensity of rivalry between competitors in an industry will depend on:• The structure of competition - rivalry is more intense where there are many

small or equally sized competitors; rivalry is less when an industry has a clear market leader

• The structure of industry costs - industries with high fixed costs encourage competitors to fill unused capacity by price cutting

• Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry

• Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier

• Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less

• Exit barriers -when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.

January 31, 2005

Critical Strategic Factors

• Clear Decisive Objectives

• Maintaining the Initiative

• Concentration/Focus of Resources

• Flexibility

• Coordinated and Committed Leadership

• Surprise

• Security“The Strategy Process” by Mintzberg and Quinn

January 31, 2005

Five P’s of Strategy

• Plan

• Ploy (Deceive Competitors)

• Pattern of Behaviors (Plan vs. Actual Strategy)

• Position (Relative to Competition)

• Perspective (also known as “Corporate Culture”) eg “The HP Way”

“The Strategy Process” by Mintzberg and Quinn

January 31, 2005

Generic Strategies

• Stage of Operations

Extract Process Fabricate Assemble Wholesale Retail

Upstream Industries --- Midstream --- Downstream Industries

January 31, 2005

Generic Strategies

• Maximization of Value Chain

InboundLogistics

OperationsOutboundLogistics

Marketing& Sales

Service

Margin

Procurement

IT and Product Technology

HR and Operations Management

Company Infrastructure, Legal, Governance…

January 31, 2005

Generic Strategies

• Alteration of Value Chain (Value Shop)

ProblemFinding

ProblemSolving

Choice ExecutionControl &Evaluation

Sales

January 31, 2005

Generic Strategies

• Stage of Operations (Value Network)

NetworkPromotion

ServiceProvisioning

InfrastructureOperations

Partnerships

January 31, 2005

Generic Strategies

• Cost Leadership

• Differentiation

• Focus – Segmentation (selected customer segments)– Niche Strategy (focus on one segment)– Customization Strategy (segment of One and

each customer is unique)

January 31, 2005

Generic Differentiation Strategies

• Price Differentiation• Image Differentiation (Branding)• Support Differentiation• Quality Differentiation• Design Differentiation• Timeliness Differentiation• Undifferentiation (Copycats)• Others?

January 31, 2005

Generic Strategies

• Position within an Existing Industry Structure– This is the Traditional View of Strategy– These companies are “Market Takers”

• Create a New Industry Structure– “Competing for the Future” Hamel & Prahalad– These companies are “Rule Breakers” and

“Rule Makers”

January 31, 2005

Three Phases of Competing for the Future

Intellectual Leadership

Deep Understanding of Industry Drivers

Creative View of Core Competencies and Customer Interfaces

Strategic Architecture

Management of Migration Paths

Preemptively building core competencies and new product concepts and technologies

Assemble a coalition of industry participants

Force competitors onto longer more expensive migration paths

Compete for Market Share

Build a worldwide supplier network

Preempt competitors in critical markets

Maximize efficiency and productivity

Manage the competition

January 31, 2005

Strategy

• "Strategy is the direction and scope of an organization over the long-term which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations".

• Strategy is about:– Where is the business trying to get to in the long-term (direction)– Which markets should a business compete in and what kind of activities are involved in such

markets? (markets; scope)– How can the business perform better than the competition in those markets? (advantage)?– What resources (skills, assets, finance, relationships, technical competence, facilities) are

required in order to be able to compete? (resources)?– What external, environmental factors affect the businesses' ability to compete?

(environment)?– What are the values and expectations of those who have power in and around the business?

(stakeholders)

Management Preferences

Organization

Resources

Strategy Environment

January 31, 2005

Survivor Challenge

• A donkey is tied to a rope 10 feet long. Twenty feet away is a field of carrots, how does he get to the carrots?

• A barrel of water weighs 20 pounds, what do you have to add to it to make it weigh 12 pounds?

• How much dirt would be in a hole 6 feet deep and 6 feet wide that has been dug with a square edged shovel?

• You threw away the outside and cooked the inside. Then you ate the outside and threw away the inside, What did you eat? Hint: It is a food...

• What unusual natural phenomenon is capable of speaking any language?

• What goes up and goes down but does not move?

• Name the elements of a Business Model.

• The other end of the rope isn't tied to anything

• holes • none, it is a hole, the hole has no dirt • Corn on the cob • an echo • the temperature • Customer Value,Scope,Revenue

Source/Model, Pricing, Connected Activities, Sustainability,Implementation, Capabilities

January 31, 2005

What is a Business Model?

• A set of activities that allows the firm to make money.– What value are we offering and to whom?– What price is appropriate?– How do we provide the value?– Do we have a competitive advantage in providing the

value, and how do we sustain it?

Internet and non-Internet

January 31, 2005

Elements of a Business Model

Business Model Component Q’s for all Business Models Q’s Internet Business Models

Positioning• What are the 5 Forces?• What is the value chain?

Is the firm in a “good space” ? How are you maximizing both IT and Internet capabilities?

Customer Value• What’s the value

proposition?

Is the firm offering something distinctive or at a lower cost than its competitors ?

What is your differentiation?

What is it about the Internet that allows your firm to offer its customers something distinctive? Can you solve new problems for customers?

Scope To which customers (geographic and demographic) is the firm offering value? What is the range of products and services offered?

What is the scope of customers that the Internet enables your firm to reach? Does the Internet alter the product or service mix?

Revenue Source/Revenue Model

Who pays for what value and when? What are the margins in each market?

Are revenue sources different with the Internet? What is new?

Copyright © 2001, The MacGraw-Hill Companies, Inc., Internet Models and Strategies, Afuah and Tucci. All Rights Reserved. (modified)

January 31, 2005

Elements of a Business ModelPricing How does the firm price the value? How does the Internet make

pricing different?

Connected Activities What set of activities does the firm have to perform to offer this value and when?

How many new activities must be performed because of the Internet? How much better can the Internet help you to perform existing activities?

Implementation What organizational structure, systems, people, and environment does the firm need to carry out these activities?

What does the Internet do to the strategy, structure, systems, people and environment?

Capabilities What are your firm’s capabilities and capability gaps that need to be filled? How does the firm fill these capabilities?

What new capabilities do you need? What is the impact of the Internet on those capabilities?

Sustainability What is it about the firm that makes it difficult for other firms to imitate it? How does the firm sustain its competitive advantage?

Does the Internet Make the sustainability easier or more difficult?

January 31, 2005

Classification of e-business Models

Strategic ScopeRefers to the company’s potential (resources, leadership, know-how,

product strength, etc.) and growth prospects in a given market

NarrowLimit activities to a single product

or market segment

BroadExpand if the company, relying on

e-bus. Pursues a strategy of diversification

Degree of Innovation

Traditional model“brick and mortar” companies that convert to e-business – business model is mixed (click and mortar)

Balanced businesses Diversified Businesses

Revolutionary model“re-invent themselves by adopting a new entrepreneurial identity”

Bold businesses Ambitious business

January 31, 2005

Classification of e-business ModelsStrategic Scope

Refers to the company’s potential (resources, leadership, know-how, product strength, etc.) and growth prospects in a given market


or market segment

BroadExpand if the company, relying on e-

bus. Pursues a strategy of diversification



Balanced businesses• Capitalize on core competencies • Does not conflict with the

traditional business model Eg. Dell

• Use as a lever to strengthen strategic position

Diversified Businesses• Focus on external positioning –

driven by operational diversification and growth

• Specific to businesses whose markets are already structured


Bold businesses• Often “start-ups”• Innovative• “New Economy” – driven by

complex applications and technology solutions (eg. search engines, cyber auctions, collaborative portals)

Ambitious business• Focuses on diversification and

growth of company’s activities.• Invest heavily in technological

infrastructures• Focus on setting up technological

standards to create high switching costs

January 31, 2005

Classification of e-business Models

Strategic ScopeRefers to the company’s potential (resources, leadership, know-how,

product strength, etc.) and growth prospects in a given market


or market segment

BroadExpand if the company, relying on

e-bus. Pursues a strategy of diversification



Balanced businesses Diversified Businesses


Bold businesses Ambitious business

Virtual Store e-mall

e-procurement

AuctionsVirtual community

Information brokers

January 31, 2005

Business Models on the Web

Brokerage Bring buyers and sellers together and facilitate transactions:

B2B, B2C

Auction broker conducts auctions for sellers –– eBay

Transaction Broker – provide a third party payment mechanism – PayPal

Virtual Mall – hosts online merchants – ChoiceMall

Advertising Model Extension of the traditional media broadcast model. The broadcaster provides content & services mixed with advertising messages. The advertising model works only when the volume of viewer traffic is large or highly specialized

Portal – About.com

Personalized Portal - MyYahoo

Registered Users – NYTimes Digital

Merchant Model Wholesalers and Retailers of goods and Services.

Virtual Merchant or e-tailer – Pure Play- Amazon.com

Click and Mortar – traditional brick and mortar retail establishment with web storefront – Chapters.ca

Catalog Merchant – catalog+web – Land’s End

January 31, 2005

Business Models on the Web

Manufacturer (Direct) Using the power of the web to allow manufacturer to reach buyers directly and thereby compressing the distribution channel. The manufacturer model can be based on efficiency, improved customer service, and a better understanding of customer preferences

Dell Computer

Affiliate Model Provides purchase opportunities. Offers financial incentives to affiliated partner sites. Pay per performance model. Includes: banner exchange, pay per click, revenue sharing programs.

Amazon.com

Tucows.com

Esellerate.com

Subscription Model Users are charged a fee to subscribe to a service. Not uncommon to combine free+fee content.

Content Services – newspapers, music, video

Person-to-Person Networking Services – conduits for distribution of user submitted information [Classmates]

Internet Service Providers

January 31, 2005

Dominant Revenue Models

• Commission

• Advertising

• Margin or Markup on Products

• Production

• Referral

• Subscription or Membership

• Fee-for-Service (incl. bandwidth, storage…)

January 31, 2005

Building a Project Team and Schedule

• Create a Clear Organization Structure– BoD, CEO, CTO, CFO, VP Mrkt, VP Sales…

• Clearly write down Roles & Responsibilities and tie these to Business Plan and Presentations

• Clearly write down deadlines for each deliverable (I’ll ask for this if Firing someone)

• Leave time for Dry Runs and Edits• Leave time to make major changes to Business

Model (prices, segments, financial plans…)

January 31, 2005

Results from Elevator Pitches

• Entertainment Edge = 73%

• Farmer Bob’s Grocery Depot = 80%

• OP Print = 73%

• Connectix = 78%

• netDrive.com = 75%

• Lottery Click = 68%

• Innotech = 71%

#1

#2#3

January 31, 2005


• Lowest Score = 1 and 32 Total

• Highest Score = 20 and 97 Total

• Lowest Scorer ave = 59, Hi Scorer = 89

• Success and Excitement Scored Lowest in Every Single eBusiness Idea

• Most Controversial (Highest Stn Dev)– netDrive Success and Excitement– Lottery Click Success and Excitement

January 31, 2005

Entertainment Edge

• Entertainment services (e.g. DVDs and Pizza) delivered to your door

• Differentiation vs Video-on-demand, Pizza…

• Scope limited by Geography

• Revenues (delivery fee, margin, memb, ads)

• Cost Structure (mktg, delivery infrastructure)

January 31, 2005

Farmer Bob’s Grocery Depot

• Groceries purchased over the Internet and assembled for pickup

• Differentiation vs Grocery Gateway?• Scope limited by Geography• Revenues ($2, margin, memb, ads)• Cost Structure (mktg, assembly infrastruct)• Asked for the meeting• What about adding RFID Tags??

January 31, 2005

OP Print

• Low cost print services for print companies. Upload content, gang running to lower cost to 60%, delivery in 7 days

• Differentiation vs Printers doing it themselves or Overnightprints.com?


• Revenues (margin)

• Connected Activity - what about returns?

January 31, 2005

Connectix

• Shopping Mall Kiosks for product searching

• Who are the Competition or Partners?

• Scope limited by Geography (?)

• Revenues (ads and paid search terms)

• Cost Structure (capital costs, content creation, s/w to tie into database systems)

• Strategic Partnership with Microsoft and Kiosk Manufacturers?

January 31, 2005

netDrive.com

• Virtual Data Storage on demand

• Differentiation vs Competition (based on data sharing?)

• Few Scope Limitations

• Revenues (monthly subscription based on bandwidth and storage used)

• Capital Costs for Servers, Bandwidth…

• Target of 500,000 users in 12 months

January 31, 2005

Lottery Click

• Lottery Ticket purchase on-line

• Why wouldn’t the government do this themselves?


• Revenues (margin)

• Cost Structure seems favorable

• Sell to non-gov’t organizations with lotteries?

January 31, 2005

Innotech

• Wireless Calendar, Scheduler, and Alerts, bundled into your Monthly Service Fees.

• Questions regarding Value and Pain


• Revenues (rev share of new messages, tech licensing and service fees to carrier)

• Cost Structure looks favorable

January 31, 2005


1. eWed = 80%

2. Greenbird Athletics = 78%

3. StarWear = 70%

4. Campus Express = 79%

#1

#2

#3

January 31, 2005


• Lowest Score = 8 and 59 Total

• Highest Score = 20 and 96 Total

• Lowest Scorer ave = 67, Hi Scorer = 96

• Success and Excitement Scored Lowest in Every Single eBusiness Idea

• Most Controversial (Highest Stn Dev)– eWed Success and Excitement

January 31, 2005

eWed

• On-line Wedding Planning

• Differentiation vs Competition– Segmentation (same sex, groom services,…?


• Revenues (ads, margins, paid search terms, commission on registries)

• Cost Structure (mrkt costs for traffic gen.)

January 31, 2005

Greenbird Athletics

• Online sales of Custom Sports Apparel

• Who is the Competition?


• Revenues (logo services, product margin)

• Cost Structure potentially favorable– Use of pre-existing logos or automated logo

generation– Flexible manufacturing needed?

January 31, 2005

StarWear

• Custom Knock-Off Bling & Fashion Apparel

• Differentiation from Celeb Product Lines?

• Revenues (product margins)

• Cost Structure (in-house manufacturing capital costs)

• Flexible manufacturing a key issue

• Connected Activity - what about returns?

January 31, 2005

Campus Express

• Convenience Items delivered to your dorm

• Differentiation vs Competition


• Revenues (delivery, margin)

• Cost Structure (mktg, delivery infrastruct)

January 31, 2005

Interim Presentation Req’ts

• Who is the Customer (in detail!) and what is their Pain?• Who are the Competitors and what is your

differentiation?• What is the Business Model?• Where are you in the Value Chain and why is this a good

place?• How will you create Revenues?

– You must figure out how to fund your e-business, by early customers or raising financing

• What are your Key Success Factors/Issues?• What do you still need to figure out or Research?

No Plans Required Yet

January 31, 2005

Interim Presentations

• How will you present your idea? How many presenters? What is the role of each group member?

• 10 - 12 minutes for presentation, time limit strictly enforced• ~10-20 minutes for questions & discussion

(record feedback and comments from class, this will help focus the business plan)

• Use of PowerPoint is expected, e-mail me a copy of your slides (after class is ok). Bring USB drive with your powerpoint, CD… ensure you can access it.

• Required - Hand-in a hard copy of the power point before starting your presentation

• Everyone to review every presentation. Attendance Req’d

January 31, 2005

Interim Presentation Grading

Business Opportunity (5 marks)- did the presentation clearly explain the business idea?- did you indicate what the target market for the business is? did you show evidence of research about, and good

knowledge of, the size of the target market?- did you explain the value proposition for this business?- did you explain how this business offers a differentiated product or service? did you identify potential competitors?- did you discuss how you will sustain this business? e.g. barriers to entry, sustainable competitive advantage?- is the business name you have chosen available? does the name accurately describe what your company does?

Business Model & Revenue Generation (3 marks)- did you explain how your business will make money? are your assumptions reasonable?- did you provide an estimate of how much money will be required to establish this business? did you indicate where

you will get your start-up financing from?- did you discuss the overall scale of your business? e.g. how many customers/sales will you need in order to make

this business viable?

Presentation (2 marks)- were the presenters confident and well-prepared?- did the presenters make eye contact with the audience?- did the team handle questions effectively?- were the slides well-designed? (appropriate colour choice, not too much info on slides, no spelling errors- did you use your allocated time effectively?

January 31, 2005

Group Work

• How are you going to present your business idea in class?

• How will you structure your presentation?• What is your ‘pitch’? How can you

convince your audience (the class) that your idea is viable?– clear market niche?– differentiated offering?– feasible revenue generation model?