Value Creation from E-Business Models

2003

Part One

e-Business Model Ontologies and Taxonomies

1

Value creation from e-Business models: issues and perspectives

Wendy L. Currie

Over the last decade, interest in e-Business has evolved from optimistic scenarios with the explicit message in the popular press that: If you’re not an eBusiness, you’re out of business, to pessimistic scenarios pointing to the demise of the dot.coms (Cassidy, 2002) largely as a result of ‘flawed e-Business models’ (Hagel, 2002). The literature on e-Business models is varied with contributions focusing upon the successful examples of Amazon.com, e-bay and priceline.com from a buyer behaviour perspective (Kauffman and Wang, 2001); taxonomies of e-Business models (Timmers, 1999; Weill and Vitale, 2001); value creation from e-Business models (Amit and Zott, 2000) and e-Business model applications and services, such as application service provisioning (ASP) (Kern et al., 2002; Currie et al., 2004) and Web services (Hagel and Seely-Brown, 2001).

The concept of the business model has gained momentum in recent years, partly through the growth and interest in e-Business. Definitions of what constitutes a business model vary in the literature, with some running the risk of being tautological. Thus, Magretta (2001, pp. 86–87) contends that: a good business model remains essential to every successful organization, whether it’s a new venture or an established player. Timmers (1999, p. 5) defines a business model as ‘the organization (or ‘architecture’) of product, service and information flows, and the sources of revenues and benefits for suppliers and customers.’ Similarly, Rappa (2000, p. 1) claims that: In the most basic sense, a business model is the method of doing business by which a company can sustain itself, that is, be profitable. The link between the business model concept and e-Business has become explicit in recent years. Weill and Vitale (2001, p. 34) define an e-Business model as: a description of the roles and relationships among a firm’s consumers, customers, allies, and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants.

Such a broad definition poses problems in researching e-Business models. Recognizing this, Weill and Vitale (2001) deconstruct the e-Business model into eight ‘atomic e-Business models’.¹. Firms may develop one or a combination of these atomic e-Business models to pursue their business strategies. There will also be variants of each atomic e-Business model, depending upon the factors outlined by the authors. Other writers suggest that the business model is a useful construct for understanding value creation from e-Business. Amit and Zott (2000, p. 1) assert that: a business model depicts the design of transaction content, structure and governance so as to create value through the exploitation of business opportunities. We propose that a firm’s business model is an important locus of innovation and a crucial source of value creation for the firm and its suppliers, partners and customers. Similarly, Ross et al. (2001, p. 3) claim that business models demonstrate: changes in how the firm generates revenues or manages costs.

Treating the e-Business model as the unit of analysis is useful since it enables a deeper understanding of firm performance (Magretta, 2001), particularly at the organizational, rather than industry level. A cursory glance at the literature identifies a common thread, which is the search for successful business models. During the first phase of the dot.com era (from 1994 to 2001) the majority of the popular publications, largely from the technology sector, suggested that developing an e-Business was critical to the survival of the firm. Within the media, there was talk of the ‘old economy’ (bricks and mortar) versus the ‘new economy’ (Internet businesses), with the former often described in pejorative terms (see Rappa, 2000).

Firms, it was suggested, had little choice but to ‘innovate or die’. In 1999, 3957 US companies received a total of $59.5 billion to develop e-Business inititatives. The average venture capital deal in 1999 was $15 million (Cassidy, 2002, p. 240). Many of these firms adopted a ‘get big fast’ (GBF) strategy (Oliva et al., 2003) by forming strategic alliances and partnerships to compete in the high velocity technology market (Eisenhardt and Martin, 2000). e-Business models became prolific. According to Timmers (1999), e-Business models developed as e-shops, e-procurement, e-mail, e-auctions and e-markets (EMs). In fact, just by prefacing anything with an ‘e’ seemed to imply an e-Business model existed. Taxonomies of e-Business models emerged (Timmers, 1999; Weill and Vitale, 2001). Others focused more specifically at the emergence of EMs (Bakos, 1998), value creation from e-Business (Amit and Zott, 2000; Magretta, 2001), profitability and revenue generation (Ross et al., 2001), B2B e-Commerce (Soh and Markus, 2002) and group buying behaviour on the Internet (Kauffman and Wang, 2001) to give a few examples.

Against a background of ‘hype’ about e-Business models, which preceded the dot.com crash of around 2001, it is apparent that very few ‘successful’ e-Business models exist. Whilst our interest in Amazon.com, e-Bay, Dell, etc. continues, our emphasis upon the few that are currently successful tends to eclipse the many tens of thousands worldwide that have failed! Indeed, what happened to all the venture capital money, which was used to support the start-up of thousands of e-Business ventures? Clearly, the answer is that most failed, and many investors were left with collapsing share prices.

As the dot.com hype was replaced with the stark reality that many of these new e-Business ventures were unattractive to potential customers, some traditional ‘bricks and mortar’ firms abandoned their e-Business efforts. For example, in the case of ASPs, many established businesses, such as telecommunications firms and independent software vendors (ISVs), recognized that their ‘core business’ was far more lucrative than diverting attention to ASP activities. ISVs further saw little value in moving to a remote model of software delivery based upon a subscription, pay-as-you-go pricing model, when they could generate more revenues using a traditional licence fee and maintenance contract model (Currie et al., 2004).

To some authors, the focus on the business model concept was problematic. The inherent problems with business models could be explained by adopting an industry analysis of the markets and hierarchies in which firms compete. According to Porter (2001, p. 73): the definition of a business model is murky at best. Most often, it seems to refer to a loose conception of how a company does business and generate revenue. Yet simply having a business model is an exceedingly low bar to set for building a company. Generating revenue is a far cry from creating value, and no business model can be evaluated independently of industry structure. The business model approach to management becomes an invitation for faulty thinking and self-delusion.

Whilst these criticisms are valid (and will be revisited throughout this volume), the success of some e-Business ventures and the failure of many more, we argue, require both an industry-level analysis and a firm (organizational) level analysis. Whilst it is clear that many of the dot.com failures could be analysed in terms of structural problems in the capital markets (Quinn-Mills, 2001), the relative competitive success of other firms can be explained by other factors, notably, entrepreneurial and managerial capability, and the ability to leverage technology for competitive advantage (Weill and Broadbent, 1998). To this end, the fact that technology is largely a commodity (Carr, 2003), accessible to most firms who can afford it, does not adequately explain comparative differences in the use of technology assets, resources and capabilities within and across firms. Nor does it explain comparative success and failure factors with regard to the e-Business models of firms.

Value creation from e-Business models aims to provide a more rigorous intellectual and practical analysis of the e-Business model concept, not forgetting the criticality of an industry-level analysis. But rather than offering a superficial analysis of a few successful e-Business case studies, this edited book draws together theoretical and empirical contributions from leading academic scholars in the field of management information systems (IS). The book is intended as a reader to illustrate the diverse ways in which e-Business models may be researched and analysed.

1.1 Organization of the book

The book is divided into four parts, each of which discusses e-Business in the context of one of the following topics: ontologies and taxonomies, markets and strategies, performance measurement and value creation, and applications and services. In recent years, e-Business models have emerged as a topic of interest within business schools and individual disciplinary areas, such as IS, computer science, sociology, economics and others. This book combines material by scholars mainly from the business school, IS and computer science areas. The first part on ontologies and taxonomies presents contributions, which largely seeks to understand the e-Business model concept and its relationship to other areas, i.e. business strategy and to delineate e-Business models into their component parts. The second part on markets and strategies combines material on both external (market) factors and internal (organizational) strategy making. Here, an important theme has been to examine emerging EMs in the context of user acceptance. Part Three on performance measurement and value creation identifies some of the methods and tools for evaluating success and failure factors from e-Business, which is a perennial theme within the literature. In Part Four, the accent is on software applications and services used in e-Business. This covers the development and implementation of emerging technologies (i.e. ASP) for healthcare, supply-chain e-Management systems and Web services. Whilst this book incorporates a wide range of literature, the omissions are largely due to space limitations rather than a deliberate attempt to exclude other topics. The organization of the book by chapters is as follows:

Chapter 2 is by Seddon, Lewis, Freeman and Shanks, which explores business models and their relationship to strategy. The authors position the business model concept as problematic in the literature. They present two perspectives of the term business model, each of which is distinguished from the term from strategy. The first shows that business models are abstractions of recent conceptualizations of strategy suggested by Porter (2001). The second demonstrates how business models and strategy differ on the degree of competitive focus, with strategy focusing more on competitive positioning, and business models focusing mainly on activity systems designed to create value for their customers. This chapter provides an overview of the business model literature, particularly in terms of its relevance and relationship to strategy.

Following this chapter, Joyce and Winch utilize emerging work on e-Business together with the traditional strategy theory to provide a simple framework for the evaluation of business models for e-Business. These authors use modelling techniques of systems’ dynamics to evaluate an e-Business model using the triple pair approach in an effort to capture the casual relationships and rationalize the complexity of organizational resources and the environment in which they compete. The next two chapters discuss ontologies for e-Business models. Osterwalder and Pigneur outline an ontology (rigorous framework) for e-Business models based on their extensive literature review. They demonstrate how the fusion of the ideas in the business model literature and the ideas of enterprise ontologies creates an appropriate basis for the development of a range of new management tools in the e-Business domain. By merging the conceptually rich business model approach with the more rigorous ontological approach and by applying them to e-Business, they provide a foundation for tools, which facilitate the understanding, sharing and communication, change, measuring and simulation of e-Business models. Similarly, Gordjin presents an approach to design an e-Business model, called the e³-value approach. This approach is ontologically founded in business science, marketing and axiology, but exploits rigorous conceptual modelling as a way of working known from computer science. The aim is that an e³-value e-Business model contributes to a better and shared understanding of the idea at stake, specifically with respect to its profit drivers.

In Part Two, the discussion focuses upon e-Business markets and strategies. Three chapters are presented in this section. The first is by Moon, who discusses a causal network analysis of EM business models. Drawing from the research findings on the development of EMs in four UK firms using the constructs: business model, market conditions and user acceptance, a causal network analysis identifies the relationships between antecedent, intervening and outcome variables, which influence business performance from the EMs. An EM paradox model is developed to depict declining revenues and margins due to the failure of EMs to capitalize on differentiated markets or the benefits they bring to buyers. The study shows that EM business performance is influenced by technological and customer turbulence, as well as competitive intensity. Acceptance of technology acts as an important partial moderator to business performance. Next, Newell and Huang offer a chapter broadly concerned with issues of knowledge management and e-Commerce. They argue that knowledge management is useful to examine aspects of e-Commerce and illustrate how such a perspective can help organizations better develop e-Commerce solutions that will add value. This is followed by Grandon and Pearson, who present their survey findings on the perceived strategic value from e-Commerce. The purpose of their chapter is three-fold:

(a) To summarize current research in strategic value and adoption of e-Commerce and suggest future research areas.

(b) To present a theoretical framework that explains the factors associated with the perceptions of strategic value of e-Commerce and e-Commerce adoption as well as the relationship between these two.

(c) To empirically test the validity of the proposed theoretical framework in field studies.

These authors conducted survey research in two different countries involving a total of 183 subjects.

Part Three considers a range of material largely concerned with issues of performance measurement and value creation. Madeja and Schoder present a chapter on value creation from corporate Web sites using results from a broad empirical investigation studying the effectiveness of implementing Web features for corporate performance. The empirical investigation was based on a large-scale survey comprising 469 cases in the German-speaking market, which is a leading international EM. These authors contribute to the growing body of empirical work on e-Business and offer some practical advice for corporate decision makers. Next, Barnes and Vidgen explore the uses of the E-Qual instrument (formerly known as ‘WebQual’) which was developed as a means of making a quantifiable assessment of subjective customer perceptions of e-Business implementation quality. E-Qual has been refined through many iterations and through application in different domains, both profit and not-for-profit. In this chapter, the authors explicate the E-Qual approach to e-Business evaluation and show how E-Qual has been applied in one particular setting to evaluate a cross-national e-government community, the forum on strategic management knowledge exchange (FSMKE). Following this, Willcocks and Plant examine the business Internet strategies of 78 case study organizations, over a 3-year period (1999–2002). They show that rather than strategy formulation driving corporate success, it was in fact ‘strategy execution’ that separated leaders from laggards. The leading issues preventing agile behaviour amongst ‘bricks and mortar’ organizations were largely traditional inhibitors of superior performance, such as cultural and political issues, and others arising from large-scale business process re-engineering projects. Similarly, Beulen and Ribbers look at netsourcing contracts and present findings from a European study which applies incomplete contract theory to outsourcing. It also contains an overview of the relevant theories including the resource-based view, the transaction cost theory, the incomplete contract theory and the relational view.

In Part Four, we consider e-Business applications and services. Three chapters are included. The first is by Guah, who considers the large-scale changes in the UK National Health Service (NHS), which is currently introducing primary service provisioning (PSP). The question here is: to what extent will emerging technologies (applications and services), such as ASP, improve patient experience within the NHS? Like other large-scale organizations, the NHS comprises a complex structure, with decision-making taking place at both the political and organizational levels. This poses problems for vendors who confront numerous difficulties in trying to sell e-Business solutions to the NHS. Following this chapter, Chandra, Kumar and Smirnov offer an integrated model for supply-chain management. These authors’ chapter offer a generic development methodology for e-Management of supply chain based on the principles of domain-independent problem solving and modelling, and domain-dependent analysis and implementation. The purpose of such approach is to ascertain characteristics of the problem independent of the specific problem environment. The approach delivers solution(s) or the solution method that are intrinsic to the problem and not its environment. They illustrate this with applications from the automotive industry. Finally, Currie discusses the emerging technology of Web services, which is currently perceived by some sections of the technology sector as the latest silver bullet to resolve organizational problems of poor integration of systems and applications. This chapter cautions against an over-optimistic stance for Web services, particularly in the light of the disappointing results from numerous e-Business initiatives, such as ASP. Indeed, all the chapters in this volume point to the need for more rigour and relevance in both developing and implementing e-Business solutions.

References and Further Reading

October 2000 Amit, R., Zott, C. Value Creation in E-commerce Business Models. In: Presentation the Wharton Conference of Winners and Losers in the E-commerce Shakeout. The Wharton School; 2000.

Amit, R., Zott, C. Value Creation in eBusiness. Strategic Management Journal. 2001;22:493–520.

Bakos, Y. The Emerging Role of Electronic Markets. Communications of the ACM. 1998;41(8):35–42.

5 May Carr, N.G. It Doesn’t Matter. Harvard Business Review. 2003;81:41–51.

Cassidy, J. Dot.con: How America Lost Its Mind and Money in the Internet Era. Harper Collins: Perennial; 2002.

Currie, W. Application Outsourcing: A New Business Model for Enabling Competitive Electronic Commerce. International journal of Services and Technology Management. 2002;3(2):139–153.

Currie, W. A Knowledge-Based Risk Assessment System for Evaluating Web-Enabled Application Outsourcing Projects. International Journal of Project Management. 2003;21(3):207–213.

Currie, W., Seltsikas, P. Exploring the Supply-Side of IT Outsourcing: The Emerging Role of Application Service Providers. European Journal of Information Systems. 2001;10(3):123–134.

Currie, W., Desai, B., Khan, N. Customer Evaluation of Application Services Provisioning in Five Vertical Sectors. Journal of Information Technology. 2004;19(1):3–20.

10/11 October/November Eisenhardt, K.M., Martin, J.A. Dynamic Capabilities: What Are They? Strategic Management Journal. 2000;21:1105–1121.

Hagel, J. Out of the Box: Strategies for Achieving Profits Today and Growth Tomorrow through Web Services. Harvard Business School Press; 2002.

October Hagel, J., Seely-Brown, J. Your Next IT Strategy. Harvard Business Review. 2001:105–113.

4–6 April IDC. International Conference on Managing and Growing a World Class ASP Business. San Francisco, US: Hosted by International Data Corporation; 2000.

Handbook of Electronic Commerce in Business and Society, Boca Raton, CRC Press, 2002) Kauffman, R., Wang, B. Lowry P.B., J.O.C., Watson R.R., eds. 5th Annual University of Minnesota Electronic Commerce Conference. CRC Press: Minneapolis, MN, 2001:27–28.

Kern, T., Kreijger, J., Willcocks, L. Exploring Asp as Sourcing Strategy: Theoretical Perspectives, Propositions for Practice. Journal of Strategic Information Systems. 2002;11(2):153–177.

Lewis, M. The New, New Thing. London: Hodder and Sloughton; 1999.

Magretta, J. Why Business Models Matter. Harvard Business Review. 10, 2001.

Mahadevan, B. Business Model for Internet-Based E-Commerce: An Anatomy. California Management Review. 42(4), 2000.

Nesheim, J. High Tech Start-Up. CA: Saratoga; 1997.

Oliva, R., Sterman, J., Giese, M. Limits to Growth in the New Economy: Exploring the ‘Get Big Fast’ Strategy in e-Commerce. System Dynamics Review. 2003;19:83–118.

November–December Porter, M., What is Strategy?. Harvard Business Review. 1996:61–78.

March–April Porter, M. Strategy and the Internet. Harvard Business Review. 2001:63–78.

Quinn-Mills, D. Who’s to Blame for the Bubble? Harvard Business Review. 2001;79(5):22–23.

1-9 Rappa, M., An Evaluation of Business Models. Millennium Group; 2000. http://digitalenterprise.org/models/models.html.

Rappa, M., Business Models on the Web. 2004. http://digitalenterprise.org/models/models.html.

Ross, J., Vitale, M., Weill, P. From Place to Space Migrating to Profitable Electronic Commerce Business Models. Sloan School of Management; 2001.

SCN Education B.V., ed. ASP — Application Service Providing: The Ultimate Guide to Hiring rather than Buying Applications. Germany: Vieweg/Gabler, 2000.

Soh, C., Markus, L. Business-to-Business Electronic Marketplaces: A Strategic Archetypes Approach. In: International Conference on Information Systems. Spain: Barcelona; 2002.

Timmers, P. Business Models for Electronic Commerce. Chichester, England: John Wiley & Sons Ltd; 1999.

Weill, P., Broadbent, M. Leveraging the New Infrastructure: How Market Leaders Capitalise on Information Technology. Mass: Harvard Business School Press; 1998.

Weill, P., Vitale, M.R. Place to Space — Migrating to e-Business Models. Harvard Business School Press; 2001.

¹.The eight atomic e-Business models are: direct to customer, full service provider, intermediary, shared infrastructure, value net integrator, virtual community and whole-of-enterprise/government (see Weill and Vitale, 2001, p. 21).

2

Business models and their relationship to strategy¹.

Peter B. Seddon, Geoffrey Lewis, Phil Freeman and Graeme Shanks

Abstract

The term business model is being used increasingly within the domain of e-Business as more and more organizations try to understand how to become more successful by leveraging the Internet. However, there is a great deal of confusion and very little agreement about what the term actually means. In particular, the term business model is frequently confused with strategy. In this chapter we present two perspectives of the term business model that clearly distinguish it from strategy. Under the first perspective, business models are abstractions of Porter’s recent conceptualizations of strategy. Under the second, business models and strategy differ on the degree of competitive focus, where strategy focuses more on competitive positioning, and business models focus more on activity systems, that is, on the mechanisms firms use to create value for their customers. We use these perspectives to position the work of other researchers and to clarify the term business model.

2.1 Introduction

The term ‘business model’ has been used with increasing frequency since the mid-1990s within the domain of e-Business as more and more organizations try to understand how to become more successful by leveraging the Internet. However, the term is poorly defined and there is very little agreement about what it actually means. For example, Michael Porter (2001, p. 73) notes:

The definition of a business model is murky at best. Most often, it seems to refer to a loose conception of how a company does business and generates revenue. Yet simply having a business model is an exceedingly low bar to set for building a company. Generating revenue is a far cry from creating economic value….

Furthermore, the term ‘business model’ is often confused with the term ‘strategy’. Joan Magretta (2002) notes:

Today, ‘business model’ and ‘strategy’ are among the most sloppily used terms in business; they are often stretched to mean everything – and end up meaning nothing. But as the experience of companies like Dell and Wal-Mart show, these are concepts of enormous practical value.

A review of the literature, examining leading authors’ definitions of both terms, reveals that there is considerable confusion and ambiguity, with a great deal of overlap between these two terms. There are nuances of difference, for example strategy seems more concerned with competition between firms, whereas business models are more concerned with the ‘core logic’ that enables firms to create value for their customers and owners (Linder and Cantrell, 2000). In addition, it may be that people with an information technology (IT) background tend to use the term ‘business model’ more often than those from a management background (who use ‘strategy’). But across a broad range of papers, a detailed analysis reveals that the concepts used by authors when discussing these two terms are very similar.

Although the terms ‘business model’ and ‘strategy’ are very similar in meaning, particularly if one uses Porter’s (1996, 2001) definitions of strategy, we present two perspectives of ‘business model’, consistent with the usage of many of the experts who have used the term, that clearly distinguish it from ‘strategy’. One perspective presents business models as abstractions of strategy, capturing aspects of individual-firm strategy that can be applied to many firms. The other perspective classifies business models and strategy on a two-by-two matrix of competitive focus versus firm specificity. Business models are classified as more inward looking, focusing on the activity system side of how an organization creates economic value, whereas strategy is classified as more outward looking, focusing more on competitive