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Update on Internet Business Models:
Emerging lessons and open questions about the transformation of business through information
technology
Taylor RandallUniversity of Utah
Lecture Outline
• Emerging lessons on new business models.
• Choosing a model for electronic retailing.
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Value chains have always consisted of product flowsand information flows.
Information flows
Product flows
Potential for information technology to transform information flows to create new business or streamline old business.
Common Business Propositions
#1 - Business built on information contentInformation flows alone have significant value.Examples: iVillage, web communities.
#2 - Direct sales and distributionEliminate intermediariesExamples: Web Van, eToys, Amazon
#3 - Streamlined transactionsAutomated purchasing functions exchangesExamples: E-bay, Exostar, Ventro Group
Proposition #1: Easier Delivery of Information Content
i-Village: Information Content for Women
Proposition #2: More Efficient Sales - Eliminate Retail Locations
e Toys: Toy Retailing
Proposition #3: Streamlined Purchasing: Business Exchanges
Ventro Group - B2B purchasing
4 lessons emergingfrom the dot.com crash...
They who fail to learn from history are doomed to repeat it.
Lesson 1:
History shows that innovative business success depends on a solid technological infrastructure .… this takes time.
History Quiz: Who said it and when?
“You may go to an average store, spend valuable timeand select from a limited stock at retail prices…
or have our Big Store of World Wide Stocks come to you.”
a) Jeff Bezos - business plan of Amazon.com 1995. b) Bill Gates - on retail plans for Microsoft 2000.c) Vice President of Wal-mart e-tailing 1998.d) none of the above.
History Quiz: Who said it and when?
Answer: d) none of the aboveFrom Sears-Roebuck Catalog 1915
Catalog regarded by economists as a “radical transformation in the marketing and
distribution of consumer goods.”
1890 1895 1900 1905 1910 1915 1920 1925
Richard Sears begins to sellwatches to
railroad station agents.
First largegeneral Sears
catalog.
Sales Growth History of Sears Roebuck
What happened here?
High Growth
Tough to deliver goods prior to 1900
The King Road Drag
Invention leveled and packedmuddy roads. Made autotransportation possible.
1890 1895 1900 1905 1910 1915 1920 1925
Richard Sears begins to sellwatches to
railroad station agents.
First largegeneral Sears
catalog.
Sales Growth History of Sears Roebuck
High Growth
D. Ward Kinginvents the “King
Road Drag”
Sears installspick and ship
plant (10x productivity
increase)
Congress mandates“Parcel Post” as long
as you have good roads
So what was the greatest innovation the catalog? or the King Road Drag?
“A lot of people jumped the gun.They tried to skip the first two phases.”
Roger McNamee, Integral Capital Partners 2000
Technological change happens in 3 phases:
1. Creation of infrastructure 2. Arrival of enabling technologies3. Business built on the previous 2
Creation of Infrastructure Roads ???
Arrival of enabling technologies Pick System ???Postal Service
Construction of business Catalog Sales home delivery
Stage of Development SearsDirect
Grocery Delivery
Can you identify the key technological infrastructure for your business?
Even when American voters are most angry, they re-elect88% of their politicians.
Vital Statistics of Congress.
Lesson 2:Because infrastructure changes slowly
old companies still hold power.
Examples of incumbent power:
Politicians have political action committee dollars.
3 times as expensive to acquire a customer “on-line”as it is to acquire a customer with physical stores.
Over 60% of all traditional retailers had data processing andcustomer service capabilities before going on-line.
In 1925 Sears opened retail stores by 1930 retail store saleshad outpaced catalog sales.
Incumbent power comes from existing infrastructure.
1890 1895 1900 1905 1910 1915 1920 1925 1930
Richard Sears begins to sellwatches to
railroad station agents.
First largegeneral Sears
catalog.
Sales Growth History of Sears Roebuck
D. Ward Kinginvents the “King
Road Drag”
Sears installspick and ship
plant (10x productivity
increase)
Congress mandates“Parcel Post” as long
as you have good roads
Sears opensfirst retail
stores
Lesson 3:
The parameter estimates in e-business plansare so far off, even worst case sensitivity analysis isn’t bad enough….
Incorrect estimates lead to adoption ofthe unprofitable business models.
Example: Revenue Model for a Campus Intranet ProviderAdvertising Model vs. Software Model
1 school 1 schoolAdvertising Software
# Schools 1 Install $250,000
# Users Per School 8000 Maintenance $50,000
Active Usage 65%
Sessions/Day 2
Page views/Session 12
Images/Page 4
Days year 180
CPM/1000 views $25
Total Revenue $2.25 M
Example: Revenue Model for a Campus Intranet Provider
1 school Phase I
# Schools 1 750
# Users Per School 8000 8000
Active Usage 65% 65%
Sessions/Day 2 2
Page views/Session 12 12
Images/Page 4 4
Days year 180 180
CPM/1000 views $25 $25
Total Revenue $2.25 M $2.5 B
Business Valuation $250 M
Example: Revenue Model for a Campus Intranet Provider
1 school Phase I Phase II
# Schools 1 750 1200
# Users Per School 8000 8000 8000
Active Usage 65% 65% 80%
Sessions/Day 2 2 2
Page views/Session 12 12 12
Images/Page 4 4 4
Days year 180 180 180
CPM/1000 views $25 $25 $45
Total Revenue $2.25 M $2.2 B $6.3 B
Business Valuation $250 M $500 M
Example: Revenue Model for a Campus Intranet Provider
1 school Phase I Phase II Actual
# Schools 1 750 1200 1200
# Users Per School 8000 8000 8000 7000
Active Usage 65% 65% 80% 50%
Sessions/Day 2 2 2 .5
Page views/Session 12 12 12 5
Images/Page 4 4 4 1.5
Days year 180 180 180 180
CPM/1000 views $25 $25 $45 $3
Total Revenue $2.25 M $2.2 B $6.3 B $8.5 M
Business Valuation $250 M $500 M ?
Under actual numbers software model makes more sense.
Lesson 4:
In many cases it is hard to sell the valueof improved information flow without theaccompanying product flow.
Example: Business to Business Purchasing
FragmentedManufacturers
Distributors Hospitals
Problem:Fragmentation makes purchasing function too complex (multipleshipments and invoices to track, pricing problems.
Opportunity:Use New IT to consolidate invoicing and purchasing function
Example: Business to Business Purchasing
B2BExchange
Question:
How much is the improved information flow worth?
Benchmark: Traditional Distributor gets 17% to 30% margin
New Propositions
Use technology to make old infrastructure more efficient.
#1 Enhance existing products and services with internet technology.
#2 Use technology to reduce costs of coordination within companies.
#3 Use technology to reduce transaction costs between businesspartners.
Summary
Lessons from the dot.com crash
1 - Successful businesses built on new technology take time.
2 - Incumbents may be more successful using technology.
3 - Carefully consider the estimates in your business models.
4 - Carefully evaluate the value attached to information flows.
Choosing a business model for internet retailing
Taylor RandallUniversity of Utah
Two basic choices
Retailer
Wholesaler
Customer
Wholesaler
Customer
Retailer
What factors influence the choice of supply chain?
Inventory Ownership Drop-shipping
Supply Chain options on the Internet*
Primary way company fulfills online orders % of Internet-only
retailersFrom company facility that existed 13.9%
From company facility that was developed 30.6%
Drop-shipped 30.6%
Outsourced 8.3%
From facility operated by a partner 8.3%
Electronic fulfillment (software) 5.6%
Other 2.7%
*The state of eRetailing 2000. Supplement to “eRetailing World” March 2000.
Drop-shipped 30.6%
“Cheap tricks”•Start-up capital: $825,000
•200,000 CD titles available for immediate shipment
•No inventory
Motivating Example: Meet Spun.com
One supply chain type not dominant within or across
industries
RetailCategory
CDs
GeneralRetailing
Hold Inventory Drop-ship
CDNow.com Spun.com
Amazon Value America
BANKRUPT
BANKRUPT
Business results not consistent
RetailCategory
CDs
GeneralRetailing
Hold Inventory Drop-ship
CDNow.com Spun.com
Amazon Value America
Making Supply Chain Choice: Theory
Considerations in favor of drop-shipping:
•Reduced investment into fulfillment capabilities
•Wider product selection
•Lower fulfillment cost
•No inventory obsolescence
•Benefits due to inventory pooling
Considerations in favor of inventory ownership:
•Higher product margin
•More control over stocking decisions
•More control over product offering
•Avoid encroachment of customers
•Ease of order consolidation
•Lower technology investment
Hybrid strategy?
Factors Influencing Inventory Choice
Own Drop-Ship
Development of Industry
Firm Size
Product Variety
Demand Uncertainty
Product Transportation Costs
Product Obsolescence Risk
Immature
Large
Low variants
Low uncertainty
Lower
Lower
Mature
Small
High variants
High uncertainty
Higher
Higher
Sample Description• Survey of 64 publicly held e-tailers• 56 responses, 54 usable responses (84.4%)• Between 60% and 70% of e-tailing revenue.• Financial data from COMPUSTAT data base• Example Companies
Amazon.com Pets.comBarnes&Noble.com Egghead.comCDNow.com Delias.comFogdog.com Autobytel.comWebvan.com Buy.com
• 36 companies choose to hold inventory (67%)• 11 bankrupt companies (20%)
Measure of rational supply chain choice
Actual Choice
Model Recommendation
Own
Not own
Own Not own
Irrational4 firms
Irrational4 firms
Rational21 firms
Rational17 firms
Elected to drop-ship Elected to own
0 1
Likely to drop-ship Likely to own inventory
Irrational supply chain choice is associated with bankruptcy!
Probability of Bankruptcy
Rational Irrational Difference Choice Choice
0.10 0.37 0.27*
*statistically significant difference
Irrational Supply Chain Choice and Probability of Bankruptcy
Poor supply chain choice one of factors associated with failure.
Summary
Research results:
– theoretically obtained criteria for inventory choice,
– confirmed hypothesis empirically,
– linked inventory choice and firm performance.
Supply Chain Choice Parameters in Grocery Industry
Existing Store Depot
Fixed Costs per Year $20,000 $10 million
Picking Labor Per Order $20 $5
Market Trends:
2% of all sales will be over internet$100 per order 20 or 30 times per year.5% margin on food.60 items per order$25 delivery charge
When do you use a existing store and when do you use a depot?
