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chapter seven New Business

7 Models and
Strategies for
the Internet
Economy
We have plainly arrived at one of those moments when
everyone can see that things are about to change, but nobody
can say for sure how that change will actually play out. The
companies that mean to dominate the future must make a bet
on where the world is headed—and hope they get there first.
—Joseph Nocera, Business Journalist

If you are going to be in e-commerce, you have to build a

business that destroys the old brick-and-mortar model.
—John B. McCoy, CEO, Bank One Corp.

There will be thousands of winners on the Internet. But there

will be only a very few really big winners.
—Mary G. Meeker, Morgan Stanley Dean Witter

If we want to stay competitive, we need to be in e-commerce.

—Jessica Chu, Marketing Manager, Aaeon Technology, Taiwan

Our strategy is to integrate the Internet into all of our core

businesses.
—Thomas Middelhoff, CEO, Bertelsmann AG, Germany
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T
he impact of the Internet and the rapidly emerging e-commerce environment
is profound. As many have concluded, the advent of the Internet and online
networks “changes everything.” There can be no doubt that the Internet is a
driving force of historical and revolutionary proportions. The coming of e-commerce
has changed the character of the market, created new driving forces and key success
factors, and bred the formation of
new strategic groups. From an in-
ternal perspective, a company’s
e-commerce capabilities or lack
thereof tilts the scales toward
competitively valuable resource
strengths or competitively threat-
ening weaknesses. The creative-
ness with which a company
incorporates e-commerce prac-
tices holds enormous potential
for reconfiguring its value chain
and affecting its company’s com-
petitiveness. With every passing day, it becomes clearer that the Internet economy pre-
sents opportunities and threats that demand strategic response and that require
managers to craft bold new strategies.
This chapter examines the issues companies face in crafting strategies for compet-
ing in industries where the Internet and e-commerce are ruling forces. It covers the
high-velocity character of the whole e-commerce environment, the special competitive
features of e-commerce that a company must take into account, the new types of busi-
ness models and strategies that dot-com companies are employing, and the offensive
and defensive strategies that traditional businesses are employing to make e-commerce
practices a central part of their operations.

225
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226 Part 1 The Concepts and Techniques of Strategic Management

INTERNET TECHNOLOGY AND MARKET STRUCTURE

The Internet is an integrated network of banks of servers and high-speed computers,
digital switches and routers, telecommunications equipment and lines, and individual
users’ computers. The backbone of the Internet consists of telecommunications lines
(fiber optic lines, high-capacity telephone lines) criss-crossing countries, continents,
and the world that allow computers to transfer data in digital form at very high speed.
The bandwidth of the line determines the capacity or speed of the data transfer. These
lines are connected to computerlike digital switches that move traffic along the back-
bone lines; many of these switches act as routers, deciding which way to direct the traf-
fic and how to handle the requests of users’ computers to send or obtain data based on
the destinations and line congestion. Users gain access to the network via a local area
network (LAN) server or an Internet service provider’s computerized switch that has
the capability to route traffic to and from end users directly connected to it. Many dif-
ferent types of specialized software are required to make the Internet function and in-
fuse it with attractive e-commerce capabilities.

The Supply Side of the Internet Economy

Projections called for an estimated 325 million people worldwide to be using the In-
ternet regularly by year-end 2000—about 150 million in North America, close to 100
million in Europe, 58 million in the Asia-Pacific region, 11 million in Latin America,
and over 7 million in the rest of the world.1 Associated with each of the technological
The supply side of components and activities comprising the Internet infrastructure and value chain are a
the Internet econ- diverse and growing number of firms and industries. The major groups of firms that
omy consists of di- comprise the supply side of the Internet economy include:
verse kinds of
enterprises. • The makers of specialized communications components and equipment—Cisco
Systems is the world’s leading provider of switches and routers; other prominent
companies in this group include Lucent Technologies, Motorola, Broadcom, Texas
Instruments, PMC Sierra, and 3Com.
• The providers of communications services—These companies develop and install
the communications networks that enable connectivity and traffic flow. They include
backbone providers, so-called last-mile providers, and Internet service providers.
Last-mile companies, which install and maintain the physical assets needed to con-
nect users to the Internet, include local telephone companies, cable companies,
and wireless communications providers. Leading backbone providers include
WorldCom, AT&T, Qwest Communications, Deutsche Telekom, British Telecom,
Vodaphone AirTouch, Bell Atlantic, SBC Communications, and Global Crossing.
• The suppliers of computer components and computer hardware—These companies
make PCs, workstations, servers, and peripheral equipment as well as the internal
devices that drive them. Examples of companies in this category include Intel, Sun
Microsystems, Seagate Technology, IBM, Iomega, Fujitsu, NEC, Matsushita/
Panasonic, Acer, Philips Electronics, Toshiba, Gateway, and Hewlett-Packard.
• The developers of specialized software—These companies write the programs that
enable commercial transactions; these programs include encryption software, or-
der/payment processing software, shopping cart software that tracks purchases,
browser software, software to enable banner ads and Web page design, and software

1
Reported in Business Week, October 7, 1999, p. 77.
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Chapter 7 New Business Models and Strategies for the Internet Economy 227

that governs the functioning of cable modems, wireless devices, PCs, workstations,
and LANs. DoubleClick is a developer of specialized software that collects bits of
demographic information residing on the PCs of Web surfers and, then, using crite-
ria provided by advertisers, delivers targeted ads to the Web pages popping up on
Web surfers’ screens; DoubleClick’s software also provides its advertising clients
with reports on the frequency with which surfers click particular ads and their pro-
files. 1ClickCharge, part of CMGI, develops payment software that allows online re-
tailers to charge consumers a few cents per click for product reviews, music, or
articles online. An entrepreneurial start-up named Blaxxun develops software for
building three-dimensional Web sites, an attractive feature for some retailers. En-
gage Technologies, also a start-up, specializes in software that tracks Web traffic
from site to site, enabling the creation of anonymous user profiles of Web surfers—
information that guides users in targeting their online marketing strategies. Critical
Path, another start-up, develops and markets software that allows Web sites to offer
e-mail service. Other important developers of software and e-commerce systems in-
clude Microsoft, IBM, SAP, Commerce One, Seibel Systems, Ariba, Oracle, Ink-
tomi, Baan, Sun Microsystems, Macromedia, and Novell.
• E-commerce enterprises—This category of businesses includes (1) business-to-
business merchants (Cisco, Intel, and Dell Computer conduct most of their busi-
ness with corporate customers online; General Electric does all of its business with
its suppliers online); (2) business-to-consumer merchants like Emusic.com, eBay,
CarParts.com, Furniture.com, MotherNature.com, Priceline.com, Buy.com, and
Charles Schwab; (3) media companies such as Disney, Nintendo, Electronic Arts,
and Sony that provide online entertainment; and (4) content providers like Amer-
ica Online, Yahoo!, Briefing.com, The Motley Fool, and iVillage.
Not surprisingly, some companies have staked out business positions in more than Estimates are that
one of the above categories. CMGI, part holding company and part venture capitalist, the volume of busi-
consists of a portfolio of 52 Internet enterprises; among others, it owns or has equity ness done via the
interests in 9 content companies, 12 companies that provide software and other tools Internet will grow
for facilitating e-commerce, and 12 e-commerce retailers. Softbank Corporation, a to $1.3 trillion by
2003. In 1999, three
Japanese conglomerate headed by Masayoshi Son, is a venture capital enterprise with
companies—Dell
stakes in 100-plus high-tech enterprises whose offerings include e-commerce software, Computer, Intel,
Web publishing, e-retailing, online brokerage, Web portals, assorted e-commerce ser- and Cisco Sys-
vices, and media and content providers. Softbank has ownership interests in Yahoo!, tems—were doing
E*Trade, E-Loan, Critical Path, TheStreet.com, and several other U.S.-based enter- about $100 million
prises, but the company is focusing most of its energies on commercializing the Inter- of business daily on
net in Japan, other parts of Asia, and Europe. the Internet.

STRATEGY-SHAPING CHARACTERISTICS OF THE

E-COMMERCE ENVIRONMENT
To understand the strategies and business models that work in the new age of
e-commerce, we first need to understand how growing use of the Internet by busi-
nesses and consumers reshapes the economic landscape and alters traditional industry
boundaries. The following features stand out:

• The Internet makes it feasible for companies everywhere to compete in global

markets. This is true especially for companies whose products are of good caliber
and can be shipped economically. In retailing, the Internet opens up a much bigger
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228 Part 1 The Concepts and Techniques of Strategic Management

geographic market than a traditional brick-and-mortar retailer could otherwise

reach. In the brick-and-mortar world, a consumer electronics store in Tuscaloosa,
Alabama, does not compete intensively with similar stores in Birmingham 60
miles away; in the virtual world of the Internet, however, it competes with elec-
tronics retailers hundreds of miles away (whose actual locations are unknown and
irrelevant). Thus, e-commerce escalates rivalry among sellers in different geo-
graphic areas to a whole new level. National boundaries mean much less in an
e-commerce world—for example, someone putting an item up for bid on eBay’s
auction site can connect with a buyer in Europe or Latin America, and eBay pro-
vides detailed instructions for shipping auctioned goods internationally. Growing
numbers of transportation providers can handle shipments to any part of the world.
However, one of the barriers to using the Internet to sell globally is the need for
multilingual Web sites (although this is somewhat less necessary for selling to
business enterprises since English tends to be the business language of the world).
Furthermore, buyers in different countries seem to have differences preferences
for the look, feel, and functioning of Web sites—some people like lots of bells and
whistles while others prefer simplicity. To meet the challenges of language barri-
ers and respond to varying Web site preferences, many companies operate multi-
ple Web sites, sometimes one for each country or region of the world.
• Competition in an industry is greatly intensified by the new e-commerce strategic
initiatives of existing rivals and by the entry of new, enterprising e-commerce ri-
Growing use of the vals. Not only is the Internet an important new distribution channel that allows sell-
Internet by busi- ers to reach vast numbers of buyers relatively inexpensively but the use of online
nesses and con- systems afforded by the Internet also holds considerable potential for improving
sumers intensifies business efficiency and lowering operating costs. Hence, innovative use of the In-
rivalry among com- ternet adds a valuable weapon to the competitive arsenal of rival sellers, giving
peting sellers.
them yet another way to jockey for market position and maneuver for competitive
advantage. Many existing companies are launching Web site initiatives, sometimes
for offensive reasons and sometimes for defensive reasons. At the same time, new
companies are being formed by the thousands to enter the Internet economy and
compete in market arenas heretofore difficult to enter. The outcome in most indus-
tries is a market environment with heightened rivalry among competing sellers.
• Entry barriers into the e-commerce world are relatively low. Many of the activi-
ties comprising the value chains of e-commerce businesses can be outsourced. The
software necessary for establishing a Web site is readily available (if entrepreneurs
do not wish to develop their own), and the costs of using a Web hosting company
to manage the servers and maintain the site are relatively modest—for example, a
bank can establish a new Internet banking site for under $50,000. There are now
companies specializing in providing all sorts of services for dot-com companies—
from Web page design and maintenance to answering e-mail inquiries to handling
warehousing and shipping. Companies operating “server farms” now provide a
round-the-clock server access and Web site maintenance at economical rates to en-
terprises who want to do business online but do not want to operate the site them-
selves. Manufacturing and assembly can be contracted out to others as well.
Perhaps the biggest entry barriers are the sometimes significant outlays required to
create brand awareness and to draw traffic to a company’s Web site. Even so, there
are a number of e-commerce businesses that entrepreneurs can start and operate
out of their homes. Relatively low entry barriers explain why there are already
hundreds of thousands of newly formed e-commerce firms, with perhaps millions
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Chapter 7 New Business Models and Strategies for the Internet Economy 229

more to spring up around the world in years to come.2 In many markets and in-
dustries, entry barriers are low enough to make additional entry both credible and
likely.
• Online buyers gain bargaining power because they confront far fewer obstacles to
comparing the products, prices, and shipping times of rival vendors. Vendor Web Growing use of
sites are only a few clicks apart and are open for business 24 hours a day, every the Internet and
day of the year, giving buyers unprecedented ability to compare offerings and find e-commerce tech-
the best value. Using online networks, a multinational manufacturer’s geographi- nology can produce
cally scattered purchasing groups can easily pool their orders with parts and com- important shifts in
one or more of an
ponents suppliers and bargain for volume discounts. Likewise, it is feasible for
industry’s five com-
wholesalers to use online systems to research the products, prices, and features of petitive forces.
competing manufacturers and for retailers to shop around and bargain for the best
deals from manufacturers and distributors who supply them. Individual consumers
can readily get reviews of products, compare the features and prices of rival
brands, and put up bids for how much they are willing to pay for items. The Inter-
net eliminates the geographic protection of distance that has traditionally given
small-town businesses the advantage of being the only source within reasonable
driving distance. Using the Internet, buyers can readily negotiate car purchases
with dealers hundreds of miles away, order from Furniture.com, purchase music
CDs at EMusic.com, or borrow money at E-Loan or Mortgage.com. Buyers of all
types—manufacturers, wholesalers, retailers, and individuals—can join a buying
group to pool their purchasing power and approach vendors for better terms than
could be gotten individually. Purchasing agents are banding together at Web sites
operated by Wells Fargo and Chase Manhattan to pool corporate purchases to get
better deals or special treatment. PurchasingCenter.com operates a buying pool for
industrial goods such as drill bits and motors. (Sellers are not entirely disadvan-
taged by buying pools, however, because they gain quick access to large, well-
defined pools of buyers, allowing them to save on selling and marketing costs.)
• The Internet makes it feasible for companies to reach beyond their borders to find
the best suppliers and, further, to collaborate closely with them to achieve effi-
ciency gains and cost savings. While a number of companies have relied on for-
eign suppliers for low-cost components and assembly for some years, in an
e-commerce environment companies can use the Internet to integrate foreign sup-
pliers into their supply chain networks more tightly, boosting savings and speed-
ing new products to market. All companies can extend their geographic search for
suppliers and can collaborate electronically with chosen suppliers to streamline or-
dering and shipping of parts and components, improve just-in-time deliveries,
work in parallel on the designs for new products, and communicate speedily and
efficiently. But the chief point here is that new competitive pressures can spring
from the e-commerce relationships between companies and their suppliers—com-
panies not only gain added bargaining power over their suppliers but efficient on-
line collaboration with chosen suppliers can also be a basis for gaining an edge
over rivals.
• Internet and PC technologies are advancing rapidly, often in uncertain and unex-
pected directions. For example, a few years ago, both Intel and Microsoft were

2
For a discussion of how e-commerce is attracting entrepreneurs and capital, see Gary Hamel, “Bringing
Silicon Valley Inside,” Harvard Business Review 77, no. 5 (September–October 1998), pp. 70–84.
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230 Part 1 The Concepts and Techniques of Strategic Management

focusing all their energies on expanding the role of the personal computer as a
multifunctional appliance in both businesses and households. Both companies
misjudged the technological and business significance of the Internet and had to
initiate crash programs to redirect their efforts. Also, a few years ago, investors
considered Iomega one of hottest growth stocks because of the potential for
Iomega’s Zip drives and high-capacity Zip disks to displace the standard 3.5-inch
floppy disk. Iomega signed up numerous PC makers to include its Zip drive as an
option on PCs. Its business model called for keeping prices attractively low on Zip
drives to gain greater market penetration while making money on the sale of Zip
disks, which retailed for about $10 each. Just as the Zip drive was gaining a solid
foothold in the market, the makers of computer hard drives unexpectedly hit upon
ways to greatly increase hard drive capacity (to unheard of levels—10 to 25 giga-
bytes) and, at the same time, lower hard drive production costs dramatically. PC
makers and PC users quickly shifted to PCs with bigger hard drives and bypassed
significant use of Iomega’s Zip drives and Zip disks. Iomega’s stock price declined
steadily, and the company has fallen on hard times.
• The Internet results in much faster diffusion of new technology and new ideas
across the world. Companies in emerging countries and elsewhere can use the In-
ternet to monitor the latest technological developments and to stay abreast of what
is transpiring in the markets of Europe, Japan, and North America and what the
leading companies in these areas are doing. Distance and location matter less in a
connected world; indeed, the Internet is a globalizing force that promotes the for-
mation of a world community and, from a business perspective, reduces the im-
portance of national boundaries.
• The e-commerce environment demands that companies move swiftly—“in Internet
time” or “at Internet speed.” Just a few years ago, companies that were nimble
The e-commerce
world is character- and operated with short response times could expect to have a competitive advan-
ized by high- tage over slower-moving rivals. In the exploding e-commerce world, speed is a
velocity, rapid-fire condition of survival. New developments on first one front and then another occur
change. daily. Market and competitive conditions change very quickly. Late-movers are
doomed.
• E-commerce technology opens up a host of opportunities for reconfiguring indus-
try and company value chains. For instance, using the Internet to link the orders of
customers with the suppliers of components enables just-in-time delivery to man-
ufacturers, slicing inventory costs and allowing production to match demand—for
both components and finished goods. It also allows more accurate demand fore-
casting. Tight supply chain management starting with customer orders and going
all the way back to components production, coupled with the use of enterprise re-
source planning (ERP) software and manufacturing execution system (MES) soft-
ware, can make custom manufacturing just as cheap as mass production, and
sometimes cheaper. It can also greatly reduce production times and labor costs.
J. D. Edwards, a specialist in ERP software, teamed with Camstar Systems, a spe-
cialist in MES software, to cut Lexmark’s production time for computer printers
from four hours to 24 minutes. Many of the world’s leading motor vehicle pro-
ducers are moving rapidly to incorporate e-procurement technologies into their
supply chain systems in preparation for customized mass production. Another ex-
ample of how the use of e-commerce systems alters manufacturing and industry
value chains to increase efficiency, reduce costs, and streamline the production
process is provided in Illustration Capsule 29.
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Chapter 7 New Business Models and Strategies for the Internet Economy 231

illustration capsule 29
How the Internet Can Revamp Manufacturing Economics
and Industry Value Chains
In years past, companies like Compaq Computer and
Hewlett-Packard made PCs for their corporate and busi-
ness customers by “guesstimating” which models and op-
tions customers would prefer, making variously equipped
models in quantity, and shipping them to resellers. Re-
sellers maintained inventories of a wide selection of PC
models, as well as parts to reconfigure the models in stock
to buyer specifications, and also handled marketing and
servicing. However, pressured by the lower-cost econom-
ics of Dell Computer’s build-to-order and sell-direct busi-
ness model, many PC makers have been forced to revamp
their value chain approach.
Recently, Compaq and Hewlett-Packard entered into
arrangements with Ingram Micro, the largest PC distributor
and reseller and also an assembler of PCs, and Solectron
Corp., a contract manufacturer of PCs, to supply custom
PCs to their corporate customers. The new value chain
model the partners worked out is depicted below:
This new value chain model was expected to cut pro-
duction costs substantially and reduce the amount of time a
PC sat in inventory from as much as several months to a
matter of hours.

A company places an order Online systems automatically

with Ingram Micro at provide PC maker with order
Ingram's Web site. information at time of order entry.

Step Ingram
1 Micro

PC
Company
Corporate Step
(Compaq
customer 2
computer or
Special software supplied by a third party analyzes H-P)
the order and sends it via the Web to the Ingram or
Solectron factory best suited for the order. If some
parts are not
in stock, the
Ingram software
Step and automatically
3 Solectron places orders
plants with suppliers.
Factories custom-build the
PCs, keep customers updated
as to the progress, and ship
the PCs to the customer (or to
the reseller, who arranges for
Using online systems, the PC
delivery and installation).
company and the factory
collaborate as needed on product
design and introduction of next-
generation models.

Source: Business Week, March 22, 1999, pp. EB-15 and EB-18; and information supplied by Ingram Micro, Inc., and Solectron Corp.
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232 Part 1 The Concepts and Techniques of Strategic Management

All of the different value chain activities associated with procuring items from
suppliers and collaborating with them can be streamlined and tightened. With soft-
ware from Commerce One, Oracle, SAP, Ariba, and others, company procurement
personnel can—with only a few mouse clicks—check materials inventories against
incoming customer orders, check suppliers’ stocks, check the latest prices for parts
and components at auction Web sites, and check FedEx delivery schedules, all
within one seamless system. Electronic data interchange software permits the rele-
vant details of incoming customer orders to be instantly shared with the suppliers
of needed parts and components and arrangements made for just-in-time deliveries.
The instant communications features of the Internet, combined with all the
real-time data-sharing and information availability, have the further effect of
breaking down the need for corporate bureaucracies and reducing overhead costs.
The whole “back-office” data management process (order processing, invoicing,
customer accounting, and so on) can be handled fast, accurately, and with less pa-
perwork and fewer personnel.
Radical impacts are also occurring in the distribution portion of industry value
chains. In Chapter 5, Figure 5.2 showed how software developers can use the In-
ternet to create a low-cost value chain system for marketing and delivering their
software online, thus bypassing the costs and markups of traditional software dis-
The Internet paves
tributors and retailers. Online retailers also have other cost-saving advantages over
the way for innova- traditional brick-and-mortar retailers. For instance, as of 1999 Amazon.com had
tive reconfiguration invested about $56 million in fixed assets to achieve sales of $1.2 billion (equal to
of company and in- the sales of about 235 Barnes & Noble bookstores), whereas Barnes & Noble had
dustry value chains. invested about $462 million in 1,000-plus stores and was paying additional sums
in rent and leasing fees.3
All told, the impact of e-commerce technology on industry and company
value chains is profound, paving the way for fundamental changes in the ways
business is conducted both internally and with suppliers and customers.
• The Internet can be an economical means of delivering customer service. The In-
ternet provides innovative opportunities for handling customer service activities.
Companies are discovering ways to deliver service online, thus curtailing the need
to keep company personnel at the facilities of major customers, reducing staffing
levels at telephone call centers, and cutting the time required for service techni-
cians to respond to customer faxes and e-mail messages. For example, using spe-
cially designed software, Dell Computer can take a digital reading of a customer’s
troubled computer system, pinpoint the problem, and send repairs over the Inter-
net—all without human intervention.4 Direct online customer support systems
may well prove less expensive and just as effective in a number of industries.
• The capital for funding potentially profitable e-commerce businesses is readily
available. In the brick-and-mortar world, getting the capital for a new business can
sometimes be difficult. In the Internet age, e-commerce businesses have found it
relatively easy to raise hundreds of millions, even billions, of dollars to fund a
promising new venture.5 More capital was raised through initial public offerings
(IPOs) of stock in the 1990s than in all previous decades combined.6 Investor ex-
citement about the business potential of the Internet has created a climate where

3
As reported in Business Week, October 4, 1999, p. 90.
4
As reported in Business Week, March 22, 1999, p. EB-31.
5
See Hamel, “Bringing Silicon Valley Inside,” pp. 77–83.
6
According to a study cited on CNBC, January 6, 2000.
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Chapter 7 New Business Models and Strategies for the Internet Economy 233

venture capitalists are quite willing to fund start-up enterprises provided they have If an e-commerce
a promising technology or idea, an attractive business model, and a well thought- venture has merit, it
out strategic plan. Furthermore, Internet IPOs are commonplace and their stock will attract both
prices have been quickly bid up in many instances, putting such companies in a money and capital
strong position to raise additional equity capital or to make acquisitions. But be- immediately. Capi-
ginning in 2000, investors in start-up enterprises began pressuring dot-com exec- tal requirements
utives to prove their business models were capable of producing near-term have not proved a
profitability; the stock prices of companies with sizable losses and little prospect significant barrier
of near-term profitability were sliding and start-up companies looking for capital to entering the
infusions were experiencing much tougher scrutiny from potential investors. e-commerce arena.

• The needed e-commerce resource in short supply is human talent—in the form of
both technological expertise and managerial know-how. While some e-commerce
companies have their competitive advantage lodged in patented technology or
unique physical assets or brand-name awareness, many are pursuing competitive
advantage based on the expertise and intellectual capital of their personnel and on
their organizational competencies and capabilities. Two of the most valuable com-
petitive assets a company can have are dominating depth in a particular technol-
ogy and a workforce with exceptional know-how and experience that gives a firm
uniquely strong skills and competitive capabilities. E-commerce firms are thus
competing aggressively for talent and intellectual capital; individuals with attrac-
tive qualifications and know-how can command premium compensation, includ-
ing equity ownership or lucrative stock options in start-up enterprises.
This listing should make clear that growing use of e-commerce technology can
produce important shifts in an industry’s competitive forces—intensified rivalry,
greater entry threats, a blurring of traditional industry and geographic boundaries,
shifts in the balance of bargaining power both between sellers and their suppliers and
between sellers and their customers, and incentives for all kinds of seller–supplier and
seller–customer collaboration. Internet technology and newly emerging products and
services that enable e-commerce further have the effects of altering industry value
chains, spawning substantial opportunities for increasing efficiency and reducing costs,
and affecting a company’s resource strengths and weaknesses. Moreover, the pace of
technological change is rapid and its direction is often uncertain. Market developments
occur swiftly, compelling companies to make decisions at Internet speed or risk getting
left behind in the dust.

E-COMMERCE BUSINESS MODELS AND STRATEGIES

Advances in Internet and e-commerce technology are creating industries of the future
and giving birth to a host of new business opportunities. There are new opportunities
to put a globally connected Internet infrastructure in place—building out the tele-
communications system, installing millions of servers, providing high-speed Internet
connections to literally billions of businesses and households, and developing the
software and networks to create a wired global economy. Others relate to exploiting
the business opportunities associated with day-to-day transactions in a globally wired
e-commerce environment—business-to-business sales and e-procurement, business-
to-consumer sales, e-retailing (or “e-tailing”), providing content, and providing ser-
vices to users.
The rush of new and existing enterprises to exploit the opportunities presented by
the Internet economy is giving rise to innovative business models and radically different
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234 Part 1 The Concepts and Techniques of Strategic Management

The rush to capture

approaches to competitive strategy and market positioning. It is also causing companies
the opportunities whose present businesses are threatened in one way or another by e-commerce business
presented by the approaches to adapt their business models and strategies to the new environment. It is
new Internet econ- worth looking at the specific strategy elements comprising the newly emerging business
omy is prompting models.
entrepreneurial
companies to em-
ploy innovative Business Models and Strategies for Communications
new business mod- Equipment Suppliers
els and radically dif-
ferent approaches Most all of the companies making Internet-related communications equipment use a
to competitive traditional business model—selling their manufactured products to customers at prices
strategy. that are attractively above costs and produce a good return on investment. Perhaps the
biggest strategic problem a number of these equipment makers face is that there are
competing technologies for building various components of the Internet infrastructure
and creating a globally wired economy. Other things being equal, the low-cost techno-
logical solution typically wins out. But other things are seldom equal. Often, compet-
ing technologies have materially different performance pluses and minuses, with the
trade-offs sufficiently unclear that industry participants disagree about which of the
competing technologies represent the best option. In other cases, the competing tech-
nologies are incompatible, preventing users of one from interfacing with users of the
other. If installing and maintaining parallel technological systems is prohibitively ex-
pensive, progress is slowed (and business risks are increased) until consensus emerges
around one as the industry standard. There’s a natural tendency for those with vested
interests in a particular technological approach to maneuver to make their favored
technological solution the industry standard. Technology rivals have several strategy
options for trying to win the battle for technological dominance:

• Invest aggressively in R&D to win the technological race against rivals; spending
can be aimed at improving performance features, curing performance weaknesses,
and reducing the costs of installing and maintaining the company’s technological
approach.
• Form strategic alliances with suppliers, potential customers, and those with com-
plementary technologies to build consensus for favored technological approaches
and industry standards.
• Acquire other companies with complementary technological expertise to broaden
and deepen the company’s technological base and thereby drive advances in the
company’s technology faster than rivals are able to advance theirs.
• Hedge the company’s bets by investing sufficient resources in mastering one or
more of the competing technologies; the company can then shift to the technolog-
ical approach that wins out.
A fierce competitive battle involving many of these same strategic issues is
presently under way among rivals in wireless communications technologies. In the
United States, there are two different technological approaches to mobile telecommu-
nications, with some companies racing ahead with one approach and their rivals racing
for market dominance with the other. The lack of a uniform technology standard is re-
sulting in slower growth of mobile telephone communications in the United States rel-
ative to Europe and Japan. The standard used in Europe is different from the two
competing U.S. technologies, and Japanese standard technology is different yet again.
The four different wireless technologies in play around the world pose formidable
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Chapter 7 New Business Models and Strategies for the Internet Economy 235

technological and competitive challenges for all the various market participants in es-
tablishing mobile systems capable of connecting all users irrespective of location.
Cisco Systems, the world’s largest provider of Internet hardware and technology,
is providing start-up phone companies in Europe with the latest Internet technology at
subsidized prices in a strategic offensive aimed at developing high-quality voice trans-
mission over the Internet. If Cisco’s Internet telephony effort proves successful, Eu-
rope’s largest local telephone companies would be induced to purchase significantly
larger amounts of Cisco equipment. And Cisco would be able to siphon revenues and
market share away from the European suppliers of traditional telephone equipment—
Alcatel, Siemens, and Ericcson.
Another recent technological development allows telephone calls to be routed over
the Internet rather than through existing telephone lines; “gateways” can be installed
that link phone systems to the Internet. The result is much cheaper rates for interna-
tional phone calls and significant new competition for the world’s telephone mono-
polies that have charged very hefty fees for handling cross-border calls.

Business Models and Strategies for Communications

Services Suppliers
The companies in the communications services section of the Internet value chain have
business models based on profitably selling their services for a fee—where the fee can
be based on either a flat rate per month or volume of use. Since their role is to provide
connectivity, Internet service providers are obliged to invest heavily in extending lines
and installing equipment so as to have the capacity to provide the desired point-to-
point service and handle the traffic load along their lines and systems. Investment re-
quirements are particularly heavy for backbone providers, creating sizable up-front
expenditures and heavy fixed costs. Profits come later, after the backbone has been in-
stalled and the volume of use reaches breakeven and beyond. Here, companies are rac-
ing to establish their networks ahead of rivals and to get in a position to sign up
customers for their services.
Recently, fierce competition has emerged among last-mile providers—the compa-
nies that want to sell high-speed Internet access to households, small businesses, and
large commercial enterprises. While local telephone companies like Bell Atlantic, Bell
South, SBC Communications, and U.S. West (now part of Qwest Communications)
have monopolized the market for last-mile services, their strategy to provide high-
speed (broadband) Internet connections using new digital signal line (DSL) technology
is meeting head-on competition from the providers of wireless broadband services and
cable TV providers touting cable Internet service. AT&T is launching a three-pronged
attack to enter the last-mile competition. One thrust involves a wireless strategy—giv-
ing away broadband mobile phones with Internet connection capability, selling
monthly subscriptions for wireless access, eliminating roaming charges and long-
distance charges, and promoting flat-rate per minute charges. A second thrust is to get
the permission of regulators to compete with local telephone companies in providing
local telephone service via cable connections. The third thrust involves acquiring ca-
ble TV companies (TCI and MediaOne) and promoting high-speed Internet access via
cable modems that deliver data over 100 times faster than standard 56-kilobit modems.
AT&T’s strategy is to bundle local telephone service, long distance service, cable TV
service, and Internet access into a single package, available for a single monthly fee for
all four services. Other cable companies like Time Warner are also moving to develop
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236 Part 1 The Concepts and Techniques of Strategic Management

last-mile products and services. The last-mile market is attracting attention primarily
because it is viewed as such a potentially lucrative market—monthly subscriptions and
fees for all four last-mile services could easily exceed $100 per month per household
and several hundred dollars more for small business customers.
Name recognition and advertising have recently emerged as important elements of
strategy in the just-starting battle for market share among last-mile providers. To gain
attention in the race to provide high-speed Internet access, Covad—a small Silicon
Valley company in the business of providing high-speed Internet access using DSL
technology—launched a $40 million year-long coast-to-coast advertising campaign in
late 1999 to win a place in the ranks of the leading last-mile providers; at the time,
Covad had annual sales of only $20 million. Within weeks, other rivals launched ad-
vertising initiatives of their own.

Business Models and Strategies for Computer

Hardware Suppliers
Like the makers of Internet-related communications equipment, the suppliers of PC
components and PC hardware use a traditional business model—make money by sell-
ing the company’s products at prices above costs. Again, technology is advancing at
such a rapid pace in PC components that companies in this industry must stay on the
cutting edge of technology, investing in R&D and being quick to imitate the technolog-
ical advances and product innovations that rivals are able to come up with. Competitive
success hinges on staying abreast or ahead of rivals in introducing next-generation prod-
ucts. A company can expect to command a premium price for its product only if it can
demonstrate product superiority. Otherwise, it has to be prepared to compete on the ba-
sis of price, striving to outperform rivals by means of lower costs. More and more PC
components are becoming commodities, with minimal differentiation among rivals. The
same is true in PC hardware. Hence, strategies keyed to low cost are the most reliable
for achieving competitive advantage, although best-cost provider strategies can work
well when some buyers are willing to pay for upscale features and above-average lev-
els of customer service and technical support.

Business Models and Strategies for Specialized

E-Commerce Software Developers
The developers of e-commerce software create programming applications that enable all
kinds of e-commerce activities. Their business model involves making money by invest-
ing resources (principally, the efforts of talented programmers) in designing and devel-
oping specialized software, then marketing and selling the software to other companies
(e-commerce retailers, Internet service providers, content providers, and others) at what
they hope will prove to be profitable prices. Since most software costs are incurred up
front in the programming phase and thus are largely fixed, profitability hinges on vol-
ume—once sales reach the break-even volume, a big fraction of the additional revenue
goes to the bottom line. To combat the falloff in revenues that occurs with approaching
market saturation, developers upgrade the program and offer next-generation versions.
However, some software developers that market transaction-based software have
adopted a business model whereby they collect a small fee for every transaction their
software performs rather than sell their software outright at a set price per copy. Such
a pricing approach provides them with a continuing revenue stream. The fee-per-
transaction model is particularly appealing when there’s a potential for the software
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Chapter 7 New Business Models and Strategies for the Internet Economy 237

to perform millions of transactions and the number of Web sites requiring such soft-
ware is relatively small (thus limiting the potential number of copies that can be sold).
The size of the transactions fee that a developer can charge is a function of competi-
tion—whether competing software is available and whether the software developer’s
own product is decidedly superior to alternative products. Buyers may not object
strongly to a fee-per-transaction arrangement because it lowers their front-end costs
for the software and they end up paying only for services rendered. Inktomi is the
world’s leading search-technology provider, supplying software for conducting
searches, compiling directories of subject categories, doing comparison shopping, and
delivering Web pages faster. Inktomi sells its search engine software to companies
and Web portals, collecting a fee of about half-a-cent per Web page retrieved from
each query.
Recently, software providers have launched strategies to convince PC users to rent
the software they want by logging on to a Web site, connecting to a server with the
desired programs, and paying a user fee, thus avoiding having to buy software, install it
on their computers, and run applications from hard disks. The idea of software rental or
leasing has appeal to some business users because it allows them to outsource informa-
tion technology (IT) and pay IT providers a fixed fee per PC for software use and sup-
port; this can prove cheaper than having their own IT departments perform all the
necessary functions in-house at costs that often overrun budgeted amounts. It can also ap-
peal to home users who want to try out a new application or use certain applications only
occasionally; pay-per-use can also make good economic sense for game and entertain-
ment programs and educational programs for children. For about $3, customers can log
on to Arepa.com’s PlayNow site and run a program as often and as long as they like for
a 48-hour period.
MP3.com has shaken up the music industry with its software technology that al-
lows Web users to compress a song in digital form, download it to their computer
drive, and then copy it to a recordable disk; its business model involves signing up
artists to record songs and albums, then selling downloadable single songs for 99 cents
and albums for $8. MP3 also distributes the songs of aspiring bands for free. MP3’s
technology has the potential to cut into the market shares of the five largest studios
(which account for 80 percent of the music on radio and in stores) and to redefine how
music is produced and distributed.

Business Models and Strategies for

E-Commerce Retailers
Two categories of Web merchants stand out—those that sell primarily to businesses
(referred to as business-to-business merchants) and those that sell to consumers
(business-to-consumer merchants). Several business models are in play here. The
simplest, and perhaps most revolutionary, is to sell products at cost (or below) and
make money by selling advertising to other merchandisers who value the audience at-
tracted to the Web site. Buy.com, for example, sells a wide variety of items at very
low prices to attract a big audience, hoping to make money by selling ads on its Web
site; the bigger the audience that Buy.com is able to attract, the bigger the fees it can
charge advertisers. A few online merchants are willing to sell items at break-even
prices or less but collect information on buyers that can be sold to other merchandis-
ers. Car-shopping services make money not only from advertising but also by refer-
ring customers to car dealers and, further, by selling related items such as car
insurance and auto accessories.
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238 Part 1 The Concepts and Techniques of Strategic Management

Other merchants use the mostly traditional model of purchasing goods from man-
ufacturers and distributors, marketing them to buyers at their Web store, and filling or-
ders from stocks held in inventory in their warehouse—their innovation is one of
simply using the Internet as the sales site instead of brick-and-mortar retail outlets. Still
other e-tailers operate only a Web site for marketing and selling, using contract manu-
facturers to make the products, and outsourcing the distribution and delivery functions
to warehousing and shipping specialists. Buy.com obtains the products it sells from
name-brand manufacturers and uses outsiders to stock and ship what it sells; all it does
is operate an online superstore consisting of some 30,000 items.
Once an e-tailer settles on a basic business model, it can use any of the following
strategy elements to undergird its competitive success:

• Spend heavily on advertising to build widespread brand awareness, draw traffic,

and start the process of developing customer loyalty. Extravagant advertising cam-
paigns incorporating TV, print media, radio, and online banners have become stan-
dard in launching retailing Web sites. A number of enterprises have spent amounts
for advertising that were substantially in excess of current revenues, believing that
it was worth incurring substantial short-term losses in order to establish name
recognition, draw traffic to their Web site, and develop loyalty.
• Add new product lines to help generate high and growing levels of traffic at the
company’s Web site. Expanding a company’s product lines, acquiring other Internet
retailers with complementary offerings, or entering into alliances and joint market-
ing agreements with other enterprises desirous of boosting Internet sales all can
help draw new visitors and boost traffic at the company’s Web site. Amazon.com
has diversified its product offerings beyond books to include music, online auc-
tions, electronics products, toys, video games, and home improvement products. It
has also allowed small specialty-item e-tailers to market their products on its Web
site. In late 1999, Amazon offered approximately 18 million items at its site.
• Be a first-mover or at worst an early-mover. There’s a strong belief among Inter-
net entrepreneurs that being a first-mover or fast-follower significantly enhances a
company’s chances of being the biggest and best known online retailer for a par-
ticular category of goods, thus improving a firm’s prospects for dominating its
market niche and warding off challenges from newcomers.
• Pay considerable attention to creating an attractive Web site and generating “buzz.”
Web pages need to be interesting and easy-to-read, with lots of eye appeal. More-
over, the site has to be cleverly marketed. Unless Web surfers hear about the site, like
what they see on their first visit, and are intrigued enough to return again and again,
a company’s Web site will likely not generate the desired traffic and revenues.
• Keep the Web site innovative, fresh, and entertaining. This means constantly
adding new features and capabilities, enhancing the look and feel of the site,
heightening viewer interest with audio and live video, and expanding selection and
product offerings. Engaging, entertaining features add value to the experience of
spending time at the site and are therefore strong competitive assets. Creating a
strong sense of community among users and visitors—as eBay has done with its
online auctions—can also.

On the Internet, shelf space is unlimited. The “one-stop shopping” strategy (like
that of Amazon.com, described above) has the appealing economics of helping spread
many one-time costs over a wide number of items and a larger customer base; it can
also help an online retailer establish itself as a household name and facilitate marketing
an ever-greater selection of goods to frequent visitors to the site. In contrast, some
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Chapter 7 New Business Models and Strategies for the Internet Economy 239

e-tailers such as eToys have adopted classic focus strategies—building a Web site
aimed at a sharply defined target audience shopping for a particular product or product
category. Focusers seek to build customer loyalty based on attractively low prices, bet-
ter value, wide selection, convenient service, nifty options, or some other differentiat-
ing attribute. They pay special attention to the details that will please their target
audience; eToys, for example, gives customers the option of having each selection gift-
wrapped separately and affixed with an appropriate “To/From” tag; it also has removed
its name from the outside of shipping cartons to lessen the clamor from children to
open arriving boxes immediately.

“Brick-and-Click” Strategies: An Alternative to Pure

Brick-and-Mortar and Pure Dot-com Strategies.
Many traditional retailers, threatened by Internet retailing, have rushed to open their
own online shopping sites. Toys “R” Us, for example, has launched a Web site to com-
bat eToys and several other online toy merchants. Merrill Lynch and Paine Webber
have begun offering customers the option of trading online to prevent commission-
sensitive customers from moving their accounts to cheaper online brokerages such as
Charles Schwab, E*Trade, and Waterhouse. Wal-Mart has launched a Web site. Such
“brick-and-click” strategies give customers the option of either shopping in stores or
online and can be an effective way of combating competition from pure online retail-
ers, especially when customer ability to see and touch a product is an important condi-
tion for going forward with the decision to purchase. Illustration Capsule 30 explains
why a brick-and-click strategy can be highly attractive and competitively powerful.

Business Models and Strategies for E-Commerce

Services Suppliers
The Internet economy is giving birth to a host of opportunities to provide services to
e-commerce enterprises. For example, one of the key strategic issues that e-commerce
retailers must resolve is how best to handle warehousing and delivery activities. A
number of companies are springing up that specialize in warehousing and order ship-
ment for e-commerce retailers. Bechtel Group is investing $1 billion to develop logis-
tics systems, warehousing, and delivery capabilities to support online grocery retailer
Webvan Group; Webvan’s strategy is to create a Web site where consumers can shop
for supermarket items and obtain next-day delivery—within a 30-minute time window
selected by customers. Illustration Capsule 31 reports how Fingerhut is reinventing its
business by exploiting the opportunities to provide warehousing, packaging, and ship-
ping services to e-commerce retailers.
While the Internet allows companies to connect directly with their suppliers, many
companies are finding it valuable to use the services of “Internet middlemen” to effi-
ciently sort through all the various supplier choices. The middlemen—variously re-
ferred to as “infomediaries” or “e-markets”—use the instant communications capability
of the Internet to match buyers and sellers. Altra Energy Technologies allows buyers of
natural gas to shop for sellers online instead of trying to contact prospective sellers to
check on prices and availability via fax or telephone.7 Using Altra’s online e-market,

7
Business Week, October 4, 1999, p. 98.
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240 Part 1 The Concepts and Techniques of Strategic Management

illustration capsule 30
Office Depot’s Brick-and-Click Strategy
Office Depot was in the first wave of retailers to adopt an
e-commerce strategy. In 1996 it began allowing business
customers to use the Internet to place orders, thus avoid-
ing having to make a call, generate a purchase order, and
pay an invoice while still getting same-day or next-day
delivery.
Office Depot built its Internet business around its ex-
isting network of 750 retail stores, 30 warehouses, 2,000
delivery trucks, $1.3 billion in inventories, and phone-
order sales department, which handled large business cus-
tomers. It already had a solid brand name and enough
purchasing power with its suppliers to counter discount-
minded e-commerce rivals trying to attract buyers on the
basis of super-low prices. Office Depot’s incremental in-
vestment to enter the e-commerce arena was almost zero
since all it needed to add was a Web site where customers
could see pictures and descriptions of the items it carried,
their prices, and in-stock availability; marketing costs have
been less than $10 million.
Office Depot set up customized Web pages for 37,000
corporate and educational customers. Sites were designed
that allowed the customer’s employees varying degrees of
freedom to buy supplies—a clerk might be able to order
only copying paper, toner cartridges, computer disks, and
paper clips up to a preset dollar limit per order, while a vice
president might have carte blanche to order any item Office
Depot sold. Office Depot’s online prices were the same as
its store prices; the company’s strategy was to promote
Web sales on the basis of service, convenience, and lower
customer costs for order processing and inventories. Cus-
tomers reported that using the Web site cut their costs of is-
suing purchase orders and paying invoices by up to 80
percent, plus Office Depot’s same-day or next-day delivery
capability gave them the ability to reduce the amount of of-
fice supplies they kept in inventory. Starting in 1998, Of-
fice Depot launched Web sales to small businesses and
individuals at OfficeDepot.com.
Web site sales cost Office Depot less than $1 per
$100 of goods ordered, compared to about $2 for phone
orders. And since Web sales eliminate the need for Office
Depot customer service representatives having to key in
transactions, order-entry errors are now virtually zero and
returns have been cut by 50 percent. Billing is handled
electronically.
In 1999, Office Depot’s Web sales accounted for
about $300 million in sales and an estimated $30 million in
profits. Corporate Web sales were 20 percent of the com-
pany’s sales to corporations and were expected to rise to
over 30 percent of total corporate sales in 2000.
Office Depot’s Web rivals—Officesupplies.com and
Atyouroffice.com—had not captured as much as 5 percent
of the office supply sales on the Web. The leaders in Web
sales of office supplies were Office Depot, Staples, and
OfficeMax—the same companies whose brick-and-mortar
superstores were dominating the traditional retail market
for office supplies.

Source: “Why Office Depot Loves the Net,” Business Week, September 27, 1999, pp. EB-66, EB-68; and Fortune, November 8, 1999, p. 17.

buyers can shop anonymously with thousands of sellers, comparing prices and avoiding
the potential of price gouging from sellers when they learn of a buyer’s perhaps urgent
need for supplies. The convenience and efficiency of online buying and selling of nat-
ural gas has proved so popular that Altra’s e-market site has emerged as the leading
place to trade natural gas liquids, handling about $12 billion in trades, equal to a 40 per-
cent market share. Altra makes its money by charging a small commission on each
trade.
Priceline.com creates an e-market for the buyers and sellers of airline tickets, ho-
tel rooms, cars, mortgages, and other items. Airline ticket buyers submit a “guaranteed
offer” (typically the lowest price they think they can get away with) to Priceline. Price-
line compares the bids to confidential discounted fares on unsold seats supplied to it by
participating airlines. If Priceline can buy a ticket from an airline and resell it to the
buyer, it executes the transaction.
Springstreet, a San Francisco–based company, provides a free listing of some 6
million apartment rentals available in the United States, along with quotes on furniture,
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Chapter 7 New Business Models and Strategies for the Internet Economy 241

illustration capsule 31
Fingerhut’s Strategy to Provide Order-Fulfillment Services
to E-tailers
While it is a fairly simple matter for Internet entrepreneurs
to build a Web site and open a cyberstore, delivering the
goods to buyers in a cost-efficient manner is a more com-
plicated task. Traditional brick-and-mortar retailers that
have set up Web sites have found it difficult to pack and
ship the ordered goods efficiently and promptly (to meet the
holiday gift deadlines of online shoppers, for instance). A
number of delivery companies are vying for the shipping
business of customers—FedEx, UPS, Airborne Express,
and start-ups iShip and Tandata—but others are focusing on
handling the warehousing, order-picking, and packaging ac-
tivities needed to get the goods in the hands of shippers.
Fingerhut is a longtime catalog company that stum-
bled into the opportunity to serve the warehousing and
packaging needs of e-commerce retailers. In the early
1990s, Fingerhut, anticipating a surge in sales from grow-
ing popularity of home-shopping TV channels, built a new
distribution center in Tennessee. When much of the cen-
ter’s capacity went unused because of lower-than-
expected TV sales, Fingerhut began offering its services to
e-commerce retailers. A manager at the center observed
that employees who picked orders from the shelves would
be more efficient if they didn’t have to travel all over the
warehouse to fill each order separately. A computer pro-
gram was written to group customer orders for particular
items so that employees could obtain all the needed items
while they were on a particular aisle of the warehouse.
Equipment was put in place to sort the collected items into
individual orders.
Since then, Fingerhut has further refined its logistics
and packing systems. As orders come in via fax, telephone,
and the Internet, Fingerhut’s mainframe computers in
Minnesota group the orders into similar goods and forward
the results to warehouse personnel. The goods are retrieved
from warehouse shelves, at which point a computer scans
the dimensions of every item to determine the smallest
possible box that can be used for shipping—since elimi-
nating air space in packages increases the number of pack-
ages that a truck can carry. Packers put the items in the
boxes, affix preprinted labels, put the boxes on conveyors
that route them to the appropriate bay at the shipping dock
for loading onto trucks. Red lasers scan each package on
the conveyor to determine if the weight of the box matches
the specifications on the label; if not, the box is automati-
cally diverted to an inspection station, where personnel
check whether an item was incorrectly omitted or added.
Fingerhut uses a dedicated fleet of trucks to haul packages
to local post offices, saving on postage costs.
Impressed by Fingerhut’s capabilities and the manner
in which it was reinventing its business strategy, Federated
Department Stores acquired Fingerhut for $1.7 billion in
early 1999. Fingerhut immediately took on responsibilities
for shipping the online orders for all of Federated’s depart-
ment store chains—Macy’s, Bloomingdale’s, Rich’s, and
several others.
Going into 2000, Fingerhut was shipping all the on-
line orders for over a dozen retailers other than Federated,
including eToys, Pier 1, Levi Strauss, and Wal-Mart, plus
handling its own catalog orders and the online orders of
several dot-com affiliates in which it had ownership inter-
ests. It operated 4.5 million square feet of warehouse
space. In late 1999, Fingerhut’s CEO stated, “Our business
is now the Internet. Fast-forward two years, and we’ll be
one of the big five players doing retailing there.”

Source: The Wall Street Journal, September 3, 1999, pp. B1, B3; and Fortune, November 8, 1999, p. 117.

moving-truck rentals, and loan possibilities. It makes money by selling ads on its site,
and collecting transaction fees and commissions from about 35 partners linked to its
Web site, including truck rental companies, car insurance companies, and credit card
companies.
Visa, American Express, and MasterCard provide credit card services to
e-commerce firms—the Internet represents a potentially huge money-making opportu-
nity for credit card companies because credit cards are the standard mode of payment
for online business-to-consumer transactions. Exodus Communications, Dell Com-
puter, and Micron Technology offer Web hosting services to business customers. Dow-
Jones (the owner of The Wall Street Journal), McGraw-Hill (the parent of Business
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242 Part 1 The Concepts and Techniques of Strategic Management

Week and Standard & Poors), Quote.com, Briefing.com, Bloomberg, The Motley Fool,
and numerous other enterprises are providers of financial and business news to elec-
tronic brokerage firms, America Online, the Microsoft Network (MSN), and various
Web portals. Some information providers charge a fee for their service, while others do
not in hopes of building awareness and goodwill among users and attracting sub-
scribers for their more complete print versions. Greenfield Online is an Internet mar-
keting research firm that gathers data on the behavior of a proprietary panel of over 1
million Internet users across the world; using its database, it can perform surveys of ei-
ther prospective or actual users of particular products for clients, help them identify
which of several ad alternatives communicates best, and guide clients in enhancing
their Web sites. Greenfield’s competitive advantage is being able to provide clients
with timely and inexpensive empirical information compared to traditional marketing
research firms that rely on telephone and mail surveys.
These examples are indicative of how companies are employing focus strategies
and zeroing in on particular market niches, pursuing competitive advantage based on
first-mover mastery of a particular technology, product superiority, unique product at-
tributes, convenience and ease of use, speed, or more value for the money. As with
other e-commerce businesses, there is competitive value in being first to market with
an innovative product or service and trying to become the dominant market leader in a
particular niche.

Business Models and Strategies for Media

Companies and Content Providers
Media companies use intellectual capital to develop music, games, video, and text.
Some companies charge subscription fees, like the Interactive Edition of The Wall
Street Journal; others rely on a pay-per-use business model to generate revenues and
profits. It is relatively inexpensive to produce digital content, so it is possible to real-
ize a profit at a fairly modest volume of sales. Because a big fraction of Internet users
are unwilling to pay for such content, the primary customers of media companies tend
to be what are now called content providers.
Content providers like Yahoo! are mainly information aggregators and portals.
Their business model is built around creating content that attracts users and then sell-
ing advertising to companies wanting to get a message to users of the content—the
same model used by newspapers and the major TV networks. The bigger the number
of viewers/readers/users (often referred to as “eyeballs”), the easier it is to sell adver-
tising and the higher the rate that can be charged. Companies like Charles Schwab and
America Online buy information from media companies, provide the information free,
and then use the attraction of the information provided to sell subscriptions (AOL) or
services (Charles Schwab and other online stock brokerages). However, content
providers are increasingly offering site visitors an assortment of purchasing opportu-
nities in an effort to boost revenues and profits through collecting transactions fees.
Two key success factors for content providers are to create a sense of community and
to deliver convenience and entertainment value as well as information. The strategy of
Web portals like Yahoo!, Excite, and AltaVista to increase audience size involves go-
ing beyond search engine capability to include news, weather, stock quotes, stock port-
folio tracking, e-mail, online calendars and address books, chat rooms, personalized
Web pages, and shopping opportunities.
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Chapter 7 New Business Models and Strategies for the Internet Economy 243

Excite@Home paid $780 million to acquire Bluemountain.com, the dominant

leader in electronic greeting cards; at the Bluemountain.com Web site visitors can se-
lect a greeting card online, add a personal message, and e-mail the greeting directly to
the recipient at no charge; cards are available in eight languages. The free e-greeting
service attracted an average of 9 million unique users per month in 1999, giving Blue-
mountain.com a 65 percent share of the electronic-greeting-card market and an audi-
ence of loyal users that ranked third in size behind Amazon.com and eBay. Hallmark
and American Greetings also offer free e-greeting services. Excite@Home’s strategy
in acquiring Bluemountain.com included:

• Selling advertising at the Bluemountain.com site.

• Offering users of the Bluemountain.com site a range of new services—e-mail, on-
line calendars and address books, and purchasing opportunities.
• Using the site to promote and cross-sell both its @Home broadband Internet
access service and the products marketed at its Excite Web portal and search en-
gine site.
Cross-selling products available through Internet or traditional distribution channels is
a strategy that is being used with increasing frequency by e-commerce enterprises
seeking to grow Web site revenues and profits.

INTERNET STRATEGIES FOR TRADITIONAL BUSINESSES

With each passing day, it becomes clearer that the Internet has forever altered the way
that companies and customers learn about each other, communicate, and transact busi- In the years to
ness. Few businesses, if any, can escape the need to integrate use of the Internet into come, companies
their operations. The only strategic issues are: how and to what extent Internet tech- now on the fringes
nology will be made a core part of a “traditional” company’s business. While it is too of the Internet
early to be definitive about what strategies will and will not work for traditional busi- economy will make
the use of Internet
nesses, the following e-commerce initiatives are becoming common:
technology such a
• Using Internet technology to communicate and collaborate closely with suppliers
and distribution channel allies—Such efforts entail installing information systems
core part of their
business that the
to gather real-time data from wholesale and retail customers sales and using the in- distinction between
formation to create a tight supply chain network all the way back to suppliers of e-businesses and
traditional busi-
parts and components. The benefits include streamlined communications and sig-
nesses will become
nificant reductions in inventories and other operating costs. nonexistent.
• Revamping company and industry value chains—Companies will change how
some activities are performed and will eliminate or bypass others.
• Making greater use of build-to-order manufacturing and assembly—The motor
vehicle industry offers a prime opportunity for this.
• Building systems to pick and pack products that are shipped individually—Such
systems are important for business-to-consumer companies that launch Web sites
for online shopping.
• Using the Internet to give both existing and potential customers another choice of
how to interact with the company—Traditional companies can benefit from al-
lowing customers to choose how to communicate with the company, shop for
product information, make purchases, or resolve customer service problems.
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244 Part 1 The Concepts and Techniques of Strategic Management

• Adopting the Internet as an integral distribution channel for accessing new buy-
ers and geographic markets—However, the struggle that many traditional compa-
nies are having with a combination click-and-mortar strategy is the nettlesome
issue of undermining their existing dealer networks if they initiate a big push for
online sales. The partnerships that many manufacturers have forged with whole-
sale and retail dealers are central to their marketing and sales strategies; a manu-
facturer that aggressively pursues online sales to consumers is signaling weaker
strategic commitment to its dealers and a willingness to cannibalize their sales and
growth potential in order to protect its own flanks. Needless to say, taking advan-
tage of online sales opportunities without making traditional dealers angry can be
a very tricky road to negotiate.
• Gathering real-time data on customer tastes and buying habits, doing real-time
market research, and using the results to respond more precisely to customer
needs and wants—The behavior of Web surfers is a veritable gold mine of
information.

KEY SUCCESS FACTORS IN E-COMMERCE

The preceding discussion indicates that fundamentally new business models and
strategies are emerging to create value for customers and build shareholder wealth.
E-commerce enterprises are building elaborate networks of suppliers, distributors,
service providers, and customers who communicate, exchange data, and transact busi-
ness via the Internet and other electronic media in ways that produce value for cus-
tomers and for one another. The networks they are constructing are both integrated (to
create tight value chain links) and fluid (to respond to fast-changing conditions). At
this early stage in the evolution of the Internet economy, competing successfully
seems to revolve around several key factors:

A crucial key to • An innovative business model—One of the factors that sets e-commerce enter-
prises apart from traditional businesses is their use of new and different business
e-commerce suc-
cess is business models. This newness is only partly attributable to the creative nature of Internet
model innovation. entrepreneurs. The fact is that Internet technology is conducive to doing business
in radically different and innovative ways—the rules of business in an Internet
world are different from traditional business rules.
The market has • The capability to adjust the company’s business model and strategy quickly in re-
sponse to changing conditions and emerging opportunities—Operating at Inter-
transitioned from a
state where large net speed is essential because the pace of technological and market change is so
businesses beat fast. Rapidly evolving business models and strategies are thus the norm, not the
small businesses to exception.
a state where fast
businesses beat
• Focusing on a limited number of competencies and performing a relatively spe-
cialized number of value chain activities—The remaining value chain activities
slow businesses. can be delegated to outside specialists. Outsourcing enhances organizational speed
and flexibility, and it allows an enterprise to concentrate on what it can do best.
Hence, there is merit in outsourcing many activities from specialists—designing
and managing Web sites, manufacturing, warehousing, and shipping are prime
examples.
• Staying on the cutting edge of technology—At this stage in the development of
e-commerce, technological change is a dominant and pervasive driving force. No
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Chapter 7 New Business Models and Strategies for the Internet Economy 245

e-commerce enterprise can hope to succeed for long without moving first or early
to incorporate state-of-the-art technology. Technological expertise has to be de-
veloped and maintained internally, provided by suppliers, or accessed via new ac-
quisitions or strategic partnerships.
• Using innovative marketing techniques that are efficient in reaching the targeted
audience and effective in stimulating purchases or whatever other actions are
needed to produce a profitable revenue stream—Competition for “eyeballs” is al-
ready fierce and will grow even more so as the number of e-commerce enterprises
rises—a 1999 study conducted by the University of Texas found that 2,000
e-commerce sites were being added every month. Marketing campaigns that just
result in page views alone are seldom sufficient; the best marketing test is the ra-
tio at which page views are converted into revenues and profits (the “look-to-buy”
ratio). For example, in mid-1999 the traffic at Charles Schwab’s Web site averaged
6 million page views per day and generated an estimated $4.7 million in revenues;
in contrast, Yahoo!’s site traffic averaged 385 million page views daily but gener-
ated only about $1.7 million in revenues.
• Engineering an electronic value chain that enables differentiation or lower costs
or better value for the money—Striving for sustainable competitive advantage is
just as essential in e-commerce as in traditional markets. This means employing
strategies and value chain approaches that hold potential for low-cost leadership,
competitively valuable differentiating attributes, or a best-cost provider advan-
tage. If a firm is positioning itself as a low-cost provider, then it must possess
cost advantages in those activities it performs, and it must outsource the re-
maining activities to low-cost specialists. If an e-commerce company is going to
differentiate itself on the basis of superior customer service, then it needs to con-
centrate on having an easy-to-use Web site, an array of functions and conve-
niences for customers to use at the Web site, adequate “Web reps,” and logistical
capabilities to deliver products in the time frame promised. If it is going to de-
liver more value for the money, then it must manage value chain activities in a
manner calculated to yield a cost advantage in providing customers with upscale
product attributes.

key points
The Internet is an integrated network of banks of servers and high-speed computers,
digital switches and routers, telecommunications equipment and lines, and individual
users’ computers. The major groups of e-commerce firms that comprise the supply side
of the Internet economy include the makers of specialized communications compo-
nents and equipment, providers of communications services, suppliers of computer
components and computer hardware, developers of specialized software, and an as-
sortment of e-commerce enterprises—business-to-business merchants, business-to-
consumer-merchants, media companies, and content providers.
Growing use of e-commerce technology produces important shifts in an indus-
try’s competitive forces—intensifying rivalry, posing greater entry threats, shifting
the balance of bargaining power both between sellers and their suppliers and between
sellers and their customers, and providing a new basis for all kinds of seller–supplier
and seller–customer collaboration. The Internet and e-commerce further have the
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246 Part 1 The Concepts and Techniques of Strategic Management

effects of altering industry value chains and affecting a company’s resource strengths
and weaknesses. Technology, market conditions, and competitive pressures change
rapidly, often in unexpected directions. The e-commerce world is a high-velocity en-
vironment in which companies are compelled to move quickly and late-movers are
left in the dust.
The rush to capture the opportunities presented by the Internet economy is prompt-
ing entrepreneurial companies to employ innovative new business models for making
money and radically different approaches to competitive strategy. A crucial key to
e-commerce success is business model innovation. The business models and strategies
of various types of participants in the Internet economy vary rather significantly. The
manufacturers of Internet-related communications equipment, PC hardware, and PC
components use a fairly traditional business model: selling their manufactured prod-
ucts to customers at prices that are attractively above costs. Suppliers of communica-
tions services have business models based on profitably selling their services for a
fee—where the fee can be based on a flat rate per month or on volume of use. The
business model of many developers of e-commerce software involves making money
by investing resources (principally, the efforts of talented programmers) in designing
and developing specialized software, then marketing and selling the software to other
companies (e-commerce retailers, Internet service providers, content providers, and
others) at what they hope will prove to be a profitable price per copy. However, some
software developers that market transaction-based software have adopted a business
model whereby they sell their software based on a small fee for every transaction
rather than a set price per copy.
E-commerce retailers are utilizing perhaps the most revolutionary and unorthodox
business model. A number of “e-tailers” sell products at cost (or below) and make
money by selling advertising on the merchant’s Web site. Other merchants apply the
traditional model of purchasing goods from manufacturers and distributors, marketing
them to buyers at their Web store, and filling orders from stocks held in inventory in
their warehouse. Still others operate only a Web site for marketing and selling, out-
sourcing the distribution and delivery functions to warehousing and shipping special-
ists. There’s also a variety of business models in play among the different providers of
e-commerce services.
There are several important factors underlying the competitive success of
e-commerce enterprises: (1) use of an innovative business model, (2) the capability to
adjust the company’s business model and strategy quickly in response to changing con-
ditions and emerging opportunities, (3) focusing on a limited number of competencies
and performing a relatively specialized number of value chain activities, (4) staying on
the cutting edge of technology, (5) using innovative marketing techniques that are ef-
ficient in reaching the targeted audience and effective in stimulating purchases or
whatever other actions are needed to produce a profitable revenue stream, and (6) en-
gineering an electronic value chain that enables differentiation or lower costs or better
value for the money.

suggested readings
Evans, Philip and Thomas S. Wurster. “Getting Real about Virtual Commerce.” Harvard Busi-
ness Review 77, no. 6 (November–December 1999), pp. 84–94.
Ghosh, Shikhar. “Making Business Sense of the Internet.” Harvard Business Review 76, no. 2
(March–April 1998), pp. 126–35.
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Chapter 7 New Business Models and Strategies for the Internet Economy 247

Griffith, David A., and Jonathan W. Palmer. “Leveraging the Web for Corporate Success.” Busi-
ness Horizons 42, no. 1 (January–February 1999), pp. 3–10.
Gulati, Ranjay, and Jason Garino. “Get the Right Mix of Bricks and Clicks.” Harvard Business
Review 78, no. 3 (May–June 2000), pp. 107–14.
Hamel, Gary. “Bringing Silicon Valley Inside.” Harvard Business Review 77, no. 5 (Septem-
ber–October 1999), pp. 70–84.
Kaplan, Steven, and Mohanbir Sawhney. “E-Hubs: The New B2B Marketplaces.” Harvard
Business Review 78, no. 3 (May–June, 2000), pp. 97–103.
Rosenoer, Johnathan; Douglas Armstrong; and J. Russell Gates. The Clickable Corporation:
Successful Strategies for Capturing the Internet Advantage. New York: Free Press, 1999.
Tapscott, Don; David Ticoll; and Alex Lowy. Digital Capital: Harnessing the Power of Busi-
ness Webs. Boston, MA: Harvard Business School Press, 2000.
Timmers, Paul. “Business Models for Electronic Markets,” Electronic Markets (www.
electronicmarkets.org/netacademy/publications.nsf/all_pk949) 8, no. 2 (July 1998).