CHAPTER 5

E-commerce
Business Strategies
LEARNING OBJECTIVES
• Identify the key components of e-commerce business models.
• Describe the major B2C business models.
• Describe the major B2B business models.
• Understand key business concepts and strategies applicable to e-
commerce.
E-COMMERCE BUSINESS
MODELS
• A business model is a set of planned activities (sometimes referred to
as business processes) designed to result in a profit in a marketplace.
• A business model is not always the same as a business strategy,
although in some cases they are very close insofar as the business
model explicitly takes into account the competitive environment
(Magretta, 2002).
• The business model is at the center of the business plan.
E-COMMERCE BUSINESS
MODELS
• A business plan is a document that describes a firm’s business model.
A business plan always takes into account the competitive
environment.
• An e-commerce business model aims to use and leverage the unique
qualities of the Internet, the Web, and the mobile platform.
E-COMMERCE BUSINESS
MODELS
EIGHT KEY ELEMENTS OF A BUSINESS MODEL
• Value proposition—how a company’s product or service fulfills the
needs of customers. Typical e-commerce value propositions include
personalization, customization, convenience, and reduction of
product search and price delivery costs.
• Revenue model—how the company plans to make money from its
operations. Major e-commerce revenue models include the
advertising model, subscription model, transaction fee model, sales
model, and affiliate model.
• advertising revenue model a company provides a forum for advertisements
and receives fees from advertisers
• subscription revenue model a company offers its users content or services
and charges a subscription fee for access to some or all of its offerings
• freemium strategy companies give away a certain level of product or
services for free, but then charge a subscription fee for premium levels of
the product or service
• transaction fee revenue model a company receives a fee for enabling or
executing a transaction
• sales revenue model a company derives revenue by selling goods,
information, or services
• affiliate revenue model a company steers business to an affiliate and
receives a referral fee or percentage of the revenue from any resulting sales
• Market opportunity—the
revenue potential within a
company’s intended
marketspace.
• Competitive environment—the direct and indirect competitors doing
business in the same marketspace, including how many there are and
how profitable they are.
• Competitive advantage—the factors that differentiate the business
from its competition, enabling it to provide a superior product at a
lower cost.
• Market strategy—the plan a company develops that outlines how it
will enter a market and attract customers.
• Organizational development—the process of defining all the functions
within a business and the skills necessary to perform each job, as well
as the process of recruiting and hiring strong employees.
• Management team—the group of individuals retained to guide the
company’s growth and expansion.
RAISING CAPITAL
• Raising capital is one of the most important functions for a founder of
a start-up business and its management team.
• seed capital: typically, an entrepreneur’s personal funds derived from
savings, credit card advances, home equity loans, or from family and
friends
• elevator pitch: short two-to-three-minute presentation aimed at
convincing investors to invest
• Incubators: typically provide a small amount of funding and also an
array of services to start-up companies
• angel investors: typically wealthy individuals or a group of individuals
who invest their own money in exchange for an equity share in the
stock of a business; often are the first outside investors in a start-up
• venture capital investors: typically invest funds they manage for
other investors; usually later-stage investors
MAJOR BUSINESS-TO-CONSUMER (B2C)
BUSINESS
MODELS
E-tailer
• Online retail stores, often called e-tailers, come in all sizes, from giant
Amazon to tiny local stores.
• E-tailers are similar to the typical bricks-and-mortar storefront, except that
customers only have to connect to the Internet or use their smartphone to
place an order.
community provider
• creates an online environment where people with similar interests can
transact (buy and sell goods); share interests, photos, and videos;
communicate with like- minded people; and receive interest-related
information
• content provider: distributes information content, such as digital
news, music, photos, video, and artwork.
• Portal: offers users powerful search tools as well as an integrated
package of content and services all in one place
• transaction broker: processes transactions for consumers that are
normally handled in person, by phone, or by mail
• market creator: builds a digital environment where buyers and sellers
can meet, display products, search for products, and establish a price
for products
• Service Provider
• While e-tailers sell products online, service providers offer services online.
There’s been an explosion in online services that is often unrecognized.
• Photo sharing, video sharing, and user-generated content (in blogs and
social networks) are all services provided to customers.
• Google has led the way in developing online applications such as Google
Maps, Google Docs, and Gmail.
• Other personal services such as online medical bill management, financial
and pension planning, and travel recommendation are showing strong
growth.
MAJOR BUSINESS-TO-BUSINESS (B2B)
BUSINESS
MODELS
• e-distributor: a company that supplies products and services directly to
individual businesses
• e-procurement firm: creates and sells access to digital markets
B2B service provider: sells business services to other firms
scale economies: efficiencies that arise from increasing the size of a
business
• Exchange: an independent digital marketplace where suppliers and
commercial purchasers can conduct transactions
• industry consortia: industry-owned vertical marketplaces that serve
specific industries
• private industrial network
digital network designed to coordinate the flow of communications
among firms engaged in business together
HOW E-COMMERCE CHANGES BUSINESS:
STRATEGY, STRUCTURE, AND PROCESS
• industry structure: refers to the nature of the players in an industry
and their relative bargaining power
• industry structural analysis: an effort to understand and describe the
nature of competition in an industry, the nature of substitute
products, the barriers to entry, and the relative strength of consumers
and suppliers
INDUSTRY VALUE CHAINS
• While an industry structural analysis helps you understand the impact
of e-commerce technology on the overall business environment in an
industry, a more detailed industry value chain analysis can help
identify more precisely just how e-commerce may change business
operations at the industry level.
• One of the basic tools for understanding the impact of information
technology on industry and firm operations is the value chain. The
concept is quite simple.
• A value chain is the set of activities performed in an industry or in a
firm that transforms raw inputs into final products and services.
• Each of these activities adds economic value to the final product;
hence, the term value chain as an interconnected set of value-adding
activities.
FIRM VALUE CHAINS
• The concept of value chain can be used to analyze a single firm’s
operational efficiency as well. The question here is: How does e-
commerce technology potentially affect the value chains of firms
within an industry?
• A firm value chain is the set of activities a firm engages in to create
final products from raw inputs.
• Each step in the process of production adds value to the final product.
• In addition, firms develop support activities that coordinate the
production process and contribute to overall operational efficiency.
FIRM VALUE WEBS
• While firms produce value through their value chains, they also rely
on the value chains of their partners—their suppliers, distributors,
and delivery firms. E-commerce creates new opportunities for firms to
cooperate and create a value web.
• A value web is a net- worked business ecosystem that uses e-
commerce technology to coordinate the value chains of business
partners within an industry, or at the first level, to coordinate the
value chains of a group of firms.
• 3) Which of the following types of e-commerce presence is best
suited for creating an ongoing conversation with one's customers?
• A) website B) e-mail C) social media D) offline media
• 2) The cost of hardware, software, and telecommunications services
needed to build a website have ________ over the last decade.
• A) increased dramatically B) increased moderately C) decreased
dramatically D) decreased slightly
• 1) Offline media is typically used for all of the following marketing
activities except: A) education.
• B) exposure.
• C) conversation.
• D) branding.
• 7) What are the two most important management challenges in
building a successful e-commerce presence?
• A) developing a clear understanding of business objectives and knowing
how to choose the right technology to achieve those objectives
• B) having an accurate understanding of your business environment and
an achievable business plan
• C) building a team with the right skill sets and closely managing the
development process
• D) identifying the key components of your business plan and selecting
the right software, hardware, and infrastructure for your site
• 8) In order from beginning to end, the major steps in the SDLC are: A)
systems analysis/planning; systems design; building the system;
testing; and implementation.
• B) systems design; testing; building the system; and implementation.
• C) systems analysis/planning; systems design; building the system;
implementation; and testing.
• D) systems analysis/planning; implementation; building the system;
and testing.
• 9) ________ are the types of information systems capabilities needed to
meet business objectives.
• A) Information requirements B) System functionalities C) System design
specifications D) Physical design specifications
• 10) Which of the following basic system functionalities is used to display
goods on a website?
• A) product database B) digital catalog C) shopping cart system D) customer
database system
• 11) Which system functionality must your website have to be able to
personalize or customize a product for a client?
• A) an ad server B) a site tracking and reporting system C) an inventory
management system D) customer on-site tracking
• 12) Which of the following are the two main components of a systems
design?
• A) logical design and physical design B) behavioral design and technological
design C) business objectives and technology requirements D) front-end
systems and back-end systems
• 13) Which of the following helps you engage your customers in a conversation?
• A) shopping cart B) product database C) on-site blog D) site tracking and
reporting system
• 14) Which of the following is not one of the basic business objectives for an e-
commerce site?
• A) display goods B) execute a transaction C) provide production and supplier
links D) optimize system architecture
• 15) All of the following are basic information requirements for a product
database except: A) product descriptions.
• B) stock numbers. C) customer ID numbers.D) inventory levels.
• 16) Which of the following typically includes a data flow diagram (DFD) to
describe the flow of information for an e-commerce site?
• A) physical design B) logical design C) testing plan D) co-location plan
• 17) Which of the following details the actual hardware components to be used
in a system?
• A) architecture plan B) system functionalities plan C) logical design D) physical
design
• 18) Which of the following verifies that the business objectives of the
system are in fact working?
• A) system testing B) acceptance testing C) unit testing D)
implementation testing
• 19) Which of the following involves testing a site's program modules
one at a time?
• A) system testing B) acceptance testing C) unit testing D)
implementation testing
• 20) Most of the time required to maintain an e-commerce site is
spent on: A) debugging code.
• B) responding to emergency situations.
• C) general administration and making changes and enhancements to
the system.
• D) changes in reports, data files, and links to backend databases.
• 21) All of the following are simple steps for optimizing web page
content except: A) reducing unnecessary HTML comments.
• B) segmenting computer servers to perform dedicated functions.
• C) using more efficient graphics.
• D) avoiding unnecessary links to other pages on the site.
• 80) E-commerce has increased price competition in nearly all markets.
• 81) Social technologies change industry structure by shifting programming
and editorial decisions to consumers and creating substitute entertainment
products.
• 79) Interactivity that enables product customization alters industry
structure by increasing the threat of substitutes.
• 78) The Internet's universal standards can change industry structure by
increasing barriers to entry and decreasing competition within an industry.
• 77) A company's strong linkages with its customers increase switching costs.
• 73) ________ technologies are technologies that enable the
incremental improvement of products and services.
• A) Sustaining B) Differentiating C) Disruptive D) Commodity
• 71) If you wished to leverage the ubiquitous nature of the Web to
differentiate your product, you would: A) enable individual
customization of the product by consumers.
• B) implement a strategy of commoditization.
• C) adopt a strategy of cost competition.
• D) develop a scope strategy to compete within a narrower market
segment.
• 68) Which of the following features of e-commerce technology changes industry
structure by lowering barriers to entry but greatly expands the market at the
same time?
• A) global reach B) richness C) interactivity D) personalization
• 64) A ________ marketplace supplies products and services of interest to
particular industries.
• A) perfect B) differentiated C) horizontal D) vertical
• 63) SupplyOn is an example of a(n): A) private industrial network.
• B) exchange.
• C) industry consortium.
• D) e-distributor.
• 61) Which of the following may offer its customers value chain management
software?
• A) e-distributors B) e-procurement companies C) exchanges D) community
provider
• 60) ________ create and sell access to digital markets.
• A) E-distributors B) Portals C) E-procurement firms D) Market creators
• 59) W.W. Grainger is an example of which of the following business models?
• A) B2B service provider B) exchange C) e-distributor D) industry consortia
• 58) What is the primary revenue model for an e-distributor?
• A) sales B) transaction fee C) advertising D) subscription
• 57) All of the following are examples of business-to-business (B2B)
business models except: A) e-distributors.
• B) e-procurement.
• C) exchanges.
• D) e-tailers.
• 54) In the ________ business model, a Web-based business builds a
digital environment in which buyers and sellers can meet, display
products, search for products, and establish prices.
• A) market creator B) community provider C) e-tailer D) portal
• 53) The financial services, travel services, and job placement services
industries typically use the ________ business model.
• A) community provider B) transaction broker C) market creator D) e-
tailer
• 52) All of the following are business models employed in the online music
industry except: A) subscription.
• B) peer-to-peer streaming.
• C) download-and-own.
• D) cloud streaming.
• 51) eBay uses all of the following business models except: A) B2C market creator.
• B) C2C market creator. C) content provider. D) e-commerce infrastructure
provider.
• 50) The basic value proposition of community providers is: A) they offer a fast,
convenient one-stop site where users can focus on their most important
concerns and interests.
• B) they offer consumers valuable, convenient, time-saving, and low cost
alternatives to traditional service providers.
• C) they create a digital electronic environment for buyers and sellers to meet,
agree on a price, and transact.
• D) they increase customers' productivity by helping them get things done faster
and more cheaply.
• 49) Portals primarily generate revenue in all of the following ways except:
A) charging advertisers for ad placement.
• B) collecting transaction fees.
• C) sales of goods.
• D) charging subscription fees
• 48) Which of the following is not considered a portal?
• A) Yahoo B) MSN
• C) Amazon D) AOL
• 47) All of the following use an advertising revenue model except: A)
Twitter.
• B) Yahoo. C) Google. D) Amazon
• 46) The business model of e-tailers is quite similar to that of:
• A) e-distributors.
• B) transaction brokers. C) exchanges. D) service providers.
• 35) Which of the following is not a key element of an elevator pitch?
• A) exit strategy B) growth metrics C) legal structure D) market opportunity
• 34) A wealthy individual who invests personal funds in a start-up in
exchange for an equity stock in the business is referred to as a(n)
________.
• A) incubator B) angel investor C) venture capital investor D) crowdfunder
• 33) The use by a company of its competitive advantage to achieve more
advantage in surrounding markets is known as ________.
• A) market strategy B) differentiation C) leverage D) focus
• 32) All of the following use a social network marketing strategy except:
• A) Twitter.
• B) YouTube.
• C) Pinterest.
• D) Amazon.
• 31) Which of the following is another name for a revenue model?
• A) business model B) business strategy C) financial model D) financial statements
• 30) Which type of investor typically becomes interested in a start-up company after
it has begun generating revenue?
• A) incubators B) angel investors C) crowdfunders D) venture capital investors
• 28) Which of the following gives a business model the most credibility with outside
investors?
• A) the firm's management team B) the firm's value proposition C) the firm's market
opportunity D) the firm's market strategy
• 27) Which of the following is an unfair competitive advantage?
• A) brand name B) access to global markets C) lower product prices D) superior
technology
• 26) All of the following may lead to a competitive advantage except: A) less
expensive suppliers.
• B) better employees.
• C) fewer products.
• D) superior products.
• 24) In general, the key to becoming a successful content provider is
to: A) own the content being provided.
• B) own the technology by which content is created, presented, and
distributed.
• C) provide online content for free.
• D) provide other services as well as online content.
• 22) Which of the following is not an example of the bricks-and-clicks
e-tailing business model?
• A) Walmart B) Sears C) Bluefly D) Staples
• 21) An example of a company using the content provider model is: A)
Priceline.
• B) Rhapsody.
• C) Dell.
• D) eBay.
• 20) Which of the following is not a variation of the e-tailer business model?
• A) bricks-and-clicks B) virtual merchant C) market creator D) manufacturer-
direct
• 19) Which of the following is not a community provider?
• A) LinkedIn B) Facebook C) Priceline D) Pinterest
• 18) A ________ specifically details how you plan to find customers and to
sell your product.
• A) sales analysis B) business plan C) competitive strategy D) market strategy
• 17) Organizations that typically provide an array of services to start-up
companies along with a small amount of funding are referred to as: A) angel
investors.
• B) crowdfunders.C) incubators.D) venture capital investors.
• 15) All of the following can be considered a direct or indirect competitor of
Amazon except: A) eBay.B) Apple's iTunes Store.C) Walmart.D) Starbucks.
• 19) Which of the following is not a community provider?
• A) LinkedIn B) Facebook C) Priceline D) Pinterest