Defining components and taxonomy of e-commerce business models.ABSTRACT In this paper, a comprehensive set of components to develop new and improve existing e-commerce business models Business Model The way, or ways, in which a company makes generates revenue (and profit).Notes: Business model is a buzzword that everybody used (or overused) during the dot-com boom. It merely describes a model based on how a company makes money.A business model can be simple or very complex. A restaurant's business model is to make money by cooking and serving food to hungry customers - pretty easy to understand. has been introduced and explained. These components include: value proposition The primary benefit of a product or service. The term is widely used in the high-tech industry., value-added e-commerce offerings, supporting resources, revenue and cost models, and value creation. Also, a new taxonomy of e-commerce business models has been introduced. The taxonomy is based on clustering e-commerce models into four classification groups depending on their association with customers and suppliers, and also on their service/support role in e-commerce. 1. INTRODUCTION E-commerce became an important factor of modern business development. According to estimates, by the end of 2005 almost 30% of all business-to-business revenues will be generated through e-commerce transactions (Jupiter, 2002). At the same time, 12% of business-to-consumer sales will be done using the online channels by 2010 (Bednarz, 2004), which is three times more than that in 2004. E-commerce applications are used by companies to increase and sustain their competitive advantage and as a way to generate more profits/revenues and reduce cost (Mullaney, 2004). Generating successful results through e-commerce is based on a company's ability to develop an efficient e-commerce business model. A well-established business model can facilitate the company's competitive advantage and influence its monetary results. Thriving e-commerce business models, like those of Yahoo, eBay, IBM, Apple, and many others have triggered interest in understanding components of e-commerce business models. However, there are still a variety of views in terms of what an e-commerce model means, how many of these models exist today and how they are clustered. According to Rappa (2005)," Business models are perhaps the most discussed and least understood aspect of the web. There is so much talk about how the web changes traditional business models. But there is little clear-cut evidence of exactly what this means." The main goals of this paper were to: * Define and present a comprehensive set of components used in developing and/or improving any e-commerce business model in order to provide sustainable competitive advantage and successful value creation through e-commerce * Identify and present a new taxonomy of e-commerce business models based on the set of components and predetermined classification criteria. 2. ANALYSIS OF COMPONENTS AND TAXONOMY OF E-COMMERCE BUSINESS MODELS Analysis of academic sources allowed to find out that the term "business model" is commonly defined as a tool/method by which a company would like to generate revenue/profit and serve the customer needs (Turban at al, 2004; Afuah and Tucci, 2003; Laudon and Traver, 2003; Timmers, 1999; Wikipedia There Is a Hierarchy Although anybody can contribute, there is still a hierarchy. Many contributors are identified only by IP address, while others use screen names. Several hundred administrators have the power to delete entries and block IP addresses to keep vandals from changing meaningful descriptions to obscene language as well as others who continuously add strong opinions or political commentary., 2005). A typical definition would be close to the following: "A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace" (Laudon and Traver, 2003). Another similar definition states that "A business model is the method of doing business by which a company can sustain itself--that is, generate revenue. The business model spells out how a company makes money by specifying where it is positioned in the value chain" (Rappa, 2005). These definitions are correct in terms of considering revenue/profit generation ad a part of an e-commerce business model. However, the described definitions are limited in their emphasis on just revenue/profit creation. They do not reflect the fact that an e-commerce business model may be used to create and/or sustain companies' competitive advantage. Also, these definitions do not consider cost reduction as an important factor, along with revenue, in generating companies' profitability and cost effectiveness. Finally, the described cluster of definitions does not address the issue of e-commerce products and processes associated with the business model, as well as how this model affects customer satisfaction and overall company results. Analysis of literature sources allowed to identify a variety of ways that e-commerce business models are being clustered (Turban at al, 2004; Canzer, 2005). Despite of a relatively big number of the classification groups, the underlying classification criteria used to define the groups are not explained. Thus, it is hard to understand why specific groups were selected. Similar issues in terms of classification criteria are present in other academic sources that attempted to classify e-commerce business models (Rappa 2005; Rayport and Jaworski 2004; Applegate 2000; Afuah and Tucci 2003). Besides clustering e-commerce business models, a variety of authors attempted to identify and explain general elements (components) of e-commerce business models (Porter, 2001; Amit and Zott's, 2001; Laudon and Traver, 2003). Rayport and Jaworski (2004) presented four main components of e-commerce business models: * Value proposition--market segments, customer benefits and unique resources * Online offering--ordering scope, products, processes, and their mapping * Resource system--select and align company resources * Revenue models--a variety of ways to earn money in e-commerce solutions. These components are well-supported by their detail description and associated case studies (Rayport and Jaworski, 2004). However, detailed analysis of the four components also revealed their limitations. First, the construction of the four components fits well for the B2C e-commerce models, but would not be sufficient to describe the B2B models, specifically related to suppliers. This is due to the fact that the components lack description of supply-related processes associated, for example, with reverse auction or e-procurement. Second, the described components do not address the cost model, which is a critical factor of profitability in both demand-side and supply-side e-commerce models. Finally, the four components do not include description of value creation--a very important element of showing potential results in developing or improving e-commerce business models. 3. DEFINING AND CLUSTERING E-COMMERCE BUSINESS MODELS To overcome the issues in defining and grouping e-commerce business models, we have introduced a comprehensive set of components (Table 1) that may be employed to develop any e-commerce business model for any type (sector) of e-commerce, i.e., B2B, B2C, and C2C, and others. These components should be used to create efficient e-commerce business models that fulfill customer needs, provide successful performance results, and sustain and improve competitive advantage. This set in Table1 incorporates the four components described by Rayport and Jaworski (2004). We also substantially improved them by adding two new components, i.e., cost model and value creation, to make the e-commerce model development more comprehensive and embrace all types (sectors) of e-commerce. We also, enhanced some components by incorporating, for example, supplier processes in value-added e-commerce offerings. The components in Table 1 are logically connected with each other in a sequence that defines their position in the set. The development and/or improvement of e-commerce business models start with identifying the need of developing an e-commerce model--value proposition (Table 1). The value proposition describes two main elements: (1) target market (market segment) that will be using these e-commerce solutions and (2) core customer benefits. The target market may be represented by end consumers (convenience segment, low-price segment, etc.) and business customers in demand-side models or suppliers in supply-side e-commerce models. Core customer benefits are multiple benefits associated with target markets, for example, ability to choose the best quality products and services; less expensive products and services and more deep discounts; easy access to products, services and information; more choices of products, services and information; customization and personalization; and others. Value-added e-commerce offerings (see Table 1) or simply value-added activities represent a set of e-commerce products/services, processes and their relationships required to fulfill the value proposition (market segments and core customer benefits) of an e-commerce model. The value-added offerings include the three main elements: (1) product/service offerings, (2) e-commerce processes, and (3) relationships between products/services and processes. For product/service offerings, a model presented by Alter (2002) is used to describe these offerings utilizing three dimensions: degree of digitization, degree of tangibility Tangibility Characteristic that an assets can be used as collateral to secure debt., and degree of customization. The
product description in a three dimensional space clearly explains the
impact of e-commerce on the value proposition. For example, e-commerce
enables the companies to create compelling customer value by offering
additional services that can be delivered through digital products or
services. Also, e-commerce may create value by facilitating
customization of product offerings. An e-commerce process is a related
group of online activities that use information and other resources to
deliver value to customers (end consumers, business customers, or
suppliers). The value-added e-commerce processes may consist of customer
processes, supplier processes and intraorganizational processes.The third component required to develop or improve an e-commerce business model is a set of resources that should support the e-commerce model's value proposition and online offerings (see Table 1). A company should also consider identifying unique resources that would add value to e-commerce development and differentiate the company from competitors. These unique resources could be: e-commerce technology, brand name, quality of products and services, distribution network, supplier network, buyers' and sellers' base, personnel, integrated software ERP system, outsourcing, and other resources. The quality and appropriateness of e-commerce resources are based upon their ability to be unique in providing: competitive advantage, strong links between resources and value proposition, and strong links (complementation 1. Functional interaction between two defective viruses permitting replication under conditions inhibitory to the single virus. 2. Interaction between two genetic units, one or both of which are defective, permitting the organism containing these units to function normally, whereas it could not do so if one unit were absent. The fourth component is revenue and cost models (see Table 2). The revenue model describes how a company will generate revenue/profit through e-commerce to build and sustain competitive advantage. The cost model emphasizes ways that a company will employ to reduce cost through an e-commerce business model. It is important to point out that for demand-side e-commerce (e-tailing, auctions, etc.), both revenue and cost models are relevant. However for supply-side e-commerce (e-procurement, reverse auctions, etc.), the revenue generation may not be feasible, because companies do not usually generate revenues through outsourcing. In this case, the cost model becomes the only model for supply-side e-commerce. The fifth and final component of the e-commerce business model is value creation. It represents potential/expected monetary and non-monetary results of utilizing an e-commerce business model. The main monetary results include: * Revenue enhancement through volume growth and price differentiation * Cost reduction related to cost of goods sold and operating costs * Asset intensity reduction through reducing the cost of working capital and/or fixed assets. The non-monetary value creation may incorporate a variety of tangible and intangible results relevant to e-commerce development: * Improved quality of products and services * Faster delivery schedules * Improved customer satisfaction * Global outreach of products, services, and information * Permanent access to information The described set of components provides a comprehensive solution for developing a new or improving existing e-commerce business model. However, our research would not be complete if we did not present taxonomy of e-commerce business models. We introduced a new taxonomy based upon clustering e-commerce models into four classification groups depending on their association with customers and suppliers, and also on their service/support role in e-commerce (Figure 1). These four groups of models are based upon the following classification criteria: demand-side e-commerce models, supply-side e-commerce models, collaborative commerce (c-commerce) models, and e-service models (see Figure 1). A brief description of each model is provided in Table 3. [FIGURE 1 OMITTED] 4. CONCLUSION In this paper, we introduced and explained in details a comprehensive set of components to develop new and improve existing e-commerce business models. These components include: value proposition, value-added e-commerce offerings, supporting resources, revenue and cost models, and value creation. The introduced set of components should be used to create efficient e-commerce business models that fulfill customer needs, provide successful performance results, and sustain and improve competitive advantage through e-commerce. We also provided a new taxonomy of e-commerce business models (see Figure 1) based on predetermined classification criteria. The taxonomy is based on clustering e-commerce models into four classification groups depending on their association with customers and suppliers, and also on their service/support role in e-commerce. The four groups of models are based upon the following classification criteria: demand-side e-commerce models, supply-side e-commerce models, collaborative commerce (c-commerce) models, and e-service models. These e-commerce business models may serve as an effective base for developing e-commerce applications, their implementation and future improvement. REFERENCES: Afuah, A and Tucci, C.L., Internet Business Models and Strategies, McGraw Hill/Irwin, New York, 2003. Alter, S., Information Systems: The Foundation of E-Business, Prentice Hall, 2002. Amit, R. and C. Zott, "Value Creation in E-Business", Strategic Management Journal, Vol. 22, 2001, 493-520. Applegate, L.M., "E-commerce Models", in Information Technology for the Future Enterprise: New Models for Managers, Prentice Hall, Upper Saddle River, 2000. Bednarz, A., "Analyst Firm Predicts E-business Upswing", Network World, September 1, 2004. Canzer, B., e-Business: Strategic Thinking, Houghton Mifflin Co., Boston, 2005. Juniper Media Metrix, "The Forecast for Business-to-Business E-commerce", DM Review, Jan. 17, 2002, www.DMreview.com Laudon, K. and Traver, C.G., E-commerce: Business Technology, Society, Pearson/Addison Wesley, Boston, 2003. Lewis, D., "Pressure Mounts to Gauge E-Biz ROI", InternetWeek, No.835, 2000, 147-148. Mullaney, T., "E-Biz Strikes Again", Business Week, May 10, 2004, www.businessweek.com/magazine. Porter, M. E., "Strategy and the Internet", Harvard Business Review, March-April 2001. Rappa, M., "Business Models on the Web", Digital Enterprise, May 10, 2005, http.//digitalenterprise.org/models/models.html. Rayport, J. & Jaworski, B., Introduction to e-Commerce, McGraw-Hill/Irwin, New York, 2004. Timmers, P., "Business Models for Electronic Markets", Electronic Markets, Vol.2, No. 2, 1998. Turban, E. at al, Electronic Commerce: A Managerial Perspective, Prentice Hall, Upper Saddle River 2004. Weill, P. and Vitae, M.R., Place to Space: Migrating to eBusiness Models, Harvard Business School Press, Boston, 2001. Wikipedia, "Business Model", Internet Wikipedia, 2005, www.wikipedia.org Zinovy Radovilsky, California State University, East Bay, Hayward, California, USA Dr. Zinovy Radovilsky earned his Ph.D. at the Scientific Research Institute of Labor, Moscow in 1984. Currently he is a professor of management at California State University, East Bay and Managing Editor of Journal of International Business and Economics (JIBE).
TABLE 1. COMPONENTS OF E-COMMERCE BUSINESS MODEL
COMPONENT KEY QUESTIONS
Value Proposition Who are the customers and what will be their
benefits?
Value-added E-commerce What value-added offerings (value-added
Offerings activities) including e-commerce products/
services and e-commerce processes are involved
to fulfill the value proposition?
Supporting Resources What are resources that support the value
proposition, e-commerce products/services and
processes?
Revenue and Cost Models How the company generates revenue and reduces
cost through e-commerce model?
Value Creation What monetary and non-monetary value (results)
is created though e-commerce business model?
TABLE 2. REVENUE AND COST MODELS
REVENUE/COST MODEL DESCRIPTION
Revenue Model
Product, Service, or Info Sales Sales through retail, wholesale sites
or pay-per-use information
Transaction Fees Charging a fee or taking a percentage
of the transaction sum for
facilitating a customer-seller
transaction
Subscription Fees Subscriber fees for magazines,
newspapers or other information/
service businesses
Advertising Charging fees for selling adds,
sponsoring links and sponsoring sites
Affiliate Fees Companies receive commissions for
referring customers to other sites
Licensing Fees Fees generated from the licensing of
content (software applications)
Cost Model
Direct or Indirect Reduction of direct/indirect material
Material/Resource Cost costs through lower unit price, less
inventory stock, on-time delivery,
etc.
Cost Due to Paperl Environment Reduction or elimination of paper
transactions
Administrative Expenses Reduction of human resources due to
e-commerce solutions
Quality Cost Reduction or elimination of cost
associated with incorrect design,
rework repair, excessive warranty
payments, etc.
TABLE 3. DESCRIPTION OF &COMMERCE BUSINESS MODELS
GROUPS MODELS BRIEF DESCRIPTION
Demand-side Storefront A seller opens an electronic
E-commerce marketplace to sell its products/
services to the business customers or
end consumers
Forward Auction A seller opens a seller-centric
auction online to sell overstocked,
obsolete products or hard to move
commodities
Infomediary/ Selling aggregated information on
Affiliate products, services and research
reports/papers online.
Supply-side Reverse Auction A buyer opens an electronic
E-commerce marketplace and invites potential
suppliers to bid on the announced
request for quotation RFQ
E-procurement A buyer utilizes an electronic
with Catalog marketplace to do purchasing/
outsourcing online using electronic
catalogs
E-sourcing Strategic sourcing online; locating
and selecting appropriate suppliers,
negotiating contracts with them
Exchange An electronic intermediary company
runs an electronic marketplace where
buyers and sellers can meet for
trading
Collaborative E-design/ E-design/Collaborative Product
commerce CPC Commerce (CPC)--Provides online
capabilities for design partners to
sharing information, drawing, and
other data on new product design
CPFR Collaborative Planning, Forecasting,
and Replenishment (CPFR)--Suppliers
and retailers collaborate in their
planning and demand forecasting to
optimize supply chain flow
E-services Web Portal A web site that provides a starting
point (gateway) to other resources on
the Internet or an intranet
Mobile Service Provides wireless service to do an
type of e-commerce
E-payment Allows to make payments and money
transactions using any e-commerce
business model
E-logistics Provides logistics/transportation
capabilities for online businesses
ISP/ Internet Service Provider (ISP)
Web Hosting provides companies with access to the
Internet. They also do web hosting--a
service that provides Internet users
with online systems for storing
EDI Electronic Data Interchange
(EDI)--Third parties provide EDI
services that enable organizations
with different equipment to connect
for business transactions
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