Models of Virtue

For almost 230 years the world hailed Encyclopaedia Britannica as its most comprehensive and authoritative source of knowledge. Millions of families proudly forked out up to several thousands of dollars for the privilege of owning a set. Now technology and some brash young competitors have blown Britannica's tried and true business model out of the water. Suddenly any hope of survival for Britannica means doing what would previously have been considered totally insane - cannibalising its own revenues to make the encyclopaedia available free online.

That's how profoundly the new economy challenges the assumptions that have underpinned successful businesses for generations. The new economy demands new business models - and that's a reality many Australian companies remain ill-equipped to face. "If you don't allow cannibalisation of your existing channels to protect the existing business, then very soon someone else will cannibalise them and the new business will be marginalised," says Paul Lewis, associate partner financial services with Andersen Consulting.

"Australian companies in general still seem to be struggling with this challenge and run the risk of losing their market position to new, nimble start-ups. Unless you are highly efficient and highly effective, someone else can just wipe your feet from underneath you," Lewis says. An effective e-business is a network of participants, each of which are individual companies, and all the new business models are networked models, he explains.

High Risk

Companies everywhere are grappling with the problem of devising new business models that will work in the new economy. "Competition today is not between different products. It is between different business models," Professor Gary Hamel told a recent US leadership conference sponsored by Cambridge Technology Partners.

It is a game most businesses will have to play sooner rather than later. Wait-and-see just won't cut it in a world where a competitor can steal your customers using new and innovative ways to market, sell and service, thanks to streamlined processes, new technology tools, new flatter organisational structures and more customer-centric and innovative cultures.

Instead, trial and error must serve. "The really exciting thing about the emergence of both B2C and B2B is the fact that there are no rules," says Geoff Gander, general manager of SupplySearch. "The amount of new concepts and business models that have come to light in the past few years is unprecedented.

"Couple this with hungry capital markets all over the world and you have the vast array of companies that have raised money in the billions. most of these have no history of revenue or profitability, but instead a radical new business model that looks to leverage the change in buying patterns created by e-commerce," he says.

On the Internet, says Daniel Lavecky, CEO of Pure Commerce, sustainable competitive edge is not based on patents, because technology is changing so rapidly. It is not based on geography, because the Internet is limitless. It is based on customer experience and building customer "stickiness" - that is, getting people to stay with you by finding a business model that will let you keep on adding value so they'll keep coming back.

And there are plenty of models out there which organisations can adopt and adapt to their own purposes. Greengrocer.com.au managing director Doug Carlson freely admits to borrowing his business model from Dell Computer. "The fact is that Dell has been very, very successful at taking on the big, traditional computer companies," Carlson says. "The others can't compete because they have a completely different mindset. When you've grown up online, you understand the business and the industry much better than if you're a clicks and mortar person.

"Like Dell, we get all the money up front, we let the customer program our production line, we keep no inventory and we deliver the customer a very good product at a very cost-effective price. It's that business model that allows us to be better than the competition."

Still, not everyone will be able to just copy their business model from someone else and expect it to work for them. Netscape president and CEO Jim Barksdale says understanding how the burgeoning Net economy is going to change your business model and everything you do each day is a critical part of making your company successful in the future.

Patterns as Frameworks

"Creating new kinds of supply chain transactions, becoming an enterprise service provider, acquiring customers through a portal, setting up a custom portal, outsourcing and hosting Internet applications - these are all new ways of doing business that just didn't exist three years ago," Barksdale says. "And they are ways of doing business that take advantage of the capabilities of Internet technologies to provide transaction integrity, scalability, reliability, and manageability. Internet technologies also let you quickly create prototypes, test them online, and refine them, thereby giving you a quicker time to market."

The risks are high and the way ahead uncertain. As more and more consumers exercise their buying power on the Internet, and dotcom companies find new and innovative ways to market, sell and service, organisations are having to make numerous adjustments at once. It's a fast, no-holds-barred, high-stakes game of survival of the fittest: where relationships are constantly shifting and the rules remain entirely undefined, but where patterns are starting to come into clearer focus.

"While the Internet's impact on business models varies from industry to industry, definite patterns have emerged," writes Forrester VP research Mary Modahl in her book Now or Never: How Companies Must Change to Win the Battle for Internet Consumers. "Taken as a whole, these patterns offer a valuable framework for thinking through how a company's financial performance will be affected by the transition to the Internet."

Modahl says hopeful dotcom companies, making their rounds of the venture capitalists in search of funding, create business plans that are inherently tough for established competitors to mimic. The fastest way to do that is to undermine the pricing structure of the existing business. "This strategy buys the dotcom time, in which to grow. Existing players resist cutting prices, especially while electronic commerce still represents only a tiny fraction of total sales," Modahl says.

To attack the pricing structure of an industry, a start-up must realign all the components of revenues - in other words it must change the revenue mix of the industry (who pays for what, and how). "These three elements are highly interrelated," Modahl says. "A start-up that wants to change the how, or pricing structure, must first find a way to alter what is being sold and also locate new customers - the who - to generate revenues to support the business."

The brash new upstarts are not only doing so with gusto, they are getting smarter and more aggressive at it by the day. The days of the Internet start-up founded in a garage and built on a shoestring are over. Now the threats to existing businesses come from second-generation start-ups backed by millions of dollars of investment and formed by people with years of complementary skills in Internet businesses. And they can move fast. For instance, Business Week reports US start-up Epinions.com went from idea to operating business in 12 weeks with $8 million in venture capital.

Trial and Error

Michael Hentschel, principal author of the report "Profit: E-Commerce Business Models and Enabling Technologies" from Datacomm Research and Techvest International, says many of the new business models are based on electronic information chains. And he says there'll be plenty of experimentation until businesses get the new models exactly right. "The Internet is the most efficient market ever devised, but the inexorable drive towards cost and below-cost pricing will compel vendors to discover new paths to profit. Traditional business models will be replaced by new models based on electronic information chains," Hentschel says.

The report says many businesses will sell products at cost, making money off advertising, shipping and handling charges, membership fees, and cash flow. Auction sites will continue to evolve, and shopping bots will make the entire Internet into one, big real-time auction.

But sometimes what looks brand new is really something old in a new guise. Peter Williams, head of e-business with Deloitte Touche Tohmatsu, uses the example of the numbers of Internet start-ups that operate on the premise that traffic is the real currency of the Web. Free ISPs like Freenet, he points out, in being able to generate enough money on advertising per user to enable them to provide a free ISP service, are not all that different from free-to-air television providers who make their money on advertising revenue.

Not only can such models give the business enough revenue to survive in their own right, they can also create other revenue-raising opportunities. "Organisations like that are able to leverage customer relationships and maybe start providing them with transactions down the track, or entering into vendor alliances with other providers who provide them with some trial commissions or whatever," Williams says. "So those business models aren't unique, but they're being provided in a different way - it's giving away something for free and then leveraging that - like Netscape giving away its software originally. Suddenly they had a portal business which made some dough and then they created a brand which allows them to sell high-level software."

Meanwhile, others experiment with becoming an enterprise service provider, acquiring customers through a portal or hosting Internet applications.

Eric B Upin, managing director with US-based investment analyst Robertson Stephens Upin, identifies five new business models that early adopters are experimenting with. In the content model players try to develop a portal strategy and become a destination, offering news about the industry and deriving revenue primarily through advertising and subscriptions. Under the distributor or aggregator model one company may offer a wide range of products or there may be a catalogue with products from thousands of suppliers. Some players aggregate buyers, like a purchasing group, to get better prices from suppliers.

Under the auction model, organisations like eBay describe products and put them out for bid. In the software model, developers provide software infrastructure to run a piece of the business and charge for the transactions performed with that technology. Then there is the exchange or e-marketplace, considered the holy grail of B2B. This refers to a real-time, highly liquid, anonymous trading environment that brings together large populations of buyers and sellers. In the e-marketplace buyers and sellers will get together to create complementary revenue streams, provide new ways for existing players to conduct trade and pave the way for additional new models like bid systems.

Upin says once vendors are selected and exchanges established it is likely to become a "winner-take-most" situation. As a result, the winning players will probably have durable businesses with high barriers to entry. "Like most Internet industries, viral marketing allows for geometric growth. By virtue of the Internet, we expect their reach to be almost infinite with low variable costs," he says.

Shape Shifters

If the Global 2500 wants to keep playing the game in the face of all that new competition, Forrester Research says, it should consider entirely reshaping their organisations for e-commerce. In a recent report, Forrester advised companies to deploy a centralised group within the organisation (dotcorp) to take the existing business online, and a spin-off group (dotcom) to create new business models.

Leading bricks and mortar organisations like John Fairfax Holdings, News Corp, Telstra and the main banks have already taken the advice - moving to create new stand-alone businesses to give them Internet credibility. In doing so they've found that spinning off the Internet side of the business can give an organisation much greater flexibility as it struggles to develop the culture, leadership, employee performance and remuneration policies essential to retain staff in the new online world. It can also reduce the problems of trying to create an organisation with the capability to react fast to new business realities from a cumbersome, control-oriented, centralised business structure.

But it is a strategy that carries some considerable risk. Bob Hayward, senior VP Asia Pacific Operations GartnerGroup, says such moves can lead to a fragmentation between the traditional organisation and its e-commerce component. "My experiences tell me that people tend to be very stove-piped in their thinking inside an organisation. They think within the unit that they operate in rather than the organisation as a whole and this could well exacerbate that," Hayward says.

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