e-Business Strategy:Business models

4.1 Introduction

The information system (IS) development team should be prepared to answer the question: how does this IS development project fit with the organization's business strategy? In pre-Internet IS developments, the question of strategic fit is often implicit and taken as given. The project is part of a portfolio of IS developments that in some way, at some higher and more abstract level, align with the organization's business strategy.

With Internet based development projects there is often a direct and tangible relationship between information systems and strategy – the IS development may have implications for the way the organization deals with customers and other partners as well as a direct impact on revenue flows. In some organizations, particularly the dot-com, the information systems are the very embodiment of the organization's business strategy.

There are many definitions of strategy, but Porter's (1980) definition is succinct and to the point:

Strategy is a broad based formula for how business is going to compete, what its goals should be, and what policies will be needed to carry out those goals. The essence of formulating competitive strategy is relating a company to its environment.

At the close of the 20th century, dot-com mania set in as Internet companies achieved valuations of startling proportions. In the last quarter of 1999 Lastminute.com, a specialist in late bookings for holidays and theatre tickets, had revenues of £0.6 million, a loss of £6 million and a market capitalization of £770 million. The high street bricks and mortar travel agent Thomson Travel had a turnover of £3 billion in 1999, a profit of £77 million, and a market capitalization of £980 million. In January 1999 Amazon.com had a market capitalization of $29 billion (despite never having made a profit at that point) while the retail giant Sears had a value of a 'mere' $16.5 billion. Clearly, many of the business models that underpinned these staggering dot-com valuations were not going to be sustainable.

Porter (2001) argues that the age of the 'new economy' is over and that the terms e-business and e-strategy have been dangerous and misleading. To view Internet operations as separate from the rest of the business can lead to simplistic ways of competing and a more general failure to integrate the Internet into traditional value-creating business activities. Some companies have struck a good balance. For example, Walgreens, a large US pharmacy chain, allows customers to place prescription orders online and to collect the order at their local store. Ninety per cent of customers prefer to collect their prescription from the local store than to have the order delivered to their home. Walgreens have integrated the marketspace (the convenience of Internet ordering) with the marketplace (collection from a physical store) to provide customers with a bricks and clicks solution – the marketface. The approach adopted by Walgreens does not cannibalize the sales of physical stores, but uses the Internet to complement and build on their traditional value-adding activities.

Similarly, for our case study of the Barchester Playhouse (see appendix A for details), the aim must be to use the Internet to support its business strategy – how it will create value and how it will compete and sustain itself in its environment. Although we might have reservations about dot-coms and the

dangers of separating out the 'e' aspect of business and strategy, there are indeed innovative ways in which the Playhouse might use the Internet to create business models that go beyond the obvious: using e-commerce to add sell theatre tickets online.

4.2 Business models

Rappa (2001) defines a business model as:

In the most basic sense, 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.

This generic definition is consistent with a view of strategy as survival in a competitive environment. Timmers' (1999) definition of a business model is yet more specific:

An architecture for product, service and information flows, including a description of the various business actors and their roles; and – a description of the potential benefits for the various business actors; and – a description of the sources of revenue.

Timmers argues that a business model in itself is necessary, but not sufficient. To assess the commercial viability of the business model we also need to know the marketing strategy of the organization. A marketing model comprises a business model together with the marketing strategy (how we are to compete) of the business actor under consideration. Timmers identifies a range of business models, the most basic of which is the e-shop.

The Barchester Playhouse could, with relative ease, implement an e-shop for ticket and merchandise sales. The e-shop would constitute an additional sales and marketing channel for the Playhouse, allowing customers to buy tickets online rather than in person or by telephone at the box office. Although this basic approach to the Internet may well result in operational benefits for the Playhouse, such as reduced transaction costs through automated ticket sales, and convenience for the customer, including 24-hour ticket bookings and electronic ticket delivery, it can hardly be classified as a significant change in business strategy and the way in which the Playhouse competes. Timmers identifies a range of further business model archetypes, such as the auction, the value chain integrator, and the community, which would have greater strategic implications for the Playhouse.

Using Timmers' definition of a business model, we can produce a generic template that acts as a useful checklist to think about both the broad business

strategy and the specifics of how the strategy will be implemented in terms of how to compete (table 4.1).

The apparent simplicity of a question such as 'What business are we in?' can surface a wealth of taken for granted assumptions and highlight a lack of shared understanding about an organization's core business. For example, should the Playhouse provide popular entertainment using actors seen on television? Should it create a cultural experience through the staging of the classics? Should it aim to educate young people on the intricacies of stagecraft? Many organizations do not have a clear view of what business they are in and even where the view is clear at the top it is not necessarily communicated and shared throughout the organization. In chapters 5 and 6 we introduce systems thinking as a way of surfacing assumptions and discussing what might constitute purposeful activity for an organization such as a theatre.

– Business (strategy)

• What business is the Organization in?

• What are the products and services?

– Products and services

• What are the sources of revenue?

• What are the benefits to the business actors?

– Who are the Customers?

– Who are the Competitors?

– Marketing strategy (how to compete)

• What is the Organization's marketing strategy?

Table 4.1: Business planning template (adapted from Timmers, 1999)

Using the template in table 4.1 we might state that the core business of the Playhouse is the staging of productions in order to provide live entertainment to the theatre-going public. Additional and complementary services include bar and restaurant facilities, and conferences. The source of revenue is therefore primarily from ticket sales, with ancillary streams from catering and the hire of conference facilities. The customers are the people of Barchester, tourists visiting the town, and corporate clients. The Playhouse stages productions for the entertainment of the public, but it also has a mission to educate, particularly local school children, through its outreach programme. Competitors include other theatres in the town and other forms of entertainment, such as cinemas and television. In order to compete the Playhouse needs to have a clear marketing strategy that will inform the choice of productions and a communications strategy to promote the Playhouse and its productions.