e-Business Models Theoretical Review

Amit and Zott (Amit 2001) argue that each mentioned theoretical framework makes valuable suggestions about possible sources of value creation. Many of the insights gained from cumulative research in entrepreneurship and strategic management are applicable to e-business. However, the multitude of value drivers suggested in the literature raises the question of precisely which sources of value are particular importance in e-business, and whether unique value drivers can be identified in context of e-business (Amit 2001). Amit and Zott (Amit 2001) introduce a model that suggests that the value creation potential of e-businesses hinges on four interdependent dimensions, namely: efficiency, complementarities, lock-in, and novelty. To enable an integration of the mentioned theoretical perspectives on value creation, they offer the business model construct as a unit of analysis for future research on value creation in e-business. While the term ‘business model’ is often used these days, it is seldom defined explicitly. The rise of e-commerce, with its myriad new firms eschewing conventional ways of doing business, has thrown, a spotlight on the topic, which is widely discussed by practioners and investors, but is not yet prominent in academic discourse (Chesborough and Rosenbloom 2002). Chesborough and Rosenbloom (2002) offer a more detailed and technology operational definition with six functions of a business model: value proposition, markets segment, value chain, profit potential, value network, and competitive strategy. [add figure p 536](Chesborough and Rosenbloom 2002)

Several attempts have been made thus far to define models, specifically e-business models. Timmers (1998) presents a widely cited definition of an architecture for the 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 the description of sources of revenues (Timmers 1998). The definition of Timmers (1998) is like Hawkins (2001) definition more concrete: a description of the commercial relationship between a business enterprise and the products and/or services it provides in the market. More specifically, it is a way of structuring various cost and revenue streams such that a business becomes viable, usually in the sense of being able to sustain itself on the basis of the income it generates (Hawkins 2001).
These definitions share that a business model seems to influence the potential revenues and the future success of the e-Business initiative (Alt and Zimmermann 2001). According to Owens (Owens 2006) successful e-business depends on a level of trust between parties to a transaction that is not normally evident in traditional business dealings. Trust means that parties to a transaction will not attempt to exploit the weakness(es) of each other. According to Weill and Vitale (2001) an e-business model is a description of the roles and relationships a firm’s consumers, customers, allies and suppliers that identifies the major flows of product, information, money and the major benefits to the participant. They define eight infinitesimal e-business models and consider six areas: strategy, organisational structures, business processes, value chain, revenue stream, and core competences. These aspects are strongly related to the six aspects mentioned by Chesborough and Rosenbloom (2002). Another view of web-based business models provides the list of nine generic e-business models of Rappa (Rappa 2000).

The central core of e-business is the customer: customer service, transaction data and customer relationship management. Three important questions to answer are (Weill 2001): Who owns the customer relationship, customer data, and customer transaction? This view can also be seen in Amit and Zott’s article (Amit 2001): They argue that a business depicts the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities.

Developing e-business models for conducting e-business is not simply about the adoption of new technologies. It also concerns changes in work practices, in customer/supplier relationships, in the way products are delivered to consumers, in marketing practices and changes in staff skills needed to support e-business. Accordingly, e-business models signify new opportunities for re-organizing the way businesses are currently practiced (Vassilopoulou 2001).

At the beginning of the Internet there was a marvellous model for making money in the online environment: it was called the content business. The economic basis for it: connect-time revenue splits. It is the time-honored mode that made often small or unknown content providers on e.g. America Online (AOL) rich and famous. The business model was simple: people who supplied content to online services got credit for helping keep users online. Since users paid by minute or hour, this generated connect-time revenues that were allocated according to a negotiated split between content providers and online services. Internet Service Providers shifted to a flat-rate monthly pricing and so along came the second major commercial model in the online world: the advertiser-driving business model: selling ‘eyeballs’ too advertisers. Only a few could play profitably (e.g. Yahoo) but for most companies, advertising just was not a business. The third economic model, e-commerce, entered. E-Commerce refers to the practice of selling real products for real money through online channels. The argument was that a lower-cost channel structure resulting form the “disintermediation” of middleman could reward new intermediaries, such as Web-based retailers, with fatter margins (e.g. Amazon.com).
Because of competition companies adopted the fourth model: monetizing concept. E-commerce companies in which strategy revolves around the idea of never making a profit selling real products for real money (e.g. Buy.com). The model argues that online businesses must first capture large audiences of users or shoppers, and then later monetize those audiences through subscription fees, advertising and –ecommerce through a variety of cross-selling, up-selling and service-based approaches sometime in the future. The idea is to encourage investors to supply what was know in the 1980’s as “patient capital”, by suggesting that we are in a long-term investment phase in Web businesses. The investment in customer relationships, and harvest time is yet to come. This model deals with long-term relationship with customer and brand (Rayport 1999).




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Value Creation Theoretical Review

Five significant Entrepreneurship and Strategy theories are described:.

Value Chain Analysis
Porter’s value chain framework (Porter 1985) analyzes value creation at the firm level. Value chain analysis identifies the activities of the firm and then studies the economic implications of those activities. It explores the primary activities, which have a direct impact on value creation, and support activities, which affect value only through their impact on the performance of the primary activities. Primary activities involve the creation of physical products and include inbound logistics, operations, outbound logistics, marketing and sales, and service.
Value can be created by differentiation along every step of the value chain, through activities resulting in products and services that lower buyers’ costs pr raise buyers’ performance. Drivers of product differentiation, and hence sources of value creation, are policy choices (what activities to perform and how), linkages (within the value chain or with suppliers and channels), timing (of activities), location, sharing of activities among business units, learning, integration, scale and institutional factors. Porter and Miller (Porter 1985) argue that information technology creates value by supporting differentiation strategies.

Schumpeterian Innovation
Schumpeter (Schumpeter 1934) pioneered the theory of economic development and new value creation through the process of technological change and innovation. He viewed technological development as discontinuous change and disequilibrium resulting from innovation. Schumpeter identified several sources of innovation (hence, value creation) including the introduction of new goods or new production methods, the creation of new markets, the discovery of new supply sources, and the reorganization of industries.

Resource-based view of the firm
This view builds on Schumpeter’s perspective on value creation and views the firm as a bundle of resources and capabilities: Even in equilibrium, firms may differ in terms of the resources and capabilities they control, and that such asymmetric firms may coexist until some exogenous change or Schumpeterian shock occurs. Hence, RBV theory postulates that the services rendered by the firm’s unique bundle of resources and capabilities may lead to value creation (Penrose 1959). A firm’s resources and capabilities ‘are valuable, if they reduce a firm’s costs or increase its revenues compared to what would have been the case if the firm did not possess those resources.’ (Barney 1997)

Strategic Networks
Strategic Networks are ‘stable interorganizational ties which are strategically important to participating firms. They make the form of strategic alliances, joint ventures, long-term buyer-supplier partnerships, and other ties’ (Gulati 2000). The size of the network and the heterogeneity of its ties have been conjectured to have a positive effect on the availability of valuable information of the participants within that network (Granovetter 1973). Sources of value in strategic networks are enabling access to information, markets, and technologies (Gulati 2000), offering the potential to share risk, generate economies of scale and scope (Katz 1985; Shapiro 1999), sharing knowledge, and facilitating learning (Dyer 1998; Anand BN. 2000; Dyer 2000), and reaping the benefits that accrue from interdependent activities such as workflow systems (Blankenburg Holm 1999). Other sources of value in strategic networks include shortened time to market (Kogut 2000), enhanced transaction efficiency, reduced asymmetries of information, and improved coordination between the firms involved in an alliance (Gulati 2000)

Transaction cost economies
The central question addressed by transaction cost economics is why firms internalize transactions that might otherwise be conducted in markets (Coase,1937). Williamson (Williamson 1983) suggests that ‘a transaction occurs when a good or service is transferred across a technologically separable interface. One stage of processing or assembly activity terminates, and another begins.’ At its core, transaction cost theory is concerned with explaining the choice of the most efficient governance form given a transaction that is embedded in a specific economic context (Amit 2001). Transaction cost economics identifies transaction efficiency as a major source of value, as enhanced efficiency reduces costs. It suggests that value creation can derive from the attenuation of uncertainty, complexity, information asymmetry, and small-numbers bargaining conditions (Williamson 1975). Moreover, reputation, trust, and transactional experience can lower the cost of idiosyncratic exchanges between firms (Williamson 1979; Williamson 1983). In addition to decreasing the direct costs of economic transactions, e-businesses may also reduce indirect costs, such as the costs of adverse selection, moral hazard, and hold-up (Amit 2001).



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