The Internet Encyclopedia (Volume 3)

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528 VALUECHAINANALYSIS

focusing on relationship development with customers. To

maintain pricing power firms must differentiate and find

a means of creating value for customers by evaluating the

e-commerce value chain and business models.

BUSINESS MODELS

A value chain disaggregates business functions into a set

of activities. A business model differs from a value chain

in that it illustrates the process flows between the var-

ious value-creating activities of a firm. As with value

chains, businesses must modify their models in response

to change in the competitive environment. Of the variety

of business modeling perspectives, a functional business

model identifies the interaction of functions within a busi-

ness. This modeling process allows a systematic approach

to viewing the complex relationships that are required to

make a business operate and can aid in identifying how

the value chain components fit together.

Figure 3 illustrates a generic e-commerce model that

takes advantage of the technologies outlined in this ency-

clopedia. Hypermedia such as Web sites can both provide

and collect information between the company and the

customer. Information collected in databases and mined

allows the customer to be served as a market of one. Com-

petitive pricing information allows dynamic pricing, or a

lack of fixed prices. Auctions and negotiations allow dy-

namic pricing, but so do database systems. Amazon.com

used its databases to charge different prices to differ-

ent customers based on what the database specified cus-

tomers would be willing to pay. This resulted in higher

prices for some customers and a strong consumer back-

lash. Credit card companies and online billing and invoic-

ing systems facilitate online payment flows. Customized

products can be delivered through independent shippers

directly to the customer. Both of these functions are often

outsourced. Inventory and working capital are minimized

because suppliers are linked to production needs. Lead-

ers who understand and can leverage technology must

manage these business models. The firm must also have

the human capital resources necessary to operate in an

e-commerce environment.

Both online-only and brick-and-mortar firms have

adopted components of this e-commerce model. The

generic e-commerce business model illustrates what is

necessary for a firm to undertake its operations, but does

not indicate areas of competitive advantage. An analy-

sis of the e-commerce value chain allows assessment of

a firm’s value activities, the identification of components

of the business model that can be outsourced, and a de-

termination of where competitive advantages lie. Because

margins for a business are dependent upon the customer

value added, firms have an incentive to develop and main-

tain long-term relationships with high-lifetime-value cus-

tomers. The interlinking of information on transactions

and customers allows online databases to determination

the value of customers and the factors that can lead to

extended relationships.

Figure 4 illustrates the e-commerce value chain. A

firm can gain cost advantages across a number of dif-

ferent areas such as lower inventory cost through JIT-

based extranets, built-to-order systems, lower promotion

costs through Web sites, and outsourced distribution.

These cost advantages may only give firms industry par-

ity or short-term advantages, not long-term differential

advantages. The use of technology and customiza-

tion from databases can allow the development and

maintenance of stronger customer relationships.

A key to implementing e-commerce technology is hav-

ing the proper support activities, including a management

Suppliers

linked

through

Extranets.

Value Creation

through operations

including product

customization.

Product Distribution

linked through extranets

utilizing independent

shippers.

Customer

seen as

market-

of-one.

Dynamic pricing

Weak pricing

power.

Communication based on

hypermedia provides basis

for information, ordering,

and tracking.

Technology supported

(Internet, extranet, intranet)

Customer information

collected and stored in

databases.

Payments made through

online transactions.

Controlled by management

and human capital

Figure 3: Generic e-commerce model.