MISY 5350 Exam 1 Review - Chapter 2

Incubators

(sometimes also referred to as accelerators) such as Y Combinator typically provide a small amount of funding, but more importantly, also provide an array of services to start-up companies that they select to participate in their programs, such as business, technical, and marketing assistance, as well as introductions to other sources of capital. Well-known incubator programs include TechStars, DreamIt, and Capital Factory.

Types of revenue model

1. Advertising 2. Subscription 3. Transaction Fee 4. Sales 5. Affiliate

Major B2B business models

1. E-distributor - Grainger Amazon Business - Single-firm online version of retail and wholesale store; supply maintenance, repair, operation goods; indirect inputs 2. E-procurement - Ariba Supplier Network Proactis - Single firm creating digital markets where sellers and buyers transact for indirect inputs 3. Exchange - Go2Paper - Independently owned vertical digital marketplace for direct inputs 4. Industry Consortium - The Seam SupplyOn - Industry-owned vertical digital market open to select suppliers

Major B2C business models

1. E-tailer 2. Community Provider 3. Content Provider 4. Portal 5. Transaction Broker 6. Market Creator 7. Service Provider

Key elements of a business model

1. Value Proposition 2. Revenue Model 3. Market Opportunity 4. Competitive Environment 5. Competitive Advantage 6. Market Strategy 7. Organizational Development 8. Management Team

Competitive advantage

Firms achieve a competitive advantage when they can produce a superior product and/ or bring the product to market at a lower price than most, or all, of their competitors (Porter, 1985). Firms also compete on scope. Some firms can develop global markets, while other firms can develop only a national or regional market. Firms that can provide superior products at the lowest cost on a global basis are truly advantaged. Firms achieve competitive advantages because they have somehow been able to obtain differential access to the factors of production that are denied to their competitors—at least in the short term (Barney, 1991). Perhaps the firm has been able to obtain very favorable terms from suppliers, shippers, or sources of labor. Or perhaps the firm has more experienced, knowledgeable, and loyal employees than any competitors. Maybe the firm has a patent on a product that others cannot imitate, or access to investment capital through a network of former business colleagues or a brand name and popular image that other firms cannot duplicate. An asymmetry exists whenever one participant in a market has more resources—financial backing, knowledge, information, and/or power—than other participants. Asymmetries lead to some firms having an edge over others, permitting them to come to market with better products, faster than competitors, and sometimes at lower cost.

Perfect market

a market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production.

Angel investors

are typically wealthy individuals (or a group of individuals) who invest their own money in an exchange for an equity share in the stock in the business. In general, angel investors make smaller investments (typically $1 million or less) than venture capital firms, are interested in helping a company grow and succeed, and invest on relatively favorable terms compared to later-stage investors. The first round of external investment in a company is sometimes referred to as Series A financing.

Examples of community provider

create an online environment where people with similar interests can transact (buy and sell goods); share interests, photos, videos; communicate with like-minded people; receive interest-related information; and even play out fantasies by adopting online personalities called avatars. Facebook, LinkedIn, Twitter, and Pinterest, and hundreds of other smaller, niche social networks all offer users community-building tools and services. The basic value proposition of community providers is to create a fast, convenient, one-stop platform where users can focus on their most important concerns and interests, share the experience with friends, and learn more about their own interests. Community providers typically rely on a hybrid revenue model that includes subscription fees, sales revenues, transaction fees, affiliate fees, and advertising fees from other firms that are attracted by a tightly focused audience. Community providers make money from advertising and through affiliate relationships with retailers. Some of the oldest online communities are The Well, which provides a forum for technology and Internet-related discussions, and The Motley Fool, which provides financial advice, news, and opinions. The Well offers various membership plans ranging from $10 to $15 a month. Motley Fool supports itself through ads and selling products that start out "free" but turn into annual subscriptions.

Revenue models

describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital. We use the terms revenue model and financial model interchangeably. The function of business organizations is both to generate profits and to produce returns on invested capital that exceed alternative investments. Profits alone are not sufficient to make a company "successful" (Porter, 1985). In order to be considered successful, a firm must produce returns greater than alternative investments. Firms that fail this test go out of existence.

Content provider

distribute information content, such as digital video, music, photos, text, and artwork. It is estimated that U.S. consumers will spend more than $58 billion for online content such as movies, music, videos, television shows, e-books, and newspapers during 2018. Content providers can make money via a variety of different revenue models, including advertising, subscription fees, and sales of digital goods. For instance, in the case of Apple Music, a monthly subscription fee provides users with access to millions of music tracks. Other content providers, such as the Wall Street Journal online newspaper, Harvard Business Review, and many others, charge customers for content downloads in addition to, or in place of, a subscription fee.

Examples of subscription services

eHarmony (dating), Ancestry (genealogical research), Scribd (e-books), Spotify (music).

First movers

is a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service. If first movers develop a loyal following or a unique interface that is difficult to imitate, they can sustain their first-mover advantage for long periods (Arthur, 1996). Amazon provides a good example. However, in the history of technology-driven business innovation, most first movers often lack the complementary resources needed to sustain their advantages, and often follower firms reap the largest rewards (Rigdon, 2000; Teece, 1986). Indeed, many of the success stories we discuss in this book are those of companies that were slow followers—businesses that gained knowledge from the failure of pioneering firms and entered into the market late.

Business model

is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace. A business model is not always the same as a business strategy, although in some cases they are very close insofar as the business model explicitly takes into account the competitive environment (Magretta, 2002). The business model is at the center of the business plan.

Market strategy

is the plan you put together that details exactly how you intend to enter a new market and attract new customers.

Table 2.7

lists the major business models utilized in the B2B arena.

Table 2.3

summarizes the eight key elements of a business model and the key questions that must be answered in order to successfully develop each element.

Freemium strategy

the companies give away a certain level of product or services for free, but then charge a subscription fee for premium levels of the product or service.

Portal

uch as Yahoo, MSN, and AOL offer users powerful search tools as well as an integrated package of content and services, such as news, e-mail, instant messaging, calendars, shopping, music downloads, video streaming, and more, all in one place. Initially, portals sought to be viewed as "gateways" to the Internet. Today, however, the portal business model is to be a destination. They are marketed as places where consumers will hopefully stay a long time to read news, find entertainment, and meet other people (think of destination resorts). Portals do not sell anything directly—or so it seems—and in that sense they can present themselves as unbiased. The market opportunity is very large: in 2018, around 280 million people in the United States accessed the Internet via a variety of devices at work or home. Portals generate revenue primarily by charging advertisers for ad placement, collecting referral fees for steering customers to other sites, and charging for premium services. Although there are numerous portals/search engines, the top five (Google, Microsoft's Bing, Yahoo (Oath), Ask, and AOL) gather more than 95% of the search engine traffic because of their superior brand recognition. Many of the top portal/search engines were among the first to appear on the Web and therefore had first-mover advantages. Being first confers advantage because customers come to trust a reliable provider and experience switching costs if they change to late arrivals in the market. By garnering a large chunk of the marketplace, first movers—just like a single telephone network—can offer customers access to commonly shared ideas, standards, and experiences (something called network externalities, which we describe in later chapters). The traditional portals have company: Facebook and other social networks are now the initial start or home page (portal) for millions of Internet users in the United States. Yahoo, AOL, and others like them are considered to be horizontal portals because they define their marketspace to include all users of the Internet. Vertical portals (sometimes called vortals) attempt to provide similar services as horizontal portals, but are focused around a particular subject matter or market segment. For instance, Sailnet focuses on the world's sailing community, and provides sailing news, articles, discussion groups, free e-mail, and a retail store. Although the total number of vortal users may be much lower than the number of portal users, if the market segment is attractive enough, advertisers are willing to pay a premium in order to reach a targeted audience. Also, visitors to specialized niche vortals spend more money than the average Yahoo visitor. Google and Ask can also be considered portals of a sort, but focus primarily on offering search and advertising services. They generate revenues primarily from search engine advertising sales and also from affiliate referral fees.