Electronic channel systems allow companies to try new online strategies

How to leverage an electronic channel system

Electronic channel systems are in their infancy, and companies in many industries are successfully undertaking each of these strategies. For example, consider the changing nature of the car dealership. Traditional auto dealers combine multiple channel roles under the same roof. They inform, they sell, they finance, and they deliver. But the Internet has allowed new infomediaries to emerge.

For example, Edmund's competes in the buyer-agency role by providing pricing, feature, and other information to the customer. This infomediary's core competence is in the processes of accumulating, organising, and publishing data about cars. Edmund's influences buyer decisions and negotiations with dealers, although it is not involved in the transaction. In contrast, Auto-by-Tel illustrates the control strategy. Auto-by-Tel has expanded from providing basic information to delivering qualified customer leads to partner dealerships under exclusive contract. This attempt to control the flow of information between dealers and customers provides greater revenue opportunities than just publishing information. Its exclusive contracts create barriers to entry for prospective competitors. CarsDirect illustrates the strategy of coordinating multiple specialists and roles. CarsDirect actually sells cars online, but relies on its relationships and partnerships, not an asset base, to perform the actual sourcing, delivery, and payment support of the transaction.

As specialised infomediaries emerge, we expect smart firms will increasingly want to provide a total solution by dynamically coordinating the most desirable infomediaries to solve a customer's problem. Processexecution advantages diminish over time due to the technology improvements available to all competitors. In contrast, the relational assets of the 'infomediary' are harder to copy and thus provide the greater competitive advantage. Thus, firms will migrate to control and coordination strategies by investing in relationships, information and good will to control/dominate channels.

This migration is beginning to occur in the auto industry. All major car companies host Web sites. This is a first step. Some major players are positioning themselves to take ownership of infomediaries (that is, Ford and Carpoint) which have access to customer queries about cars across multiple vendors. We believe that manufacturers will increasingly invest in customer insight to execute a control or coordination strategy in their channels.

Creating a business model

The myths of easy Internet success have a hard core of truth. It should be clear from the foregoing discussion that there are many ways to do business in the wired new world. But no one should consider launching an Internet business without first thinking through the issues of value proposition and channel strategy discussed above.

For example, E-bay's founder hadn't intended to create a dominant Internet business when he started the company. He merely wanted to trade Pez candy dispensers with like-minded collectors. Word about his site got around, collectors of other items found it, posted messages about items they were interested in, and soon made E-Bay the most successful auction site on the Web.

The story is true – a true myth, if you will. It has inspired a superstition that Internet business success often depends on acting without careful forethought.

But that isn't the right conclusion to draw from the E-Bay story. It doesn't matter that E-Bay was the accidental product of spontaneous generation. E-Bay could not have built and sustained its competitive position without meticulous thinking about customer value and channel strategy. And when that kind of thinking is absent from Internet ventures, they fail – as E-Bay's many would-be competitors have failed. Two particularly dangerous superstitions about cyberspace business involve advertising revenues and online customer spending.

The notion that new Internet businesses will be able to earn substantial advertising revenues is, in general, wrong. Lycos, Yahoo! and other portal companies have made lucrative, high-profile marketing deals; Buy.com and OnSale sell to customers at cost, and rely on advertising revenues to generate profit. But these early successes are unlikely to be duplicated. There are several reasons why. First, advertising rates are dropping quickly. AdKnowledge, a Palo Alto firm specialising in Web-based advertising, reports that online advertising fell 6% last year – for the second year in a row. The problem: more sites are competing for attention and ad dollars, so online advertising is becoming a buyer's market. It turns out that two-thirds of all online advertising dollars go to just nine Web sites, leaving only one-third of the reported billions in spending for the remaining thousands of sites.

Lucrative multi-year agreements of the past can no longer be relied on either. A survey of executives of companies with long-term online advertising deals found only 5% of respondents 'highly likely' to renew their existing agreements, because more than two-thirds of these executives reported that their costly online advertising deals had produced disappointing sales results. The progress of technology also threatens advertising revenues. As access speeds and bandwidth grow, consumers click through screens faster, and spend less time looking at ads. Worse – from an advertiser's perspective – those consumers who really dislike ads can now block them altogether, using software from such vendors as Privnet to prevent browsers from downloading advertisements.

Another superstition is the belief that the ease of doing business on the Internet will prompt customers to spend more. This logic has driven the stock market valuations of many Internet companies. But a recent Deutsche Bank study found that most online spending merely replaces offline spending. In no category did overall spending increase. Thus, the Internet does not expand the market pie – it merely introduces more competition for the pieces. This conclusion was reinforced by another recent study that found the lifetime value of online customers could be predicted with the same models used by offline retailers. So, while the Internet is driving innovation, it is not repealing the basic law that success in business requires careful planning and sound operating and strategic business models.

An operating business model is the organisation's essential logic for consistently achieving its principal objectives. The business model of a profit-oriented enterprise explains how it consistently makes money. These should not be confused with components of business models. Since organisations compete for customers and resources, a good business model highlights the distinctive activities and approaches that enable the firm to attract investors, employees and customers in order to deliver products and services profitably. Consider the operating business model of SupplyGenie.com, a businessto- business office products site:

1. SupplyGenie.com sells office products at dealer cost over the Internet.

2. The opportunity to buy at dealer cost attracts small and mid-sized firms accustomed to paying 25% to 40% markups.

3. Good service (including wide selection, next day delivery, and phone centre support) keeps customers coming back.

4. This builds volume.

5. High volume enables SupplyGenie to negotiate purchase discounts with wholesale suppliers.

6. These discounts, and a lean cost structure, provide SupplyGenie's profit margin, allowing it to attract investors.

7. Growth and the promise of an initial public offering (IPO) help the company attract top talent, and continue to improve service and performance.

This operating business model shows what SupplyGenie must do consistently and uniformly in order to succeed. By contrast, its strategic model shows how it must change. Business models do suffer a sort of time decay. That is, their value declines as their distinctiveness erodes. In the Internet this happens quickly, because competitors are quick to imitate any successful innovation. How does SupplyGenie leverage its most important assets, capabilities, relationships, and knowledge to achieve an advantage over time? Here, briefly, is the strategic model:

1. SupplyGenie's operating model gives it an important asset: a base of satisfied small and mid-sized business customers.

2. SupplyGenie leverages this asset by expanding its offerings to these customers to include other convenience goods and services at excellent prices – such as office furniture, payroll services, insurance, and temporary help.

3. The broader product/service line increases SupplyGenie's value for convenience- and cost-oriented customers

4. Which improves customer retention and account size, and…

5. … shuts out competitors.

6. Increased sales enable SupplyGenie to continue to expand its product line, customer service, and marketing reach

7. Which fuels growth and increases profitability.

Thus, developing a sustainable Internet business requires a thorough understanding of customer value, channel strategy, and business modelling. These elements are the foundation of a sound operating model. The operating model, in turn, is the foundation of the strategic change model The first steps toward building an operating model for Internet business are:

1. Identify all sources of revenue.

2. Select a clear value proposition.

3. Decide on channel strategy – how to deliver value profitably and consistently.

The assets, capabilities and relationships of the enterprise should come together in the kind of 'round' logic illustrated by SupplyGenie's operating model. The strategic change model builds on the operating model by identifying:

the most important asset used to create new sources of value
the supporting assets
new revenue sources, value proposition(s) and/or cost structure(s) that can be created by leveraging these assets, and what is required to profitably create these new opportunities.

Clarifying a company's operating and strategic business models will not only sharpen the business focus and enhance its competitiveness, but also position the firm for inevitable change. Investors typically require this level of clarity in a business model before committing capital. Is it too rigorous to demand such discipline in the rapidly-moving environment of the Internet? Cyberspace is changing quickly, but future uncertainty does not excuse present poor planning.