Business Models and Strategies in E-Commerce

The development of Internet technologies and e-commerce forms the economy of the future and generates new business opportunities, including the formation of the Internet infrastructure; leads to the formation of a global e-commerce environment.

The desire of new and traditional companies to realize the capabilities of the Internet gives rise to innovative business models and fundamentally new approaches to competition and market positioning. Traditional companies, whose business is under threat for any reason, are trying to use electronic technologies to modify their business models and strategies in accordance with the requirements of the modern business environment.

The desire to use the capabilities of the Internet economy encourages companies to look for innovative business models and fundamentally new competitive strategies:

1. Suppliers of communication equipment mainly, producing equipment for Internet-communications, adhere to the traditional business model – to sell the released equipment at prices that provide a sufficient level of profit and return on investment. The main strategic problem of these companies is the availability of several competing technologies to create the infrastructure of the Internet and the global electronic economy. Naturally, companies that have invested in the development of a particular solution are interested in making it such a standard. To achieve technological leadership, several strategies are used:

Intensive investment in R&D to achieve competitive superiority in technology; Creation of strategic alliances with suppliers, potential consumers and companies – developers of related technologies; Acquisition of companies with experience and know-how in related fields; Reducing entrepreneurial risk through the development of alternative technology options.

2. Communication service providers build business models on the sale of services at fixed rates or on a time-based basis. Since the task of Internet service providers is to provide connectivity to the Internet, they invest significant sums in the development of communication networks and equipment. The desired level of profitability is not achieved immediately, but with such an increase in the load, which ensures that revenues exceed the break-even level. The main task of companies is to introduce communication lines and attract subscribers faster than competitors. Brand awareness and advertising are important elements of the strategy of Internet access providers, contributing to an increase in market share. To attract potential customers, covad, a small silicon Valley company offering high-speed Internet access via DSL lines, ran a $40 million advertising campaign in 2000. in the United States to break into the market leaders in Internet access services (at the time of the launch of the campaign, Covad sales were only $ 20 million per year). This has forced competitors to also start advertising campaigns within just a few weeks.

3. Manufacturers of computer equipment. Like manufacturers of equipment for the Internet infrastructure, manufacturers of computer equipment and components use mostly traditional business models, selling products at prices that cover costs and provide acceptable profits. In this industry, the pace of technological progress is also very high, so companies are forced to invest heavily in R&D and quickly reproduce new products and technologies offered by competitors in order to remain competitive. Success depends on the ability of companies to stay ahead of, or at least keep up with, the competition in bringing the next generation of models to market.

4. E-commerce software developers create software packages for all kinds of commercial transactions on the Internet. Their business model is to invest resources (mainly the work of programmers) in the development and improvement of specialized programs with the subsequent promotion and sale to corporate clients (electronic merchants, Internet service providers, content providers, etc.) at a price that covers costs and provides a sufficient level of profit. Since the main costs of software development companies fall on the period preceding the creation of programs, and most of them are associated with non-current assets, the profitability of this activity directly depends on the volume – if sales revenues do not exceed the break-even level, then a significant part of the proceeds goes to cover fixed costs. To counter the decline in revenue that occurs as the market saturates, developers are upgrading programs and creating new ones.

Some e-commerce software developers have modified their business model: instead of implementing programs at a fixed cost per copy, they switch to assigning a small fee for each operation performed with these programs. This approach to pricing provides them with a constant flow of revenue. The operating fee model is particularly attractive when there are millions of similar transactions and a limited number of Web sites that have programs installed. The amount of operational payment depends on the level of competition; it increases if similar software cannot be obtained from a competing company and if that company’s software product is technically more advanced.

5. E-retailers. There are two main groups of electronic traders: the first sells goods mainly to corporate customers (this group is also called B2B), and the second group to end users (B2C). These categories of Internet companies use specific strategies. The simplest and most revolutionary strategy is to sell goods at cost and make a profit by advertising other merchants interested in attracting visitors to e-commerce sites.

Other merchants use the traditional business model: buying goods from manufacturers or distributors, advertising them on their Web site, taking orders over the Internet, and fulfilling them using a stock of goods in their warehouses. This differs from the standard model only in that the Internet is used as a point of sale, and not traditional retailers. There is also a group of e-merchants who maintain Web sites only for advertising and consumer search. They transfer the execution of received orders to manufacturers on a contract basis, and the functions of packaging and shipment of goods to wholesalers and retailers of the traditional type. For example, the participation of is reduced to the content of an electronic store with an assortment of goods of more than 30 thousand items.

6. Combined strategies as an alternative to purely traditional and electronic ones. Many traditional retail companies, fearing the spread of Internet commerce, rushed to open their sites. Merrill Lynch and Paine Webber have offered their customers to shop online to prevent price-sensitive shoppers from shifting to electronic companies offering goods at low prices (Charles Schwab, E*Trade and Waterhouse). Wal-Mart has also launched its Web site. Such a combined approach provides customers with the opportunity to choose – to buy goods in traditional stores or via the Internet, moreover, it is an effective means of competition against only electronic companies, especially if before purchasing the goods the buyer wants to consider it and hold it in his hands.

7. E-commerce service providers. The Internet economy has created another new industry – the provision of services to companies engaged in e-commerce. For example, optimizing inventory and delivery management is one of the most serious problems of electronic retailers; Today, many companies specialize in providing e-commerce merchants with warehousing and delivery services. For example, Greenfield Online, an electronic market research company, collects data on the consumer preferences of millions of Internet users around the world; With the help of its database, the company performs reviews of existing and potential consumers of various products for customers, helps to determine the best types of advertising contact with the audience, gives recommendations for improving sites. Greenfield’s competitive advantage is based on the relative cheapness of its services compared to the services of traditional competitors, which collect data through telephone and postal surveys. Focused strategies are applied, servicing market niches, achieving a competitive advantage due to leadership in technology, higher quality or unique consumer properties of goods, speed and ease of use, the optimal combination of price and quality. In e-business, it is very important to be the first to bring an innovative product or service to the market in order to gain a strong competitive position and leadership in the selected segment.

8. Media companies content providers. Media companies use intellectual capital to create texts, videos, games and music. Some companies, such as the publisher of the Wall Street Journal, provide access to their electronic publications on a subscription basis, others charge a fee for each visit to the site, which ensures a constant flow of profits. The production of digital content is relatively inexpensive, so you can work at a profit even with a modest volume of sales. Since most users fundamentally do not want to pay for information on the Internet, the main customers of electronic media companies have become the so-called content providers. Content providers, such as Yahoo, are mainly engaged in the collection of information and the support of portals. Their business model is to create an information product that can attract users, and sell advertising space to companies that want to enter into advertising contact with content users (the standard business model of newspapers and television). The greater the number of viewers, readers, users (in other words, the wider the audience), the better the advertising space is sold and the more expensive it is. In addition, content providers are constantly expanding the range of goods and services, thereby hoping to stimulate the growth of sales and, accordingly, profits – due to the commissions charged. In the business of information electronic companies, two factors play a decisive role – the creation of a community of users and the supply of information in a convenient and attractive way. Wanting to attract new visitors, the Web portals Yaho!, Excite and Alta Vista provide not only search engine services, but also news, weather and securities rates, e-mail services, electronic calendars and notebooks, chat rooms, personalized Web pages and online shopping opportunities [15 pp.212-213].