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; it leads to the formation of a global e-commerce environment.
The desire of new and traditional companies to realize the potential of the Internet generates innovative business models and fundamentally new approaches to competition and positioning in the market. Traditional companies, whose business is under threat for any reason, are trying to modify their business models and strategies with the help of electronic technologies 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:
Suppliers of communication equipment, mainly those producing equipment for Internet-communications, adhere to the traditional business model of selling manufactured equipment at prices that provide a sufficient level of profit and return on investment.
The main strategic problem of these companies is the presence of several competing technologies for the creation of infrastructure for the Internet and the global electronic economy. Naturally, companies that have invested in the development of a solution are interested in making it such a standard. Several strategies are used to achieve technological leadership:
Intensive investment in R&D to achieve competitive advantage in technology; Creation of strategic alliances with suppliers, potential consumers and companies developing related technologies; Acquisition of companies with experience and know-how in related fields; Reduction of entrepreneurial risk through development of alternative technologies.
Communication service providers build business models for selling services at fixed rates or on a time basis. As the task of Internet service providers is to provide connection to the Internet, they invest significant amounts of money in the development of communication networks and equipment. The desired level of profitability is achieved not at once, but with such an increase in load, which provides an excess of income over the level of break-even.
The main task of the companies is to introduce communication lines and attract subscribers faster than competitors. Recognizability of the brand and advertising are important elements of the strategy of Internet access providers, contributing to an increase in market share. To attract potential customers, a small company Covad from Silicon Valley, offering high-speed access to the Internet via DSL lines, in 2000 conducted an advertising campaign worth $40 million.
in the United States to break into the ranks of the market leaders in Internet access services (at the start of the campaign, Covad sales were only $20 million per year). This also led competitors to launch advertising campaigns within just a few weeks.
Manufacturers of computer equipment. Like manufacturers of equipment for Internet infrastructure, computer equipment and component manufacturers use mostly traditional business models, selling products at prices that cover costs and provide acceptable profit.
The pace of technological progress in this industry is also very high, so companies are forced to invest heavily in R&D and quickly replicate new products and technologies offered by competitors in order to remain competitive.
Success depends on the ability of firms to stay ahead of, or at least keep pace with, competitors in introducing next-generation models to the market.
E-commerce software developers create software packages for all types of commercial operations in the Internet. Their business model is to invest resources (mainly programmers’ labor) in the development and improvement of specialized programs with further promotion and sale to corporate clients (e-commerce, Internet service providers, content providers, etc.) at a price that covers costs and provides a sufficient level of profit.
As the basic expenses of the companies-developers of software fall on the period previous to creation of programs, and the most part of them is connected with noncurrent assets, profitableness of this activity directly depends on volume – if incomes from sales do not exceed level of break-even, the considerable part of profit goes on a covering of constant expenses.
To withstand the decline in revenue as the market saturation, developers upgrade programs and create new ones.
Some e-commerce software developers have modified their business model: instead of implementing programs at a fixed price for a copy, they are switching to assigning a small fee for each operation performed with the help of these programs. This pricing approach ensures a constant revenue stream for them.
The transaction fee model is particularly attractive when there are millions of similar transactions and a limited number of websites on which software is installed. Transaction fees depend on the level of competition; they increase when similar software cannot be obtained from a competitor and the software product is technically superior.
Electronic retailers. There are two main groups of e-retailers: the first group 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 to other traders interested in attracting visitors to e-commerce sites.
Other traders apply the traditional business model: buy goods from manufacturers or distributors, advertise them on their Web-site, accept orders via the Internet and perform, using the stock of goods in their warehouses. This model differs from the standard model only in the fact that the Internet is used as a point of sale, rather than traditional retailers.
There is also a group of electronic traders who maintain Websites only for advertising and consumer search. They transfer the execution of the received orders to manufacturers on a contractual basis, and the functions of packaging and shipping goods – to wholesalers and retailers of the traditional type. For example, Buy.com’s participation is limited to the content of an e-commerce store with a range of over 30,000 products.
