E-Commerce Business Plans / Business Models

MELJUN CORTES

Business Plan

• A document that describes how a firm will make a profit selling its products or services

• A selling document that should convey the excitement and promise to potential investors

Reasons to Write One

• Convincing yourself• To obtain capital• Mergers, Acquisitions, and

Strategic Alliances• Attract key executive personnel• Help maintain focus

How to go about it?

• Start asking the right questions• Provide piecemeal answers

• Don’t try to get it all right – right away! It’s not going to happen

How long?

• Summary Business Plans – About 10 pages – An extended executive summary– Appropriate for a start-up– Seeking seed capital– To gauge investor interest– Well known founders

Healtheon Business Plan

Doctors

Payers

Providers

Consumers

Healtheon

How long?

• Full Business Plan– About 10-40 pages long– Significant or later stage financing – Strategic partnerships

What should it contain?

• Cover Page• Table of Contents• Executive Summary• Company• Market Opportunity• Product/Service• Sales and Promotion• Financials• Appendix

Cover Page

• Company’s Name • Address• Main Contact (CEO or President)

– Name– Phone Number– E-Mail

• Confidentiality Statement

Executive Summary

• Should give the reader a clear understanding of what you are up to

• Miniature version of the complete plan

• Keep it short (2 to 3 pages max)• Attempt a draft before you write

the rest of the plan – it will expose weaknesses

Company

• Mission and Strategy– Past, Present, and Future

• People and Management– directly relevant experience to the

opportunity being pursued– Skills and abilities, motivations and

commitment

Market

• Who are the buyers? Examples?• Quantify the benefits• Other measures – convenience,

etc.• Pain-killer or vitamin?• Growing or shrinking market?• Objective analysis of competition• Pricing strategy and its rationale

Product/Service

• Key product/service features and a cost versus benefits justification

• Delivery issues• After-sales issues

Sales and Promotion

• Choice of sales channels – analyze based on cost, relationships with channel partners, and competitive pressure

• Motivating the salespeople• Product/service promotion

Financials

• Income Statement• Balance Sheet• Cash Flow Statement

• Also, include a sales forecast explaining how the sales numbers are obtained.

Cash Flow Statement

• Happiness is positive cash flow• a record of cash available at different

points in time• It shows not only how much you might

need but also when you will need• Usually monitored monthly• Cash on hand at beg. of month +

receipts – actual disbursements = Cash on hand at end of month

Income Statement

• Revenues – direct labors and materials = gross profit or loss (GP)

• GP/Revenues = Gross margins (can be compared across industry)

• GP – indirect expenses = pretax net profit or loss (PTP)

• Net income = PTP - Taxes

Balance Sheet

• A measure of business health• Lists assets and liabilities• Assets include current (cash and

accounts receivable) and fixed (furniture and computers)

• Liabilities include current (accounts payable) and long-term (investor owned equity)

Questions to ask

• How much will you need to maintain a positive cash flow?

• When will you need it?• What form (debt,equity, or both)

should it be?

Need integrated financial statements

Making good projections

• Can’t avoid forecasting errors – no forecast is correct!

• Can avoid technical errors – incomplete or misleading models!

Spreadsheets help – but cannot replace basic accounting/finance knowledge.

Relationships

Sales Forecast

Income Statement

Cash Flow Statement

Balance Sheet

E-commerce: What is it?

• Electronic commerce is a means of conducting transactions that, prior to the evolution of the Internet as a business tool in 1995, would have been completed in more traditional ways—by telephone, mail, facsimile, proprietary electronic data interchange systems, or face-to-face contact [Digital Economy II]

• the ability to buy, sell, and advertise goods and services to customers and consumers [W3C]

Example: Dell Computers

• Dell has fully integrated its value chain using Internet technologies– Daily Web-based sales > $15m in 1999– Customer orders are relayed to suppliers

via corporate extranet– Components arrive at factory JIT;

complete computer shipped out in hours– Customers can track order over Website

EC to e-business

• Electronic commerce denotes the seamless application of information and communication technology from its point of origin to its end point along the entire value chain of business processes conducted electronically and designed to enable the accomplishment of a business goal.

Terminology

• Goods vs. services– Good: physical item which is delivered– Service: an act which is performed

• Digital vs. physical items– Digital items: all transactions are done electronically– Physical items: involve logistical activities such as

transportation

• Degree of commoditization of products– Standard/commodity: available in large quantities,

well-identified– Custom-built or customized: designed to customer

spec.

What is a business model?

• A business model is a representation of the activities of a business

• It describes what the business is about and how it will work

• It defines the competitive position of the business by identifying its value drivers

• It defines the structure of the business - as in its relationship to its customers, suppliers, etc.

Internet Opportunities

• Companies can establish direct links to customers (and suppliers) to complete transactions more easily

• They can bypass others in the value chain

• They can develop and deliver new products and services to new customers

• They can become the dominant player in the electronic channel of a specific industry or segment.

The shifting economics of information

• Reach• Richness

– Bandwidth– Customization– Interactivity

Reach

Ric

hnes

s

Establishing the Internet Channel

• Provide (at least) the same level of service that they can get directly from a salesperson

• Personalize the interaction so that customers see only what they want

• Provide new services inexpensively (customer reviews, FAQs,..)

Features of the Internet Channel

• Could minimize or eliminate traditional sales, marketing, and service costs

• Allows increasingly higher levels of service without incremental costs

• First movers have the advantage of establishing relationships that make it hard for followers to woo them away

• Firms may be forced to participate by their competitors and customers

• It costs a lot more to get a new customer than to retain an existing customer

• It helps to understand your customer needs and preferences

• Direct interaction with customers not only reduces your costs but also helps you understand your customers

• This is easier to do for start-ups without existing value chains; a lot more difficult for established companies.

Questions to ask

• How much would it cost to provide services that customers could get themselves online?

• How can individual customer information be used to personalize service?

• What help can customers be given by using the experience of other customers and the expertise of employees?

• Will it be a significant disadvantage if competitors are first to provide these services

Pirating the Value Chain

• It is possible for a participant in the value chain to usurp the role of any other participant

• Examples: publishers could bypass distributors and sell directly to readers; Amazon could decide to publish books of its own

• Such pirates are in a position to define new business rules and introduce new business models

Questions to ask

• Can significant gains be realized by consolidating parts of the value chain?

• Can significant value be created for customers by reducing the number of entities they have to deal with in the value chain?

• What additional skills and capabilties would be required?

• First mover advantages?

Digital Value Creation

• The internet channel can also serve as a platform for innovation (new products and services without incurring traditional costs)

• Creating services for new customer segments

• Customer information can be used to up-sell and cross-sell

Questions to ask

• Can additional information or transactions services be offered to existing customers?

• Can the needs of new customer segments be addressed by repackaging current assets?

• Can new sources of revenue be generated such as advertising or sales of complementary products?

• First mover advantages?

Becoming the dominant player

• Firms can become category destinations (on-line versions of category killer stores such as Toys R Us)

• Factors that make this possible are:– physical distance is largely irrelevant– growth is not cost prohibitive as it

usually is in the physical world– services can be differentiated for

multiple customer segments

Customer Magnets

• Firms that become customer magnets could organize themselves around– a specific product or service (Amazon,

Yahoo)– a particular segment of customers(Tripod-

GenXers)– an entire industry (Auto-By-Tel, Carpoint)– a unique business model (online auctions)

Questions to ask

• Can the industry be divided into logical product, customer, or business-model segments that could evolve into customer magnets?

• What services could an industry magnet offer that would make it efficient for customers to select and purchase products or services?

• What partnerships or allainces would be needed to establish a critical mass?

• First mover advantage?