New economy business models

I’m getting interested in the issue of how the internet is still changing whole industries.

Do I believe that the internet creates whole new business models? No. The same laws of supply and demand, cash and profit, margin and volume, growth and sustainability, risk and reward… all still apply, particularly so in a downturn. Michael Porter’s Five Forces still apply.

Does the innovation in internet tools create a disruption to existing models by providing new ways to engage customers? Yes. Those titans at McKinsey are, as you read this, putting together a study on ‘How businesses are using Web 2.0 tools‘. Their scope looks, to me, to be too tactical a question for the reality of the situation. Better question: How is the Web 2.0 platform fundamentally changing the ways that business engages with everything? Or, more importantly, Mr CEO, you can’t ignore the web any more, you really do need a plan that revolutionises all your engagement channels (and, in many media company cases, your products too). We’re not just tinkering with tools here!

The internet (and accessible digital technology generally), therefore, is transforming the means to manage your business model – re-orientating the value chain, supply chain, interaction patterns, demand dynamics, pricing transparency and competitive environment. Yes. Porter’s Five Forces get re-organised with the disruption.

Is this evolution that will cannibalise existing platforms or channels? Will they compliment, supplement or undermine? Yes and no – they’ll add cost base, distractions and innovation opportunities. 

Look at the music industry. Turmoil as the digital platform eradicates the value of the medium – tape, CD, record. The whole basis for the economics got wiped out. And, everyone’s saying ‘what next?’ and ‘back to live – but this isn’t enough’. (Andrew Smith, who knows about these things says, actually, it’s down to Last.fm… we’ll subscribe to a year’s worth of new musical exposure… well, CBS music exposure, given they bought Last.fm. Sounds like the BBC model to me).

More later.

 

To save you the Porter click-through, I’ve pasted the Wikipedia run-down:

The threat of substitute products
The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).

  • buyer propensity to substitute
  • relative price performance of substitutes
  • buyer switching costs
  • perceived level of product differentiation

The threat of the entry of new competitors
Profitable markets that yield high returns will draw firms. The results is many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).

The intensity of competitive rivalry
For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.

  • number of competitors
  • rate of industry growth
  • intermittent industry overcapacity
  • exit barriers
  • diversity of competitors
  • informational complexity and asymmetry
  • fixed cost allocation per value added
  • level of advertising expense
  • Economies of scale
  • Sustainable competitive advantage through improvisation

The bargaining power of customers
Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer’s sensitivity to price changes.

  • buyer concentration to firm concentration ratio
  • bargaining leverage, particularly in industries with high fixed costs
  • buyer volume
  • buyer switching costs relative to firm switching costs
  • buyer information availability
  • ability to backward integrate
  • availability of existing substitute products
  • buyer price sensitivity
  • differential advantage (uniqueness) of industry products
  • RFM Analysis

The bargaining power of suppliers
Also described as market of inputs. Suppliers of raw materials, components, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

  • supplier switching costs relative to firm switching costs
  • degree of differentiation of inputs
  • presence of substitute inputs
  • supplier concentration to firm concentration ratio
  • threat of forward integration by suppliers relative to the threat of backward integration by firms
  • cost of inputs relative to selling price of the product

This 5 forces analysis is just one part of the complete Porter strategic models. The other elements are the value chain and the generic strategies.

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3 Responses to “New economy business models”


  1. 1 free market research July 13, 2008 at 10:55 pm

    porter has wrote the bible and its now up too us to take this forward!

  2. 2 Andrew Bruce Smith July 11, 2008 at 1:43 pm

    Have a look at my piece for One magazine from last October on LastFM:

    http://www.iamone.co.uk/2007/10/01/saving-the-last-dance/

  3. 3 Alan S Michaels July 11, 2008 at 3:23 am

    Thanks Charlie.

    We agree. We’ve used the Porter Five Forces model to analyze the top 10,000 global industries; and the model works just as well for Web 2.0 industries as it does for other Internet industries and for traditional industries.

    So for those who have read Porter’s “Competitive Advantage” and “Competitive Strategy” classics – party on!

    Cheers,
    Alan S. Michaels
    co-founder http://www.eCompetitors.com


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