eStrategy: Thinking About eBusiness Models (Part IV)

This series discusses four eBusiness models. This article discusses the Knowledge based eBusiness model.

This series of articles discusses different types of eBusiness models. To recap, the first article laid out four eBusiness models:

  1. Information
  2. Transaction
  3. Knowledge
  4. Community

Part II described the Information based eBusiness model. Part III described the Transaction based eBusiness model. This article describes the Knowledge based eBusiness models in detail.

eBusiness Model: Knowledge

Organizations make money – in a sustainable and consistent manner - based upon their business models. At the heart of a business model is the ability of the organization to do something that no-one else can do. Often called “core competency” this unique ability is what provides the basis for differentiation i.e. why you got that customer and your competitor did not; why you are still in business and someone else is not.

To be sure, core competency is not the only reason why one business model works and another doesn’t. Market and timing are equally important factors. But usually it is core competency that drives business success. To beat a dead horse, one can argue that the ability to identify markets and timing is also a core-competency. No arguments from me for the purpose of this article!

Core competency then manifests itself in the organizations’ business capability – strategy, processes, technology and people. One can also argue that core competency is derived from business capability but then again we are in the chicken and egg realm and that discussion will do little to help understand the knowledge based eBusiness model any better.

Perhaps the best example of core competency is the Coke formula. Without this formula Coke is nothing. We are not diminishing their marketing ability in selling essentially water at an exorbitant markup without the formula the water doesn’t have the flavor customers want…to pay for!

The issue for other organizations is: can our core competency be similarly “bottled”?

For if you had your “formula” in a “packet” then you just need machines and lower skilled people to add water to it. This is the best strategy to maximize margins.

Microsoft’s bottled formula – Windows and Officer etc. – sells for hundreds of dollars and costs a marginal rate of cents per copy to cut a CD!

Dell’s business model is based on its expertise, i.e. core competency, in “made to order” and “direct to customer” capability. (They are changing this business model as we speak but the jury is still out of that adventure). This requires an integrated product development and supply chain process. This process is implemented using systems and people. The essence of Dell’s core competency is “bottled” in its IPD and Supply Chain systems.

Similarly, UPS’s core competency in logistics is bottled in its system and operations.

The next question is: How do we deliver this “bottle” to the customer?

Coke uses pallets and trucks to get their bottles to the retail outlets. But they also have soda fountains that dispense coke. Which is more profitable for Coke? You guessed it, the fountains! Because fountains substantially reduce the cost of bottles, transportation and bottling.

Dell sells directly through its telephone based sales team. But this method uses costly people – salary and commission; not to mention the tender love and care humans need to perform at optimal capacity - to man the phones and still requires UPS to get the computer to the customer. Is there away to eliminate – or substantially reduce – the cost of distribution?

Well the two things that jump at you are:

  1. Reduce and or eliminate the number of people manning the sales desk
  2. Eliminate UPS i.e. find a way to pipeline computers to the customer

At this time the latter is impossible but the former shows real promise. In any event, between the two, sales people cost more so eliminating them is excellent for profitability.

That is where the internet comes in. Dell has provided its formula – product configuration – over the web to its customers who bottle – configure - their own drinks i.e. computers. Please remember that product configuration is worthless in the absence of an integrated product development and supply chain process.

Product configuration is the front end of this chain and has been around for decades. For example, IBM’s sales force has used it for decades but as you can see this is the difference between bottling at a plant and having a fountain. Internet sales are Dell’s fountain.

Coincidentally, this is also what a “Knowledge” based eBusiness model is!

What is “knowledge” based eBusiness model

A knowledge based eBusiness model provides an interface to the organizations core competency. Customers can use it to buy products or get service – you can implement a knowledge engine for customer service. Employees can also have their own web based interfaces. For example, customer sales staff can have an Available To Promise (ATP) system to provide accurate delivery dates to customers. Customer support staff can have their interface to tell customers where the package is at any given time.

Knowledge based eBusiness models are a form of Transaction based eBusiness models. They are more evolved/enhanced. The difference between the two can be summed up in the difference between a “shopping cart” and a “product configurator.”

Why “knowledge” based eBusiness model?

So the reasons to implement a Knowledge based eBusiness model are:

  1. Competitive differentiation not seen in any transaction based model because the latter can be easily duplicated. Website transactional functions and features are therefore useless when it comes to competitive advantage. Those that provide an interface to a knowledge based system are extremely powerful in creating an insurmountable competitive differentiator.
  2. Revenues: Customer enablement enhances customer satisfaction that directly impacts revenue generation
  3. Cost: passing on the labor to the customer also dramatically reduces costs. Much more than “ordinary” transactions because of the complexity of the knowledge based transactions

What are the key decisions?

Knowledge based eBusiness model is important for some organizations. However, there are three decisions that need to be made:

  1. Should we invest in this model? Knowledge based models are not cheap and one should go down this path after very careful evaluation. Please remember that there is only one Dell and they stand unchallenged even by competitors such as HP and IBM.
  2. How deep should we go with this model? In other words, what are the various types of transactions our website should provide? Note: not everybody can nor everybody should provide online product configuration. Not everybody can nor everybody should provide rules based customer service online.
  3. Should we have only this model? In other words, should we have other channels active for the same transactions at the same time?
  4. How can we make the customer experience seamless? Will our customers see and feel the same things the same way if they saw, called or clicked?

In a sense, you are not in eBusiness till you have implemented a knowledge based eBusiness model but it is still not an imperative for most organizations. Think before you jump into this model.

Examples:

1) Dell and its online product configuration

2) Progressive.com’s quotation and comparison engine. Insurance.com and other quote sites are also pretty close.

3) http://www.amazon.com/ and http://www.netflix.com/ with their product recommendations engine.

That brings us to the golden question: should WalMart that is selling Dell computers now have online desktop configuration or should they stick to their information based model?

Next, we will look at the Community based eBusiness Model

About the Author

Sourabh Hajela is a management consultant and trainer with over 20 years of experience creating shareholder value for his Fortune 50 clients. His consulting practice is focused on IT strategy, alignment and ROI. For more information, please visit www.StartSmartS.com. Or feel free to contact Sourabh at Sourabh.Hajela@StartSmartS.com


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Posted on 05/20/2009 by


eStrategy: Thinking About eBusiness Models (Part IV) author sourabhhajela

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