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E-Business Strategies and Internet Business Models:

How the Internet Adds Value

G.T. LUMPKIN GREGORY G. DESS

T he Internet continues to grow and evolveas a vital resource with which companies can upgrade their capabilities and grow their businesses. Shop.org and Forrester Research predict that, at its present growth rate, on-line retail sales in the United States will top the $100 billion mark in 2004 which represents 4.5 percent of total retail sales. Business-to-busi- ness (B2B) e-commerce is expected to grow worldwide to $4.3 trillion by 2005 according to International Data Corp (IDC). The phenom- enal success of young companies such as eBay, Google, and Amazon are also indicative of the Internet’s potential.

The impact of the information technology revolution, however, goes beyond the Inter- net. At a more basic level, it is the shift from analog to digital technologies that is respon- sible for so many new information technology (IT) capabilities. Analog was once the primary technology for conveying information such as music recordings, voice communications, and television signals. Many technologies have made the switch from analog to digital— phones, photographs, television signals, and even books—and the trend suggests digitiza- tion is here to stay. As a result, digital tech- nology capabilities which, in essence, make the Internet possible, are altering the way business is conducted. According to digital economy visionary Don Tapscott:

The Net is much more than just another technology development;

the Net represents something quali- tatively new—an unprecedented, powerful, universal communica- tions medium. Far surpassing radio and television, this medium is digi- tal, infinitely richer, and interactive . . . Mobile computing devices, broadband access, wireless net- works, and computing power embedded in everything from refrig- erators to automobiles are conver- ging into a global network that will enable people to use the Net just about anywhere and anytime.

These technology-driven initiatives—the Internet, wireless communications, and other digital technologies—are having a significant impact on the economy. They have done so by changing the ways businesses interact with each other and with consumers. This has not only created an environment in which busi- nesses must perform at a higher level—faster, cheaper, smarter—but also it has created many new business opportunities.

Even so, many firms are still struggling with the basic issue of how to use the Internet and digital technologies for their best advan- tage. Despite the visible and noteworthy suc- cesses such as eBay and Google, other Internet companies continue to struggle including ‘‘here-to-stay’’ giants such as Time Warner. The weak economy is partially to blame for faltering Internet businesses. However, a

Organizational Dynamics, Vol. 33, No. 2, pp. 161–173, 2004 ISSN 0090-2616/$ – see frontmatter � 2004 Elsevier Inc. All rights reserved. doi:10.1016/j.orgdyn.2004.01.004 www.organizational-dynamics.com

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more fundamental reason is that companies are still not clear how the Internet adds value.

In this article we look at how companies are leveraging the unique features of digital technology to create competitive advantages. Two aspects of this approach stand out. First, there are several strategies that Internet- based businesses can use to improve their value propositions. These include four Inter- net-specific activities that are providing firms with new capabilities—search, evaluation, problem-solving and transaction. These value-adding activities are enhanced further by managing three different types of Internet content—customer feedback, expertise, and entertainment programming. Second, these value-adding strategies are best understood in the context of business models that are specific to the Internet environment. Thus, we will consider seven Internet business models that have emerged and proven suc- cessful, and outline how value-adding activ- ities and content are best used in the context of each of the Internet business models.

I N T E R N E T A C T I V I T I E S T H A T A D D V A L U E

In his article, ‘‘Strategy and the Internet,’’ Michael Porter has emphasized that Internet technology becomes strategically significant only when its practical application creates new value. How are firms using the Internet to add value? By allowing companies to

conduct business on-line and use digital technologies to streamline operations, the Internet is helping them develop new value propositions. Fig. 1 illustrates four related value-adding activities that are being revo- lutionized by the Internet—search, evalua- tion, problem-solving, and transaction. In this section, we address how companies can use these capabilities to add value and create competitive advantages.

S e a r c h A c t i v i t i e s

Search refers to the process of gathering information and identifying purchase options. The Internet has enhanced both the speed of information gathering and the breadth of information that can be accessed. This enhanced search capability is one of the key reasons the Internet has lowered switch- ing cost—by decreasing the cost of search. These efficiency gains have greatly benefited buyers. Suppliers also have benefited. Small suppliers that had difficulty getting noticed can more easily be found. Large suppliers can publish thousands of pages of informa- tion for a fraction of the cost that hard-copy catalogs once required. Additionally, on-line search engines have accelerated the search process to incredible speeds.

Consider the example of Google, a search engine developed as a project by two graduate students, which became the number-one search service in just four years. Why? Because it is capable of incredible

FIGURE 1 INTERNET ACTIVITIES THAT ADD VALUE

Evaluation

Problem-Solving

Search Transaction

Service-Related

Product-Related

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things: Using 10,000 networked computers, it searches 3 billion Web pages in an average of 500 milliseconds. To do the same search manually, by thumbing through 3 billion pages at the rate of 1 minute per page, would take 5,707 years. This ability has made Goo- gle an essential tool for many businesses. As a result, Google has built a powerful adver- tising business. Mark Kini, who runs a small limousine service in Boston, spends 80 per- cent of his advertising budget on Google and other search engines. ‘‘It’s how we survive the recession,’’ says Kini.

Thus, enhanced Internet search capabil- ities make it possible for firms to find critical information much more rapidly and have greatly increased the possibility that one firm can be located by another firm or by custo- mers wishing to conduct business with it.

E v a l u a t i o n A c t i v i t i e s

Evaluation refers to the process of consider- ing alternatives and comparing the costs and benefits of various options. On-line services that facilitate comparative shopping, provide product reviews, and catalogue customer evaluations of performance have made the Internet a valuable resource. For example, bizrate.com offers extensive product ratings that can help evaluate products. Sites such as CNET that provide comparative pricing have helped lower prices even for quality pro- ducts that have traditionally maintained pre- mium prices. Opinion-based sites such as epinions.com and planetfeedback.com pro- vide reports of consumer experiences with various vendors.

Enhanced evaluation is a capability that adds value to the process of selling products or manufactured goods. Many Internet busi- nesses, according to digital business experts Ming Zeng and Werner Reinartz, could improve their performance by making a stronger effort to help buyers evaluate pur- chases. Even so, only certain types of products can be evaluated on-line. Products such as CDs that appeal primarily to the sense of sound sell well on the Internet. But products that appeal to multiple senses are harder to evaluate on-line. This explains why products such as furniture and fashion have never been strong on-line sellers. It’s one thing to look at a leather sofa, but to be able to sit in it and touch and smell the leather on-line is impossible.

P r o b l e m - S o l v i n g A c t i v i t i e s

Problem-solving refers to the process of iden- tifying problems or needs and generating ideas and action plans to address those needs. Whereas evaluation is primarily product- related, problem-solving is typically used in the context of services. Customers usually have unique problems; such problems, there- fore, are typically handled one at a time. For example, on-line travel services such as Tra- velocity help customers select from many options to form a unique travel package. Furthermore, problem-solving often involves providing answers immediately (compared to the creation of a new product). Firms in indus- tries such as medicine, law, and engineering are using the Internet and digital technologies to deliver many new solutions. Some of these are quite remarkable. Exhibit 1 describes how

Exhibit 1

Eli Lilly: Virtually Seeking Solutions—Worldwide In 2001, pharmaceutical giant Eli Lilly was anticipating a big drop in sales. That was the year the patent

expired on its blockbuster drug Prozac, which accounted for 34 percent of Lilly’s annual sales. But rather than launch a new drug, Lilly launched an Internet business—InnoCentive, LLC.

InnoCentive, as the name implies, provides incentives for innovation. It does so by providing a platform for scientists from around the world to work in virtual communities to solve complex problems. The effort does not just benefit Lilly, but provides a virtual, open source research and development (R&D) organization that any member company can use.

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Eli Lilly & Company has used the Internet to form a virtual platform where top scientists help drug companies solve complex pro- blems.

Many products involve both a service and a product component; therefore, both problem solving and evaluation may be needed. Dell Computer’s Web site is an example of a site that has combined the benefits of both. By creating a Web site that allow for customization of individual com- puters, they address the unique concerns of customers ‘‘one computer at a time.’’ But the site also features a strong evaluative compo- nent because it allows users to compare the costs and features of various options. Shop- pers can even compare their customized selection to refurbished Dell computers that are available at a substantially lower cost.

T r a n s a c t i o n A c t i v i t i e s

Transaction refers to the process of complet- ing the sale, including negotiating and agree- ing contractually, making payments, and taking delivery. Numerous types of Inter- net-enabled activities have contributed to lowering this aspect of overall transaction costs. Managing costs, and even changing

the cost structures of certain industries, is a key feature of the digital economy. Applica- tions of Internet-based technologies have already had an enormous impact. Giga Infor- mation Group, Inc. estimates that the cost savings from business use of e-commerce will reach $1.25 trillion by the mid-2000s.

There are numerous examples of how the Internet is both lowering the cost of and speeding up the transaction process. Auc- tions of various sorts, from raw materials used in manufacturing to collectibles sold on eBay, facilitate the process of arriving at mutually agreed-on prices. Services such as Paypal provide a third-party intermediary that facilitates transactions between parties who have never met. Amazon’s One-Click technology, which allows for very rapid pur- chases, and Amazon’s overall superiority in managing order fulfillment has made its transactions process rapid and reliable. In fact, Amazon’s success today can be attrib- uted to a large extent to the fact they have sold this transaction capability to other com- panies such as Target Corp., Toys ‘‘R’’ Us Inc., and Borders Books & Music.

These four factors are primary ways that organizations go about adding value. Exhibit 2 describes several examples of how

Exhibit 2

Value Adding in the Auto Industry The auto industry jumped on the Internet bandwagon in a big way. One of the early successes was

Autobytel, and many on-line auto sales Web sites quickly followed. The majority of them have now fizzled away. The big auto makers also made huge investments in the Internet. Ford was especially aggressive and

Here’s how it works: Drug companies, called ‘‘Seekers,’’ put up ‘‘Wanted’’ posters describing problems that need addressing. Bounty-hunting scientists, labeled ‘‘Solvers,’’ sign confidentiality agreements that gain them admission to a secure project room where they can access data and product specifications related to the problem. If they solve the problem, they get a reward—around $25,000–$30,000 depending on the problem.

According to InnoCentive president and chief executive officer (CEO) Darren J. Carroll, what Lilly has done is unusual for two reasons. First, by creating a global community of scientists, ‘‘We’re punching a hole in the side of the laboratory and exposing mission-critical problems to the outside world,’’ says Carroll, ‘‘It’s using the Net to communicate, collaborate, and innovate.’’ Second, it makes it possible for scientists to essentially become freelancers. According to Carroll, ‘‘Free agency has never been an option in the hard sciences—until now.’’

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the automobile industry and car buyers have used each of these four activities to benefit their own value-adding efforts.

C o n t e n t a s a S o u r c e o f C o m p e t i t i v e A d v a n t a g e

There are other factors that can be important sources of competitive advantage. One of the most important of these is content. The Inter- net makes it possible to capture vast amounts of content at a very low cost. REI.com, for example, a provider of recreational equip- ment and apparel, has over 78,000 items described on its 45,000-page Web site. But firms have not always managed content in ways that add value. Garden.com, a site that started strongly in 1999 and raised enormous venture capital, spent millions on creating

detailed and attractive content. But the expense did not generate sales. Content only adds value if it contributes to the overall value proposition. As a result Garden.com failed in early 2001 (but the name is still being used by the Burpee company, a 125-year-old supplier of garden products who bought rights to the name).

Three types of content can improve the value proposition of a Web site—customer feedback, expertise, and entertainment pro- gramming:

� Customer feedback: Buyers often trust what other buyers say more than a com- pany’s promises. One type of content that can enhance a Web site is customer testimo- nials. Remember the leather sofa in the exam- ple above? Even though individuals can’t feel and smell a sofa on-line, the unbiased

launched several Web sites—Trilogy.com, CarOrder.com, FordDirect.com—most of which never amounted to anything. But that was in the late 1990s, when it was still unclear how best to use the Internet. Now the automakers—and the auto-buying public—have found ways to use the Internet profitably. Here are a few examples:

Search Ebay, the on-line auction giant that makes searching for products of all sorts fast and simple, has become a player in the used car business. Beginning with a few private individuals, the auto auction business took off unexpectedly, so the company formed eBay Motors, which contributed about $100 million to eBay’s total revenue of $1.2 billion in 2002. eBay’s technology speeds the process of on-line search, and buyers who may have been reluctant to shop for cars on-line are comforted by eBay’s reputation. eBay and other on-line auto-sales sites make searching for insurance and auto financing easier as well.

Problem Solving To help its dealers manage inventories more effectively, General Motors Corp. developed SmartAuction. For vehicles that are coming off lease, SmartAuction notifies customers to bring in cars for an inspection before the lease expires. The condition of the car is logged into the system and sent to GM dealers who use it to purchase cars electronically. The system helps dealers find cars that fit their target audience, manages the auto-titling process, and shortens the time cars are carried in inventory.

Evaluation In the early days of the Internet, most thought that cars would never sell on-line because customers like to kick the tires and take a test drive. This is often still true. But customers who go for a test drive, and have also already researched the car on-line, usually save money when they buy. Economists researching this phenomenon have labeled it the ‘‘information effect’’—auto shoppers who first gather information on-line are better able to evaluate their purchase.

Transaction Auto referral services such as CarsDirect have streamlined the transaction process by brokering purchases between dealers and consumers. Through these companies, both new and used cars can be purchased on-line, sight unseen. One shopper, who bought a used car on-line, flew to Fort Worth, Texas to pick it up, and drove it 18 hours back home to Ohio said, ‘‘in retrospect, I had more information about this vehicle than if I had gone onto a dealer’s lot and started haggling over price.’’ On-line auto shoppers typically save money due to the ‘‘contract effect’’ which occurs because third-party auto referral services monitor the quality of the information provided by dealers and facilitate the transaction.

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testimonials of other buyers can build con- fidence and add to the chances that the pur- chaser will buy on-line ‘‘sight unseen.’’ This is one way that content can be a source of competitive advantage. Being able to interact with like-minded customers with shared interests by reading their experiences or hearing how they have responded to a new product builds a sense of belonging that is otherwise hard to create.

� Expertise: The Internet has emerged as a tremendously important learning tool. Fifty- one percent of users compare the Internet to a library. The prime reason many users go to the Web is to gain expertise. Web sites that pro- vide new knowledge or unbiased information are highly valuable. Additionally, the pro- blem-solving function often involves educat- ing consumers regarding options and implications of various choices. For example, LendingTree.com, the on-line loan company, provides a Help Center that includes ex- tensive information and resources about obtaining loans, maintaining good credit,

and so forth. Further, the expertise function is not limited to consumer sites. In the case of B2B businesses, Web sites that facilitate

sharing expert knowledge help build commu- nity in industry or professional groups.

� Entertainment programming: The Inter- net is being used by more and more people as an entertainment medium. With technol- ogies such as streaming media, which allows the Internet to send television-like images and sound, computers can provide everything from breaking news to video games to on-line movies. In fact, a study by the Pew Internet & American Life Project indicates that among people using high- speed broadband service, TV viewing is down, and on-line activity has increased. One reason is because the technology is interactive which means that viewers don’t just passively watch but use the Web to create art or play on-line games. Businesses have noticed this trend, of course, and are creating Web content that is not just infor- mative but entertaining. Exhibit 3 tells how on-line game developer Skyworks Technol- ogies is using games to increase product sales.

These three types of content—customer feedback, expertise and entertainment programming—are potential sources of

Exhibit 3

‘‘Advergaming’’: Making Advertisements Interactive and Fun Video games were popular well before the Web came along. But new digital technologies have made it

possible to feature some of the best games on-line. Combine this with advertisers’ need to use the Net’s interactivity to make on-line ads more interesting and what do you get: Advergaming—on-line games that weave advertisements into the experience. Here are some examples:

� A game designed for Pepsi involves an auto race in which the goal is to recover a stolen shipment of Mountain Dew Code Red. The top 100 gamers received a free case of the soft drink.

� Some games make you buy something to play. To play the Pebbles Big Barney Chase game, players must answer a question; to learn the answer, you have to purchase a box of Post Cereal.

� Candystand.com, a Web site developed by Skyworks to promote Life Savers for Kraft Foods, features dozens of card, racing, and arcade games and ranks as the sixth most popular gaming destination on the Web.

According to Skyworks Technologies founder Garry Kitchen, advergaming can leave a deeper and more positive impression than television commercials. The idea is catching on—in a recent year, Skyworks made $4.3 million in revenues. Industry analyst Kent Allen of the Aberdeen Group expects the trend to continue, especially among consumer packaged-goods marketers. ‘‘The consumer guys are starting to understand advergaming,’’ says Allen. ‘‘They’re realizing it’s a great way to connect with people.’’

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competitive advantage. That is, they create advantages by making the value-creation process even stronger. Or, if they are handled poorly, they diminish perfor- mance. Quality content that is strategically deployed provides companies with a way to effectively differentiate their product or ser- vice offerings. This can be especially impor- tant in an on-line environment where the opportunities to differentiate may be con- strained compared with the opportunities to compete on the basis of low costs.

Next, we turn to the topic of Internet business models. How the Internet creates value depends to a great extent on how a value proposition is enacted. Business mod- els provide a guide to the effectiveness of the value-adding process.

I N T E R N E T B U S I N E S S M O D E L S

The Internet provides a unique platform or staging area for business activity which has become, in some ways, like a new market- place. How do firms conduct business in this new arena? One way of addressing this ques- tion is by describing various Internet busi- ness models. A business model is a method and a set of assumptions that explains how a business creates value and earns profits in a competitive environment. Some of these models are quite simple and traditional even when applied in an Internet context. Others have features that are unique to the digitally networked, on-line environment. In this sec- tion, we discuss seven Internet business models that account for the vast majority of business conducted on-line.

� Commission-based models are used by businesses that provide services for a fee. The business is usually a third-party intermedi- ary and the commission charged is often based on the size of the transaction. There are many different types of commission- based businesses. The most common type is a brokerage service such as a stockbroker (e.g., ameritrade.com) or real estate broker (e.g., remax.com). This category also includes auction companies such as eBay. In exchange

for putting buyers and sellers together, eBay earns a commission. Reverse auctions run by companies such as FreeMarket.com have also gained importance by generating sub- stantial savings in procurement costs for business-to-business users.

� Advertising-based models are used by companies that provide content and/or ser- vices to visitors and sell advertising to busi- nesses that want to reach those visitors. It is similar to the broadcast television model in which viewers watch shows produced with advertising dollars. A key difference is that on-line visitors can interact with both the ads and the content. Large portals such as yahoo.- com are in this category as well as specialty portals such as iNest.com, a portal that pro- vides services for buyers of newly constructed homes. ePinions.com, a recommender system, is just one example of the many types of content that are often available.

� Markup-based models are used by busi- nesses that add value in marketing and sales (rather than production) by acquiring pro- ducts, marking up the price, and reselling them at a profit. Also known as the merchant model, it applies to both wholesalers and retailers. Amazon.com is the most well- known example in this category. It also includes bricks and mortar companies such as Wal-Mart Stores, which has a very suc- cessful on-line operation, and vendors whose products are purely digital, such as fonts.- com, which sells downloadable fonts and photographs.

� Production-based models are used by companies that add value in the production process by converting raw materials into value-added products. Thus, it is also referred to as the manufacturing model. The Internet adds value to this model in two key ways: first, it lowers marketing costs by enabling direct contact with end users. Second, such direct contact facilitates custo- mization and problem-solving. Dell’s on-line ordering system is supported by a state-of- the-art customized manufacturing process. Travelocity uses its rich database of travel options and customer profiles to identify, produce, and deliver unique solutions.

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� Referral-based models are used by firms that steer customers to another com- pany for a fee. One type is the affiliate model in which a vendor pays an affiliate a fee each time a visitor clicks through the affiliate’s Web site and makes a purchase from the vendor. Many name brand companies use affiliate programs. For example, Wedding- Channel.com, which provides a bridal reg- istry where wedding guests can buy gifts from companies such as Tiffany’s, Macy’s or Crate & Barrel, receives a fee each time a sale is made through its Web site. Another referral-based example is Yesmail.com, which generates leads using e-mail market- ing.

� Subscription-based models are used by businesses that charge a flat fee for providing either a service or proprietary content. Inter- net service providers are one example of this model. Companies such as America On-line and Earthlink supply Internet connections for fees that are charged whether buyers use the service or not. Subscription-based models are also used by content creators such as The Economist or New York Times. Although these recognizable brands often provide free content, only a small portion is available free. The Economist, for example, advertises that 70 percent of its content is available only to subscribers.

� Fee-for-service-based models are used by companies that provide ongoing services similar to a utility company. Unlike the com- mission-based model, the fee-for-service model involves a pay-as-you-go system. That is, activities are metered, and companies pay only for the amount of service used. Applica- tion service providers fall in this category. For example, eProject.com provides virtual work space where people in different physi- cal locations can collaborate on-line. Users essentially rent Internet space, and a host of tools that make it easy to interact, for a fee based on their usage.

It is important to keep in mind that many companies combine these models to achieve competitive advantages. For example, a com- pany such as LendingTree not only sells advertising but also earns a commission as

a third-party intermediary and earns fees by referring viewers to other sites through its affiliate programs. As noted earlier, Ama- zon.com not only earns revenues by reselling marked-up merchandise but also has gener- ated income by charging fees for providing expertise based on its transaction capabil- ities. Major manufacturers such as Ford Motor Co. and Dell Computer not only use their sites to manage procurement with sup- pliers, but also to advertise their services and provide consumers with information that is used to order customized products.

Table 1 summarizes the key feature of each Internet business model, suggests what role content may play in the model, and addresses how the four value-adding activ- ities—search, evaluation, problem-solving, and transaction—can become sources of competitive advantage.

Clearly, Table 1 provides a framework for exploring means by which a company can enhance its sources of competitive advan- tage. By using Internet-specific value-adding activities in the context of viable business models, many new avenues for using the Internet to add value may come to light. Firms seeking to add value by using Internet capabilities might ask:

� How has the Internet affected our value-adding processes? Is there some aspect of our value chain that needs to be reevaluated or realigned? Are we relatively strong in our use of the Internet, or has it exposed new weak- nesses that are making us vulnerable?

� How might our firm make better use of search, problem-solving, evalua- tion, or transaction capabilities to improve its value proposition or save costs internally?

� How can we enhance the content of our Web site with testimonials, exper- tise, or entertainment programming in order to strengthen the usefulness of the Internet?

� Has the digital economy created new opportunities that our firm can seize by deploying its unique competencies and capabilities? Conversely, do we

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face new threats because of the adop- tion of Internet technologies by our competitors?

� In addition to what we are now doing with our Web site, how might we utilize other business models and/or combine complementary activities to add greater value?

Questions such as these can help man- agers evaluate new avenues for adding value from using digital and Internet technologies. Additionally, there are a number of illustra- tive examples of firms that have used these value-adding techniques in unique ways.

An interesting example is the fast-grow- ing company salesforce.com, a provider of sales management services. Many companies have jumped into the sales management

field, referred to more broadly as customer relationship management (CRM). But sales- force.com has taken a slightly different approach. Instead of installing software on each user’s PC, salesforce.com rents out its service for $65 to $125 per user. Users access the software by going on-line; accounts are managed and maintained on the Internet. According to Marc Benioff, CEO of salesfor- ce.com, ‘‘We’re a utility . . . We’re like elec- tricity. You only pay us if you use us.’’ Thus, salesforce.com has utilized a fee-for-service business model to create a business system that is seriously challenging Oracle and Sie- bel Systems, its close competitors. With other enterprise software, there is typically a large upfront expense and additional training and consulting is required to get it working. This

TABLE 1 INTERNET BUSINESS MODELS

TYPE FEATURES AND CONTENT SOURCES OF COMPETITIVE

ADVANTAGE

Commission-based Commissions charged for brokerage or intermediary services. Adds value by providing expertise and/or access to a wide network of alternatives.

Search Evaluation Problem-solving Transaction

Advertising-based Web content paid for by advertisers. Adds value by providing free or low cost content—including customer feedback, expertise, and entertainment programming—to audiences that range from very broad (general content) to highly targeted (specialized content).

Search Evaluation

Markup-based Reselling marked-up merchandise. Adds value through selection, distribution efficiencies, and by leveraging brand image and reputation. May use entertainment programming to enhance sales.

Search Transaction

Production-based Selling manufactured goods and custom services. Adds value by increasing production efficiencies, capturing customer preferences, and improving customer service.

Search Problem-solving

Referral-based Fees charged for referring customers. Adds value by enhancing a company’s product or service offering, tracking referrals electronically, and generating demographic data. Expertise and customer feedback are often included with referral information.

Search Problem-solving Transaction

Subscription-based Fees charged for unlimited use of service or content. Adds value by leveraging strong brand name, providing high quality information to specialized markets or access to essential services. May consist entirely of entertainment programming.

Evaluation Problem-solving

Fee-for-service-based Fees charged for metered services. Adds value by providing service efficiencies, expertise, and practical outsourcing solutions.

Problem-solving Transaction

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makes the salesforce.com solution especially attractive to small and young firms that are trying to hang on to their cash. The company has become successful by developing a sim- ple business model which provides a solu- tion that is both differentiated and relatively low cost to the longstanding problem of sales management. It is creative combinations such as this that are helping Internet compa- nies develop strong new value propositions.

There is a contrasting view, however, to the perception that enlightened applications of Internet technologies are creating value. At the industry level, what may be good for a few companies has been devastating for others. That is, there are whole industries that have lost value because of adopting Internet solutions.

Consider the following example: Makers of color-printed cardboard boxes such as those used to package frozen dinners and breakfast cereals have been forced, in essence, to participate in reverse auctions in order to make sales. Reverse auctions get their name from flipping the traditional ‘‘one-seller, many-buyers’’ model to create auction systems where many sellers bid for the business of one buyer. With traditional auctions, the bidding drives prices up; but with reverse auctions bidding drives prices down. In many industries, including the printed cardboard box industry, this bidding process has driven prices down to levels that were unthinkable prior to the advent of Inter- net-based auction processes. Some Internet observers claim that Internet-enabled reverse auctions not only create economies, but also allow small suppliers who would not other- wise have a chance to participate to be included in the bidding. But cardboard box companies and manufacturers of many other industrial products claim that these Internet techniques have increased the bargaining power of buyers to such a degree that their industry has been seriously compromised. The long-term impact of this intense price competition is uncertain, but to the extent that it damages whole industries, it is doubt- ful whether the net effect will be to create value across the whole economy.

Thus, the Internet is having a strong impact on many business sectors. In some, it is clearly creating opportunities to attract customers and generate new revenues. But successfully creating wealth requires that companies identify which technologies and solutions can be enacted to add value. Mon- itoring the effect of these technologies and the changes that they stimulate will become an increasingly important task for strategic managers as firms adjust to the new practices and possibilities of the Internet-enabled digi- tal economy.

C O N C L U S I O N

The Internet and digital technologies have created new opportunities for firms to create value. This paper has examined ways in which companies are using the Internet to add value. Four value-adding activities that have been enhanced by Internet capabilities were addressed—search, evaluation, prob- lem-solving, and transaction. Search activities include processes for gathering information and identifying purchase options. Evaluation activities refers to the process of considering alternatives and comparing the costs and ben- efits of various options. Problem-solving activities include identifying problems or needs and generating ideas and action plans to address those needs. Transaction activities involve the process of completing a sale, including negotiating and agreeing contrac- tually, making payments, and taking delivery. These four activities are supported by three different types of content that Internet busi- nesses often use—customer feedback, exper- tise, and entertainment programming.

Internet business models provide a con- text for enacting value-adding activities. Seven business models have been identified that are proving successful for use by Internet firms. These include commission, advertising, mark-up, production, referral, subscription, and fee-for-service based models. Strategic use of value-adding activities, as well as the seven business models, can help firms build competitive advantages and contribute to

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profitability. Firms have also found that com- binations of the Internet business models can contribute to greater success.

Firms that want to benefit from these new value-adding approaches need to ask how the Internet is affecting their current operations and how they might effectively implement Internet capabilities. Identifying

the practices and models that will enhance and not detract from a firm’s value proposi- tion is central to using the Internet to create wealth.

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SELECTED BIBLIOGRAPHY

Michael E. Porter popularized the concept of the ‘‘value chain’’ in his seminal book, Com- petitive Advantage (New York: Free Press, 1985). Here, he described two different cate- gories of activities: primary activities (inbound logistics; operations; outbound logistics; marketing and sales; and service) and support activities (procurement, technol- ogy development, human resource manage- ment, and firm infrastructure). By exploring relationships among activities within a firm as well as between the firm and a more encom- passing value chain that includes suppliers, customers, and alliance partners, a greater understanding of how value is created and competitive advantage is achieved is possible. Charles Stabell and Oystein Fjeldstad, in Stra- tegic Management Journal (May 1998) built on Porter’s seminal work by describing value shops, value chains, and value networks to broaden Porter’s framework beyond manu- facturing firms and include organizations that predominantly use intensive technologies (e.g., hospitals) and mediating technologies (e.g., real estate brokerages). Fig. 1 draws on the work of Stabell and Fjeldstad, as well as insights from Ming Zeng and Werner Rein- artz, in California Management Review (Winter 2003) who addressed the role of the Internet in the value-adding process. Michael Porter also addressed how the Internet influences the five competitive forces in ‘‘Strategy and the Inter- net,’’ Harvard Business Review (March 2001).

For a fuller discussion of the seven busi- ness models that are addressed in this paper, refer to Allan Afuah and Christopher L. Tucci, Internet Business Models and Strategies,

2nd ed. (Burr Ridge, IL: McGraw-Hill, 2003). Table 1 draws on insights from these authors as well as the work of Paul Timmers, Electro- nic Commerce (New York: John Wiley & Sons, Ltd., 1999) and Michael Rappa, ‘‘Business Models on the Web,’’ http://digitalenterpri- se.org/models/.

For more information about Lilly’s Inno- Centive program, refer to: B. Breen, ‘‘Lilly’s R&D Prescription,’’ Fast Company, 2002; and www.innocentive.com. Information about ‘‘advergaming’’ can be found in M. Athitakis, ‘‘The Entertainer,’’ Business 2.0, May, 2003; P. Suciu, ‘‘Mobility Takes the Forum,’’ GameSpy, May 2, 2003; and, www.skyworkstech.com. Information about how the auto industry uses the Internet to add value was drawn from V. Postrell, ‘‘How Much is that Civic On-Line?’’ New York Times, April 24, 2003; M. Stepanek, M ‘‘New Routes in the Internet Car Business,’’ CIO Insight, January 23, 2003; and N. Wing- field and K. Lundegaard, ‘‘eBay is Emerging as Unlikely Giant in Used-Car Sales,’’ Wall Street Journal, February 7, 2003.

Some of the other articles and/or Web sites that we have drawn on include: ‘‘B2B E-Commerce Headed for Trillions.’’ CyberA- tlas, March 6, 2002 (www.cyberatlas.com); www.shop.org.; P. Evans and T. S. Wurster, Blown to Bits (Cambridge, MA: Harvard Busi- ness School Press, 2000); Q. Hardy, ‘‘All Eyes on Google,’’ Forbes, May 26, 2003 (www.for- bes.com); C. Bayers, ‘‘The Last Laugh,’’ Busi- ness 2.0, September 2002; A. Weintraub, ‘‘E- Assets for Sale —Dirt Cheap,’’ BusinessWeek e.biz, May 14, 2001; and L. Tischler, ‘‘Vote of Confidence,’’ Fast Company, December 2002.

G.T. (Tom) Lumpkin is an associate professor of management and entrepreneurship at the University of Illinois at Chicago. His primary research interests include entrepreneurship, strategic management, and

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the strategic implications of the Internet. Lumpkin received his Ph.D. in business administration from the University of Texas at Arlington ([email protected]).

Gregory G. Dess is the Andrew R. Cecil Professor of Applied Ethics at the University of Texas at Dallas School of Management. His primary research interests are in the areas of strategic management, organization– environment relationships, and knowledge management. Dess received his Ph.D. in business administration from the University of Washington.

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