Business Models in the Digital Economy

Each firm that exploits the Internet should have an Internet business model, i.e., how it plans to make money now and how it plans to do so in the long term using the Internet (Afuah & Tucci, 2001). A business model is the method of doing business by which a company can generate revenue to sustain itself (Rappa, 2002; Turban, King, Lee, Warkentin, & Chung, 2002). It describes the basic framework of a business. It also tells what market segment is being served (who), the service that is being provided (what), and the means by which the service is produced (how) (Chaudhury & Kuilboer, 2002).

A firm's business model should also spell out how the company is positioned in the value chain or within the business ecosystem. Weill and Vitale (2001) define an e-business model as a description of the roles and relationships among a firm's consumers, customers, allies, and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants. According to Timmers (1998), a business model is:

"… an architecture for the product, service, and information flows, including a description of the various business actors and their roles; and a description of the potential benefits for the various business actors; and a description of the sources of revenues."

In a broader approach, Slywotzky (1996) defines a business model (design) as:

"… the totality of how a company selects its customers, defines and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its resource, goes to market, creates utility for customers, and captures profits. It is the entire system for delivering utility to customers and earning a profit from that activity."

A business model consists of multiple components or elements. Rayport and Jaworski (2001) argue that a "new economy" business model requires four choices on the part of senior management. These include the specification of: (1) a value proposition or a value cluster for targeted customers; (2) a scope of marketspace offering, which could be a product, service, information, or all three; (3) a unique, defendable resource system, i.e., the associated resource system to deliver the benefits; and (4) a financial model, which includes a firm's revenue models, shareholder value models, and future growth models. In a similar effort to bring together the various lines of thought and to establish a common denominator for the business model discussion, Alt and Zimmermann (2001) distinguish six generic elements of a business model. They are: (1) mission, i.e., a highlevel understanding of the overall vision, strategic goals, and the value proposition; (2) structure that determines which roles and agents constitute and comprise a specific business community as well as the focus on industry, customers, and products; (3) processes, which provide a detailed view of the mission and the structure of the business model; (4) revenues, which are the bottom line of a business model; (5) legal issues that have to be considered with all dimensions of business models; and (6) technology, which is both an enabler and a constraint for technology-based business models. In a similar effort, Dubosson-Torbay, Osterwalder, and Pigneur (2002) propose that an e-business model framework consists of four principal components: product innovation or value proposition, customer relationship, infrastructure management, and financial aspects that can be found throughout the three former components, such as cost and revenue structures.

Specifically, Rappa (2002) identifies eight basic Internet business models. They are: brokerage, advertising, infomediary (e.g., recommender system, registration model), merchant, manufacturer (direct marketing), affiliate (provide commission for online referrals), community (voluntary contributor model or knowledge networks), subscription, and utility (e.g., pay by the byte). In addition, Turban et al. (2002) also identify several types of Internet business models including name your price, find the best price, dynamic brokering, affiliate marketing, group purchasing, electronic tendering systems, online auctions, customization and personalization, electronic marketplaces and exchanges, supply chain improvers, and collaborative commerce.

In sum, a business model in the new economy consists of many dimensions. Although there is no clear consensus on the definition and elements of a business model, business models are largely believed to determine the success of an Internet venture (Alt & Zimmermann, 2001). In order to sustain a successful business venture, an Internet business model should address a number of issues or generic elements and the dynamics of the respective elements (Alt & Zimmermann, 2001) that include: what value to offer customers (strategic goals and value proposition); which customers to provide the value to (scope of offerings), how to price the value (pricing); how much and who to charge for it (revenue models); quantity of resources required and the associated costs to provide the value; what strategies, structures, and processes need implementing to offer value; and the legal issues that may influence the general vision of the business model. In addition, in order to prosper in e-commerce, a firm's Internet business model must capitalize on the "disruptive" attributes and characteristics of the Internet or digital economy to enable it to offer innovative solutions and value to customers.