Ecommerce Business Models: A Worked Example

Ecommerce business models are various, and can be difficult to establish immediately. This fictional example illustrates how an ecommerce plan is often conceived, assessed and modified — with typical costs and timespans.

Halberd Engineering Ltd

Halberd Engineering Ltd. is a UK-based supplier of parts for the naval and commercial marine industries. It has offices in Sweden, the US and Japan, and an annual turnover around £40 million. Unfortunately, the company has been slow to modernize, and its share of the world marine engineering spares market has declined in recent years. It retains a reputation for being a solid and reliable supplier, but its pricing structure is not competitive, particularly for the large Far East market.

Proposal: IT Division

The IT Division suggest that Halberd should consider expanding its services by offering information and order facilities over the Internet. A company portal would display catalogues, list spare parts with prices, delivery times and shipping costs. A pilot scheme could be set up for £800,000, a modest sum that would be recouped within two years by increased sales and better inventory control.

First Discussion: Main Board

The Board accept the need for some overhaul of Halberd operations, but have recently invested heavily in the Japan Division, with only limited success. They are not keen to increase expenditure at a time of difficult trading conditions, and believe ecommerce to be greatly over-hyped. In discussion, the following emerges:

1. £800,000 can be only a notional figure, as the IT Division has never delivered within time and budget. The Division urged a company intranet in 1998, which was initially costed at £720,000 but eventually ran up a bill of £2 million, with benefits that remain unclear.

2. There can be no advantage, if Halberd prices are indeed uncompetitive, of advertising the fact on a website. The Company should build on its reputation for providing a personal and knowledgeable service, and its ability to source parts beyond the reach of its competitors.

3. The IT proposal has the interest of the Chairman, one non-executive director with contacts with the airline industry, and the directors responsible for IT, Sweden and the USA. The proposal is opposed by the directors responsible for finance, engineering, the UK and Japan operations. Other directors are undecided.

To resolve the situation, the non-executive director suggests setting up a steering committee under the chairmanship of the most skeptical director (finance) but with an agenda agreed by the main board. Key points are:

• the proposal should be studied in detail, with costs and timescales properly assessed.
• a cost-benefit study of the Company intranet should be undertaken, to assess its value and learn from any previous mistakes.
• this assessment should last 6 months and cost no more than £80,000.
• input should be sought from all Divisions, particularly marketing companies and overseas sales Divisions.
• competitor analysis should be included, but secrecy maintained throughout.
• assessment should cover the new technologies of customer relationship management and supply chain management in an effort to improve competitiveness.

First Proposal Assessment

Conclusions of the first assessment are generally discouraging. These are the salient points:

1. A very large portal is required, with something around 13,000 pages. Even with additional staff, or the use of outside contractors — possibly application service providers — the building and testing of such a system would take two years.

2. Costs would be as follows (over 2 years: all in £'000):

ITEM	IN HOUSE	OUTSIDE CONTRACTORS
server + hosting	1,700	800
IT salaries	440	-
webpage build	-	780
programming	-	250
division reorganization	1,200	800
TOTAL	3340	2630

3. The IT Division is opposed to outside contractors: a crucial element of Halberd's business (and possibly survival) would be in the hands of third parties.

4. Access to Halberd's prices could be restricted to bona fide customers through a supplied id and password. The information so obtained would provide some measure of the effectiveness of the site, though the restriction would also impact on the primary intention, which was to widen the customer base.

5. Supply chain management is not applicable. Halberd's problem is not the dovetailing of complex operations but obtaining supplies from 137 manufacturers, many of which are old-fashioned and inflict handling costs out of proportion to the value of sales.

6. Customer relationship management has future possibilities, but a current application is expensive (£2.1 million) and its track record unconvincing. The Japan Division in particular stresses the need for repeated personal contact.

7. The Company intranet has (unexpectedly) paid its way. Savings in order duplication, inventory levels and staff travel amounted to £320,000 last year, and could be increased further if an xml-based system were introduced. Time and budget overruns were caused by ad hoc decisions taken by separate Divisions without proper cost-benefit studies — i.e. poor central control.

8. Internet ordering has been adopted in a random manner by the industry, but smaller suppliers — especially those supplying secondhand material through in-house auctions — appear to have been successful. Anecdotal evidence suggest that sales have been increased in the 15% to 35% range.

9. Informal contacts indicate that at least two of Halberd's important competitors are working on Internet selling strategies: their pricing structure is expected to further undercut Halberd's.

Second Discussion: Main Board

The Board finds itself in a dilemma. The finance director has been won over to Internet trading, but the original proposal has little to commend it. Halberd certainly needs to rethink its business, but ecommerce is too expensive an option at the present time, and its benefits too uncertain. Various possibilities are discussed — bank loans, going public, joint ventures — but rejected.

The mood brightens over lunch. The non-executive director points out the airline industry now uses electronic procurement almost exclusively, but relies on frequently-updated catalogs supplied on CD. Why not something similar for Halberd? CD catalogs with parts illustrated and numbered could be used as marketing material by Halberd reps. The portal would simply provide the latest prices, delivery times and shipping & handling charges for bona fide customers — a simple database solution in short.

The non-executive director also observes that 70% of Halberd's turnover comes from selling parts supplied by just 8 manufacturers. Why not create a new company that handles just these fast-selling items, perhaps even joint-venturing with the supplier of the CDs, since the media world has high entrance costs. Indeed the director happens to know two media companies that are anxious to expand into the marine supplies market.

And the rump of the business, the safe, solid but not very competitive part of Halberd? Keep it in its present form, but allow it to charge premium prices for sourcing obscure items.

A new (6 month: £80,000) proposal is drawn up, to investigate these possibilities:

• set up a new company, controlled by Halberd but able to joint venture with media and other companies to take advantage of electronic commerce. This company would:
  • focus on selling the products of 8 manufacturers
  • produce CD catalogs
    • featuring products of these 8 manufacturers
    • attempt through its joint venture to supply non-competitors with similar CDs, i.e. expand the supply/media business
  • achieve significant savings in price and delivery time
  • create a portal site that:
    • restricted access to Halberd customers
    • supplied price, delivery, shipping & handling charges for CD catalog products
    • took delivery times (and if possible prices) directly from 8 manufacturers
• keep the original Halberd Company in its present form, but
  • introduce a premium sourcing service for some products
  • increase prices for other lines — expecting to gradually wind up this unprofitable side of the business
• redesign the Company intranet with xml
• build the database-driven customer portal as an extension of the company portal — i.e. allowing input and some control from all Halberd divisions.

Second Proposal Assessment

The prospects now look very different.

1. Costs are estimated as follows (over 2 years: all £'000)

ITEM	HALBERD	NEW COMPANY
server + hosting	-	20
IT salaries	-	140
CD production	-	130
programming	200	250
company setup / reorganization	200	500
total	400	1040 (Halberd share: 51%)

 

2. A media company (Icaro Productions) is prepared to joint venture on a 51:49 basis, and to sign an exclusivity clause for future business in the marine engineering market.

3. One of the manufacturing companies already has its information in CD form, and two of the others agree to employ Halberd's new company to produce CDs for them.

4. All divisions are enthusiastic about the proposal, particularly Japan, which will have the pricing necessary to break into the Korea and China markets.

5. The proposal is a solidly-researched document, against which Halberd's bank is happy to advance a loan.

Please consider the e-book to explore other examples of ecommerce business models in action.

 

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