What Makes a Dot Com Successful

The Web Evolution

Sometimes, the transformation of the value chain results in the emergence of new intermediaries who step in to replace the old. These so-called infomediaries gain enormous power through the Internet. The reason is that they are able to mine customer transaction data, making so-called mass customization possible. For example, some online stores recommend new books or CDs based on the past purchasing patterns of their customers.

Ethiraj, Guler and Singh show that the Internet creates entrepreneurial opportunities. How, though, should entrepreneurs exploit them? The answer depends in part upon the kind of business models that entrepreneurs develop to gain competitive advantage over their rivals.

References to "business models" are frequent whenever aspiring entrepreneurs pitch their plans to potential investors. While the popular media uses the term loosely and vaguely, the researchers attempt a precise definition: A business model is "a unique configuration of elements comprising the organization's goals, strategies, processes, technologies and structure, conceived to create value for the customers and thus compete successfully in a particular market." In other words, the business model is what allows a company to capture and deliver value to its customers.

Ethiraj, Guler and Singh point out that business models must have four important elements: scalability, complementary resources and capabilities, relation-specific assets, and knowledge-sharing routines.

1. Scalability: Information assets, which dominate the e-business world, have a unique property--they are generally costly to produce in the first place, but once produced, very easy--and relatively inexpensive--to reproduce. As a result, first movers in a market have an enormous advantage. They can flood the market, and essentially create a winner-take-all situation. In order to exploit this aspect of competitive advantage on the Web, it follows that companies must develop business models that are scalable.

2. Complementary resources and capabilities: A company with an innovative business model can initially use its technological prowess to steal a march over its competitors. Entrepreneurs would be wrong, however, to believe that this advantage is long-lasting. The Web sharply lowers barriers to entry, and rivals can soon catch up with the first mover. In order to protect their competitive positions, companies that lead in the digital arena may have to acquire physical assets to keep their competitors at bay. For example, AOL's acquisition of Time Warners' bricks-and-mortar assets may have been driven by this need.

3. Relation-specific assets: No individual firm can hope to dominate the Internet, which is a complex network designed precisely to avoid such dominance. As a result, networks of alliances become increasingly important. Business models on the Web must recognize that competitive advantage in e-business is often based on managing collaborative relationships with key partners well.

4. Knowledge-sharing routines: This condition follows from the previous one, which emphasizes the need for strong collaborative relationships. These relationships can only become truly effective if the collaborators develop mechanisms through which they can share knowledge with one another. Such knowledge-sharing will help the partners to enhance their collective competitive advantage over rivals and their partners.

As companies attempt to develop Internet strategies, they would do well to pay attention to these ideas. If they do, they will avoid the plight of entrepreneurs whose dot-coms develop pneumonia each time that tech stocks on the Nasdaq catch a cold. If they are lucky, they could even ensure that their Internet strategies will help them to gain competitive advantage and build profitable e-businesses over time.