Connectivity is what gives the Internet its power. Ever since consumers widely adopted the World Wide Web, new possibilities have existed for buying and selling goods and services. Companies that already sold products directly to consumers gained another channel for doing so, and companies that relied on wholesalers and distributors to sell their products via different retail outlets suddenly were able to eliminate, partially or completely, those parties from their distribution channels. Selling directly, via the manufacturer model, often resulted in higher profits for manufacturers and more savings for consumers. Selling products or services directly to consumers is at the heart of the business model known as the manufacturer model.
UNDERSTANDING BUSINESS MODELS
Business models describe how companies generate revenue from their efforts by detailing the ways products, information, and other elements are utilized for commercial activity. Companies can generate revenue in a number of different ways. For example, some only sell products and services to consumers, some sell to other businesses, and some sell through both of these channels. Third-party organizations, including distributors or online marketplaces, enable transactions between companies and other businesses or consumers.
Business models often involve multiple levels within supply chains or value chains, which companies review and analyze regularly to remain optimally efficient. Value chains define the different steps involved in creating value along the spectrum of supply and demand. At one end of this spectrum are the raw materials used during manufacturing. At the other end are finished products used for direct consumption or as components by other manufacturers.
Because of the widespread variation in the marketplace, many different business models exist, ranging from those that are simple like the manufacturer model, to the more complex. In addition, some companies rely on a combination of different business models, and even within one industry may rely on very different approaches.
General business models are good tools for painting pictures of the way enterprises profit in the marketplace. With that in mind, they normally do not go into descriptions of detailed strategies. For that purpose, companies rely on a special kind of business model called a marketing plan. Marketing plans identify the specific situation a company finds itself in within a particular marketplace, the differentials that set a company apart from its competitors, the marketing tactics used to accomplish strategic objectives, and so on.
TRADITIONAL VERSUS ELECTRONIC BUSINESS MODELS
Long-established business models used in the physical world may or may not be meaningful for e-commerce. Some, including manufacturer models, subscription models, mail-order models, advertising models, free-trial models, and direct-marketing models, work well on the Internet. Furthermore, some business models have no place in the physical world and are native to electronic markets. Focusing heavily on the movement of electronic information, these include information-barter models, digital-delivery models, and freeware models.
Just because a company relies on an established online business model does not mean that it will be successful. Many other factors are responsible for the success or failure of an enterprise, online or offline. According to Jeffrey F. Rayport, "Every e-commerce business is either viable or not viable. They hardly qualify for the paint-by-number prescriptions that business people seem to expect. Business models themselves do not offer solutions; rather, how each business is run determines its success. So the success of e-commerce businesses will hinge largely on the art of management even as it is enabled by the science of technology."
The use of direct sales channels was expected to significantly increase in the early 2000s, boding well for companies using a manufacturer model. Stamford, Conn.-based Peppers and Rogers Group and the Menlo, Calif.-based Institute for the Future conducted a study that forecast revenues for consumer direct sales to grow from $190 billion in 1998 to $1.1 trillion by 2010. The study also predicted that the number of consumers using the direct sales channel would triple during that timeframe from 11 percent to 33 percent.
By eliminating third party intermediaries like distributors and wholesalers, consumers are supposed to benefit with lower prices. However, some third-party groups have made successful attempts to protect their survival. Among them are the National Automotive Dealers Association, the Wine Wholesalers Association, the National Association of Travel Agents, and the National Association of Realtors. Their efforts have made it impossible for automobile manufacturers to sell directly to consumers, and for wineries to sell wine via the Web. Efforts such as these were considered roadblocks by some manufacturers. However, others encouraged the involvement of third parties in their supply chains because they were able to offer added services that manufacturers found valuable. One such area was logistics, which can include services related to warehousing, storage, inventory management, and shipping.
While leading companies like Mattel, Nabisco, and Polo Ralph Lauren were selling some products directly to consumers in the early 2000s, they did not do so exclusively. Companies like Austin, Texas-based Dell Computer Corp. relied more heavily on the manufacturer model. In 1984, Michael Dell founded the company in a Texas dorm room with the goal of understanding the unique needs of customers and building computers that met those needs. Through a direct sales approach, the company put a premium on in-person relationships. Based on customer specifications, the company manufactured computers individually at locations in Texas, Tennessee, Brazil, China, Ireland, and Malaysia. In addition to consumers, Dell also sold computers to the corporate, education, and government sectors. It received about half of its orders and technical support requests via its Web site. Dell is proof that the manufacturer model works. The company achieved rapid growth, surpassing IBM in global market share in 1999 and climbing to the top of the overall world market in the first quarter of 2001.
The manufacturer model isn't limited to the technology industry. Airborne Direct manufactured bicycles for consumers based on their custom specifications, much like Dell did with computers. At its Web site, consumers were able to choose different types of bicycles and customize the components they wanted. The company used a "Bike Wizard" to help customers pick the right bike. Based on a number of different questions related to riding experience and body size, the wizard was able to select the right bike for each customer. If components were selected that might not be compatible with the bike, or that might delay a fast shipment, the Web site displayed special warning icons. Salespeople were available by phone or e-mail to assist customers with their orders prior to purchase. Additionally, Airborne allowed cyclists to store their custom bike designs in "online hangars" for 90 days to put bikes on display for viewing or to set up a gift registry. While most leading bicycle manufacturers remained loyal to their large networks of dealers, Yeti Cycles also sold custom bikes via the Internet. Mongoose used a combination of the two approaches to sell its line of titanium bikes, giving local retailers credit for bikes it sold online.
Flowerbud.com was another example of a company using the manufacturer model. This company sold flowers through its Web site. Founded by Mark and Alice Hayes, who operated a bulb farm near Portland, Oregon, orders sent to Flowerbud.com were filled by a handful of select growers across the United States, as opposed to florists. These growers shipped flowers in special packages via FedEx next-day service hours after being cut to ensure maximum freshness.
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SEE ALSO: Business Models