Value Creation in E-Business

Value Creation in E-Business
Author(s): Raphael Amit and Christoph Zott

Source: Strategic Management Journal, Vol. 22, No. 6/7, Special Issue: Strategic
Entrepreneurship: Entrepreneurial Strategies for Wealth Creation (Jun. - Jul., 2001), pp. 493-
520
Published by: John Wiley & Sons
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Strategic Management Journal
Strat. Mgmt. J., 22: 493-520 (2001)
DOI: 10.1002/smj.187
VALUE CREATIONIN E-BUSINESS

RAPHAELAMIT1*and CHRISTOPHZOTT2
'The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania,
U.S.A.
2INSEAD,Fontainebleau Cedex, France
We explore the theoretical foundations of value creation in e-business by examining how 59

American and European e-businesses that have recently become publicly traded corporations
create value. We observe that in e-business new value can be created by the ways in which
transactions are enabled. Grounded in the rich data obtainedfrom case study analyses and in
the received theory in entrepreneurshipand strategic management,we develop a model of the
sources of value creation. The model suggests that the value creation potential of e-businesses
hinges on four interdependentdimensions, namely: efficiency, complementarities,lock-in, and
novelty. Our findings suggest that no single entrepreneurshipor strategic management theory
can fully explain the value creation potential of e-business. Rather, an integration of the
received theoretical perspectives on value creation is needed. To enable such an integration,
we offer the business model construct as a unit of analysis for future research on value
creation in e-business. A business model depicts the design of transaction content, structure,
and governance so as to create value through the exploitation of business opportunities. We
propose that a firm's business model is an importantlocus of innovation and a crucial source
of value creation for the firm and its suppliers, partners, and customers. Copyright ? 2001
John Wiley & Sons, Ltd.
INTRODUCTION likely that over 93 percent of U.S. firms will

have some fraction of their business trade conduc-
As we enter the twenty-first century, business ted over the Internet.2 Although U.S. firms are
conducted over the Internet (which we refer to considered world leaders in e-business, the rapid
as 'e-business'), with its dynamic, rapidly grow- growth of the number of businesses that use the
ing, and highly competitive characteristics, prom- Internet is a global phenomenon. Over the period
ises new avenues for the creation of wealth. of 1999 to 2001, Europe is expected to bridge
Established firms are creating new online busi- the e-business gap with the United States by
nesses, while new ventures are exploiting the experiencing triple-digit growth in this area. By
opportunities the Internet provides. In 1999, the end of 2000, European firms' e-retail revenues
goods sold over the Internet by U.S. firms were are estimated to be worth $8.5 billion, increasing
estimated to be $109 billion and by the end of to an estimated $19.2 billion by 2001, as com-
2000 should reach $251 billion.' By 2002, it is pared to North America's figures of $40.5 billion
(for 2000) which are expected to increase to
Key words: value creation; e-business; business model

*Correspondence to: R. Amit, The Wharton School, University
of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104-
2
6370, U.S.A. Source: Forrester Research Report, 'eMarketplaces Boost
1 Source: Forrester Research. B2B Trade,' February 2000.
Copyright ? 2001 John Wiley & Sons, Ltd.

494 R. Amit and C. Zott
$67.6 billion (for 2001).3 The increase in the the context of the emergenceof virtualmarkets.
numberof e-business transactionsat major web In the data and methods section that follows the
sites (60,000 per day in 1999 comparedto 29,000 theory section, we describe the groundedtheory
per day in 1998)4 highlights the extraordinary development methodology (Glaser and Strauss,
growth and transformationof this new global 1967) that we used to determinewhich of the
business landscape.5 sources of value suggested by the literatureare
E-business has the potential of generating germane to e-businesses. The terms 'source of
tremendousnew wealth, mostly throughentrepre- value creation'and 'value driver'(which are used
neurialstart-upsand corporateventures.It is also interchangeablyin this paper)refer to any factor
transformingthe rules of competitionfor estab- that enhances the total value created by an e-
lished businesses in unprecedentedways. One business. This value, in turn, is the sum of all
would thus expect e-business to have attracted values thatcan be appropriated by the participants
the attention of scholars in the fields of in e-business transactions (Brandenburgerand
entrepreneurship and strategic management. Stuart, 1996). The data and methods section is
Indeed,the adventof e-businesspresentsa strong followed by a presentationof the findings that
case for the confluence of the entrepreneurshipemerged from our analysis of 59 e-businesses.
and strategy research streams, as advocated by Although we do not go into detail on each of
Hitt and Ireland (2000) and by McGrath and the businessesstudied,we use examplesfrom our
MacMillan(2000). Yet, academicresearchon e- explorationto illustratethe conceptsthatemerged.
businessis currentlysparse.The literatureto date Ouranalysisreveals four primaryand interrelated
has neither articulatedthe central issues related value drivers of e-businesses: novelty, lock-in,
to this new phenomenon,nor has it developed complementarity,and efficiency.We observe that
theory that capturesthe unique features of vir- value creation in e-business goes beyond the
tual markets. value that can be realized throughthe configu-
This paper attemptsto fill this theoreticalgap rationof the value chain (Porter,1985), the for-
by seeking to identify the sources of value cre- mation of strategicnetworksamong firms (Dyer
ation in e-business. To do this, we begin the and Singh, 1998), or the exploitation of firm-
paper with a theory section that highlights the specific core competencies (Barney, 1991). E-
value creationpotentialembeddedin virtualmar- business firms often innovate through novel
kets, and that explores the sources of value cre- exchange mechanismsand transactionstructures
ation in the received entrepreneurship and stra- not present in firms that are more traditional.
tegic management literatures. Specifically, we Throughoutthe discussionof the value driversof
review how value is createdwithinthe theoretical e-business,we include some observationsregard-
views of the value chain framework (Porter, ing the interrelationships among the four drivers.
1985), Schumpeter'stheory of creative destruc- In the discussionsection of the paper,we build
tion (Schumpeter,1942), the resource-basedview on our findings to offer some new ways of
of the firm (e.g., Barney, 1991), strategicnetwork integrating the entrepreneurshipand strategic
theory (e.g., Dyer and Singh, 1998), and trans- managementliteratures.Our central observations
action costs economics (Williamson, 1975). We are that no single entrepreneurship or strategic
also discuss the applicabilityof these theoriesin managementtheory can fully explain the value
creation potentialof e-business. Rather,each of
3 Source: Forrester Research Report, 'Global eCommerce the theories offers an importantinsight into one
Approaches Hypergrowth,' April 2000. aspect of value creation in e-business. In an
4 Source: Jupiter Communications (2000). to contributeto the work that seeks to
5 While e-business is still growing at an overall impressive attempt
rate, we are now witnessing a slowdown in the Business-to- integrate entrepreneurshipand strategic man-
Consumer (B2C) growth rate and an acceleration of the agement perspectives(e.g., Jones, Hesterly, and
Business-to-Business (B2B) growth rate. The B2C segment
has grown at an annual rate of 76 percent since 1998 com- Borgatti, 1997; Gulati, 1999; Hitt and Ireland,
pared to an annual growth rate of 110 percent in the B2B 2000; McGrathand MacMillan,2000), we pro-
segment (source: the Gartner Group). This argument is pose the business model constructas a unifying
additionally strengthened by the forecasts that predict B2B e- unit of analysis that capturesthe value creation
business to reach $2.7 trillion in 2004, representing over 17
percent of the total trade, while online retail (B2C) is expected arisingfrommultiplesources.The businessmodel
to represent less then 7 percent of total retail at that time. depicts the design of transactioncontent, struc-
Copyright ? 2001 John Wiley & Sons, Ltd. Strat. Mgmt. J., 22: 493-520 (2001)
Value Creation in E-Business 495
ture,and governanceso as to createvalue through As an electronicnetworkwith open standards,

the exploitation of business opportunities.By the Internet supports the emergence of virtual
addressingthe central issues in e-business that communities(Hagel and Armstrong,1997) and
emerge at the intersection of strategic man- commercial arrangements that disregard tra-
agement and entrepreneurship, we hope to con- ditionalboundariesbetweenfirmsalong the value
tributeto theory developmentin both fields. The chain. Business processes can be shared among
paper concludes with final observations and firms from differentindustries,even without any
avenues for furtherresearch. awarenessof the end customers.As more infor-
mation about products and services becomes
instantly available to customers, and as infor-
THEORY mation goods (Shapiro and Varian, 1999) are
transmittedover the Internet, traditionalinter-
Before reviewing the sources of value creation mediary businesses and informationbrokers are
implied by a range of theoreticalperspectivesin circumvented('dis-intermediated'),and the guid-
the entrepreneurshipand strategic management ing logic behind some traditionalindustries(e.g.,
literatures,we begin this section by highlighting travel agencies) begins to disintegrate.At the
the value creationpotentialembeddedin virtual same time, new ways of creatingvalue are opened
markets. Our literaturereview then focuses on up by the new forms of connectingbuyers and
value chain analysis, Schumpeterianinnovation, sellers in existing markets ('re-intermediation'),
the resource-basedview of the firm, strategic and by innovative market mechanisms (e.g.,
network theory, and transactioncost economics. reverse market auctions) and economic
For each of these perspectives,we describe the exchanges.
main theoretical approach, expose the main Thereare severalothercharacteristicsof virtual
sources of value creationsuggested, and discuss marketsthat, when consideredtogether, have a
the theoreticalimplicationsof the emergenceof profoundeffect on how value-creatingeconomic
virtualmarkets. transactionsare structuredand conducted.These
includethe ease of extendingone's productrange
to include complementaryproducts, improved
Virtual markets
access to complementaryassets (i.e., resources,
Virtualmarketsreferto settingsin which business capabilities,and technologies),new forms of col-
transactionsare conducted via open networks laborationamong firms (e.g., affiliate programs),
based on the fixed and wireless Internetinfra- the potentialreductionof asymmetricinformation
structure.These marketsare characterizedby high among economic agents through the Internet
connectivity(Duttaand Segev, 1999), a focus on medium,andreal-timecustomizabilityof products
transactions(Balakrishnan,Kumara,and Sundare- and services. Industryboundariesare thus easily
san, 1999), the importanceof informationgoods crossed as value chains are being redefined
and networks (Shapiro and Varian, 1999), and (Sampler, 1998). This in turn may affect the
high reach and richness of information(Evans scope of the firm as opportunitiesfor outsourcing
and Wurster,1999). Reach refers to the number arise in the presenceof reducedtransactioncosts
of people and productsthat are reachablequickly and increasedreturnsto scale (see Lucking-Reiley
and cheaply in virtualmarkets;richnessrefers to and Spulber,2001; for example,many companies
the depth and detail of informationthat can be now find it economicallyviable to outsourcetheir
accumulated, offered, and exchanged between IT services).
marketparticipants.Virtualmarketshave unprec- In summary,the characteristicsof virtualmar-
edented reach because they are characterizedby kets combined with the vastly reduced costs of
a near lack of geographicalboundaries.6 information processing7 allow for profound
changes in the ways companies operate and in
6 The difficulty that some e-business firms experience in estab-
lishing a pan-European presence indicates that there still exist
certain barriersto business, due, for example, to local languages 7 According to The Economist, 23 September 2000 ('A survey
and tastes, or to cross-borderlogistics. However, the importance of the new economy', p. 6) the cost of sending 1 trillion bits
of geographical boundaries still appears to be vastly reduced electronically has dropped from $150,000 to $0.12 in the past
relative to the traditional 'bricks-and-mortar'world. 30 years.
how economic exchanges are structured.They online. By doing so, it was able to add value to
also open new opportunitiesfor wealth creation. sales and fulfillmentactivities. Stabell and Fjeld-
Thus, conventionaltheories of how value is cre- stad (1998) found the value chain model more
ated are being challenged. suitablefor the analysisof productionand manu-
facturingfirms than for service firms where the
Value chain analysis resultingchain does not fully capturethe essence
of the value creation mechanismsof the firm.
Porter's (1985) value chain frameworkanalyzes Citing the example of an insurance company,
value creation at the firm level. Value chain they ask: 'What is received, what is produced,
analysis identifies the activities of the firm and what is shipped?' (Stabell and Fjeldstad, 1998:
then studies the economic implicationsof those 414). Similar questions can be asked about the
activities. It includes four steps: (1) definingthe activitiesof e-businessfirmssuch as Amazon.com
strategic business unit, (2) identifying critical and about e-businesses whose main transactions
activities,(3) definingproducts,and (4) determin- involve the processing of information flows.
ing the value of an activity. The main questions Building on this insight, Rayport and Sviokla
that the value chain frameworkaddressesare as (1995) propose a 'virtual' value chain that
follows: (1) what activitiesshoulda firmperform, includes a sequenceof gathering,organizing,se-
and how? and (2) what is the configurationof lecting, synthesizing,and distributinginformation.
the firm's activities that would enable it to add While this modificationof the value chainconcept
value to the productand to compete in its indus- correspondsbetter to the realitiesof virtualmar-
try? Value chain analysis explores the primary kets, and in particularto the importanceof infor-
activities, which have a direct impact on value mation goods (Shapiroand Varian, 1999), there
creation,and supportactivities,which affect value may still be room to capturethe richness of e-
only throughtheir impact on the performanceof business activity more fully. Value creation
the primaryactivities. Primaryactivities involve opportunitiesin virtualmarketsmay result from
the creation of physical products and include new combinationsof information,physical prod-
inboundlogistics, operations,outboundlogistics, ucts and services, innovative configurationsof
marketingand sales, and service. transactions,and the reconfigurationand inte-
Porterdefines value as 'the amountbuyers are gration of resources, capabilities, roles and
willing to pay for what a firm provides them. relationshipsamong suppliers,partnersand cus-
Value is measured by total revenue ... A firm is tomers.
profitableif the value it commandsexceeds the
costs involved in creating the product' (Porter,
1985: 38). Value can be createdby differentiation Schumpeterian innovation
along every step of the value chain, through Schumpeter (1934) pioneered the theory of eco-
activities resulting in productsand services that nomic development and new value creation
lower buyers' costs or raise buyers' performance. through the process of technological change and
Drivers of product differentiation,and hence innovation. He viewed technological development
sources of value creation, are policy choices as discontinuous change and disequilibrium
(what activities to perform and how), linkages resulting from innovation. Schumpeter identified
(within the value chain or with suppliers and several sources of innovation (hence, value
channels),timing (of activities),location, sharing creation)includingthe introductionof new goods
of activities among business units, learning,inte- or new production methods, the creation of new
gration,scale and institutionalfactors(see Porter, markets, the discovery of new supply sources, and
1985: 124-127). Porterand Millar (1985) argue the reorganization of industries. He introduced
that informationtechnologycreatesvalue by sup- the notion of 'creative destruction' (Schumpeter,
portingdifferentiationstrategies. 1942) noting that following technological change
Value chain analysiscan be helpful in examin- certain rents become available to entrepreneurs,
ing value creation in virtual markets. For which later diminish as innovations become estab-
example, Amazon.comdecided to build its own lished practices in economic life. These rents
warehouses in order to increase the speed and were later named Schumpeterian rents, defined as
reliability of the delivery of products ordered rents stemming from risky initiatives and entre-
preneurial insights in uncertain and complex plementaryand specialized resources and capa-
environments, which are subject to self- bilities (which are heterogeneouswithin an indus-
destructionas knowledge diffuses. In his early try, scarce,durable,not easily traded,and difficult
work, Schumpeter(1934, 1939) highlightedthe to imitate),may lead to value creation(Penrose,
contribution of individual entrepreneurs and 1959; Wernerfelt,1984; Barney, 1991; Peteraf,
placed an emphasis on the innovationsand ser- 1993; Amit and Schoemaker,1993). The supposi-
vices rendered by the new combinations of tion is that, even in equilibrium,firmsmay differ
resources. in terms of the resources and capabilities they
In Schumpeter's theory, innovation is the control, and that such asymmetric firms may
source of value creation. Schumpeterianinno- coexist until some exogenous change or Schum-
vation emphasizesthe importanceof technology peterianshock occurs. Hence, RBV theorypostu-
and considers novel combinationsof resources lates that the services rendered by the firm's
(and the services they provide)as the foundations unique bundle of resourcesand capabilitiesmay
of new productsand productionmethods.These, lead to value creation.
in turn,lead to the transformationof marketsand A firm's resources and capabilities 'are valu-
industries,and hence to economic development. able if, and only if, they reduce a firm's costs
Teece (1987) adds that the effectiveness of pro- or increaseits revenuescomparedto what would
tective property rights (appropriabilityregime) have been the case if the firm did not possess
and complementaryassets can add to the value those resources' (Barney, 1997: 147). While the
creationpotentialof innovations.Moranand Gho- RBV literaturehas often been concerned with
shal (1999) highlight the role of economic questionsof value appropriation and sustainability
exchange throughwhich the latent value imbed- of competitiveadvantage(e.g., Barney, 1991), a
ded in the new combinationof resourcesis realiz- recentextensionto RBV, the dynamiccapabilities
able. Hitt and Ireland (2000) contributeto this approach (Teece, Pisano, and Shuen, 1997),
theoryby addressingthe determinantsand conse- exploreshow valuableresourcepositionsare built
quences of the innovationprocess and by linking and acquiredover time. Dynamiccapabilitiesare
this process with the strategic managementof rooted in a firm's managerialand organizational
growing enterprises. processes, such as those aimed at coordination,
As innovativeentrepreneurs exploit new oppor- integration, reconfiguration, or transformation
tunities for value creation, the evolution of the (Teece et al., 1997; Eisenhardtand Martin,2000),
resultingvirtualmarketscan be describedin terms or learning (Lei, Hitt, and Bettis, 1996). These
of Schumpeter'smodel of creative destruction. capabilities enable firms to create and capture
However, virtual marketsbroadenthe notion of Schumpeterian rents (Teece et al., 1997).
innovation since they span firm and industry Examples of such value-creatingprocesses are
boundaries,involve new exchange mechanisms product development, strategic decision-making,
and unique transaction methods (rather than allianceformation,knowledgecreation,and capa-
merely new products, or productionprocesses), bilities transfer(Eisenhardtand Martin,2000).
and foster new forms of collaborationsamong The emergenceof virtualmarketsclearlyopens
firms. Furthermore,while innovationis certainly up new sources of value creationsince relational
a major driving force of the economic develop- capabilitiesand new complementaritiesamong a
ment of new and establishedmarkets,it may not firm's resourcesand capabilitiescan be exploited
be the only source of value creation in virtual (e.g., between online and offline capabilities).
markets, as suggested by the other theoretical However,virtualmarketsalso presenta challenge
frameworksreviewed in this section. to RBV theory. As information-basedresources
and capabilities,which have a higher degree of
Resource-based view of the firm mobility than other types of resourcesand capa-
bilities, increase in their importancewithin e-
The resource-basedview (RBV) of the firm, business firms, value migration is likely to
which builds on Schumpeter's perspective on increase and the sustainabilityof newly created
value creation, views the firm as a bundle of value may be reduced. Also, time compression
resources and capabilities.The RBV states that diseconomies(Dierickx and Cool, 1989) provide
marshallinganduniquelycombininga set of com- an effective barrierto imitationfor firm-specific
resources and capabilities that had to be built structuralargumentsto explore the importance
over time due to factor market imperfections, of governance mechanisms such as trust (e.g.,
and hence enable the preservationof value. The Lorenzoniand Lipparini,1999), and the impor-
prospectof value preservationor sustainabilityis tance of resources and capabilities(e.g., Gulati,
an importantincentive for value creation. In a 1999), especiallythose of suppliersand customers
networkedeconomy,however,thereis an alterna- (Afuah, 2000), for value creation.For example,
tive to ownership or control of resources and in their study of the Canadian biotechnology
capabilities(either throughbuilding or acquiring industry,Baum, Calabrese,and Silverman(2000)
them). Accessing such resources through part- found that biotech start-upscan improve their
nering and resource sharingagreementsis more performanceby configuring alliances into net-
viable in virtual markets yet the preservation worksthatenablethem to tap into the capabilities
of value, and hence its creation becomes more and information of their alliance partners. In
challenging,because rivals may have easy access additionto enabling access to information,mar-
to substituteresourcesas well. kets, and technologies(Gulati et al., 2000), stra-
tegic networksoffer the potential to share risk,
generateeconomies of scale and scope (Katz and
Strategic networks
Shapiro, 1985; Shapiroand Varian, 1999), share
Strategicnetworksare 'stable interorganizationalknowledge, and facilitate learning (Anand and
ties which are strategicallyimportantto participat- Khanna,2000; Dyer and Nobeoka, 2000; Dyer
ing firms. They may take the form of strategic and Singh, 1998), and reap the benefits that
alliances,joint ventures,long-termbuyer-supplier accrue from interdependentactivities such as
partnerships,and other ties' (Gulati,Nohria, and workflow systems (BlankenburgHolm, Eriksson
Zaheer,2000: 203). The main questionsthat stra- and Johanson, 1999). Other sources of value in
tegic network theorists seek to answer are as strategicnetworksinclude shortenedtime to mar-
follows: (1) Why and how are strategicnetworks ket (Kogut, 2000), enhanced transaction
of firms formed?(2) What is the set of interfirm efficiency, reduced asymmetriesof information,
relationshipsthat allows firms to compete in the and improved coordinationbetween the firms
marketplace?(3) How is value created in net- involved in an alliance (Gulati et al., 2000).
works (for example, throughinterfirmasset co- The networkperspectiveis clearly relevantfor
and
specialization)? (4) How do firms'differential understanding wealth creation in e-business
positions and relationships in networks affect because of the importanceof networksof firms,
their performance? suppliers, customers, and other partnersin the
Traditionally, network theorists with a back- virtualmarketspace (Shapiroand Varian, 1999;
in or
ground sociology organizationtheory have Prahalad and Ramaswamy,2000). However, it
focused on the implicationsof networkstructure may not fully capturethe value creationpotential
for value creation.The configurationof the net- of e-businesses that enable transactionsin new
work in termsof densityand centrality(Freeman, and uniqueways. For example, strategicnetwork
1979), for example, has been considered an theory and the formaltools providedby network
important determinantof network advantages, analysis (e.g., notions of network density, cen-
such as access, timing, and referralbenefits(Burt, trality, network externalities) only partially
1992). Moreover,the size of the networkand the explainthe value creationpotentialof a company
heterogeneityof its ties have been conjecturedto such as Priceline.com.This business, which has
have a positive effect on the availabilityof valu- established stable interorganizationalties, for
able informationto the participantswithin that example,with airlinecompanies,creditcardcom-
network(Granovetter,1973). panies, and the WorldspanCentral Reservation
The appearanceof networksof firms in which System, is fundamentally-anchoredin the inno-
market and hierarchicalgovernancemechanisms vation of its transactionmechanism-namely, the
coexist has significantlyenhanced the range of introductionof reverse markets in which cus-
possible organizationalarrangementsfor value tomers post desired prices for sellers' accep-
creation (Doz and Hamel, 1998; Gulati, 1998). tance-by which items such as airlinetickets are
Consequently, strategic management and sold over the Internet. Priceline.comhas even
entrepreneurshipscholars have moved beyond been granteda business method patent on their
innovative transaction method. This method have focused on the ways in which investment
distinguishesthe firm from an ordinary,online in informationtechnologycan reducecoordination
travel agency and poises the firm to tap the costs and transactionrisk (Clemons and Row,
more traditional,well-known sources of value 1992). In general, organizationsthat economize
in networks discussed above. As this example on transactioncosts can be expected to extract
indicates, virtual markets, with their unprec- more value from transactions.
edented reach, connectivity, and low-cost infor- One of the main effects of transactingover the
mation processing power, open entirely new Internet,or in any highly networkedenvironment,
possibilitiesfor value creationthroughthe struc- is the reductionin transactioncosts it engenders
turingof transactionsin novel ways. These new (Dyer, 1997). Hence, the transaction cost
transactionstructuresare not fully capturedby approachcritically informs our understandingof
networktheory. value creation in e-business. Transactioncosts
include 'the time spent by managers and
Transaction cost economics employees searchingfor customersand suppliers,
communicatingwith counterpartsin other com-
The centralquestionaddressedby transactioncost panies regarding transaction details ... the costs
economics is why firms internalizetransactions of travel, physical space for meetings, and proc-
that might otherwise be conducted in markets essing paper documents,'as well as the costs of
(Coase, 1937). The main theoreticalframework productionand inventorymanagement(Lucking-
was developed by Williamson (1975, 1979, Reiley and Spulber,2001). In additionto decreas-
1983). He suggests that 'a transactionoccurs ing these direct costs of economic transactions,
when a good or service is transferredacross a e-businessesmay also reduce indirectcosts, such
technologicallyseparableinterface.One stage of as the costs of adverse selection, moral hazard,
processing or assembly activity terminates,and and hold-up. This may result from an increased
anotherbegins' (Williamson, 1983: 104). Willi- frequencyof transactions(because of open stan-
amsonidentifiedboundedrationalitycoupledwith dards, anyone can interactwith anyone else), a
uncertainty and complexity, asymmetric infor- reductionin transactionuncertainty(by providing
mation, and opportunismin small-numberssitu- a wealth of transaction-specific information),and
ations as conditions under which transactional a reduction in asset specificity (for example,
inefficienciesmay arisethatvary with the adopted through lower site specificity-the next site is
governance mechanism (Williamson, 1975). At only 'one click away'). The small-numbersbar-
its core, then, transactioncost theoryis concerned gaining condition may be relieved in the virtual
with explainingthe choice of the most efficient market situation because of the possibility for
governance form given a transaction that is large numbersof previouslyunconnectedparties
embeddedin a specific economiccontext.Critical (e.g., buyers and sellers) to interact.
dimensionsof transactionsinfluencingthis choice Nonetheless, the emphasis of transactioncost
are uncertainty, exchange frequency, and the economicson efficiencymay divertattentionfrom
specificityof assets enablingthe exchange(Klein, other fundamentalsourcesof value such as inno-
Crawford,and Alchian, 1978; Williamson,1979). vation and the reconfiguration of resources
Transactioncosts include the costs of planning, (Ghoshal and Moran, 1996). The theory also
adapting, executing, and monitoringtask com- focuses on cost minimizationby single parties
pletion (Williamson,1983). and neglects the interdependence between
Transaction cost economics identifies trans- exchange parties and the opportunitiesfor joint
action efficiency as a major source of value, as value maximizationthat this presents(Zajac and
enhancedefficiencyreducescosts. It suggeststhat Olsen, 1993). In addition, governance modes
value creationcan derive from the attenuationof other than hierarchies and markets (e.g., joint
uncertainty,complexity, informationasymmetry, ventures)receive relativelylittle attention,which
and small-numbers bargaining conditions contrasts with the importanceof strategic net-
(Williamson, 1975). Moreover, reputation,trust, works in e-business. Finally, Williamson (1983)
and transactionalexperience can lower the cost implies that a transactionis a discreteevent that
of idiosyncratic exchanges between firms is valuable by itself, as it reflects the choice of
(Williamson, 1979, 1983). Recently, researchers the most efficientgovernanceform and hence can
Copyright? 2001 John Wiley & Sons, Ltd. Strat. Mgmt. J., 22: 493-520 (2001)
be a sourceof transactionalefficiencies.However, inquiry. The analysts wrote up the answers to

in the context of virtualmarkets,consideringany the questions using informationgathered from
given exchangein isolationfrom otherexchanges multipledata sources,writingup to severalpara-
that may complementor facilitate that exchange graphsin responseto each question.
makes it difficult to assess the value createdby Our research design was based on multiple
a specific economic exchange. This is evident cases and multipleinvestigators,therebyallowing
from the absence of direct empirical validation for replication logic (Yin, 1989). That is, we
of the relationshipbetween exchange attributes treateda series of cases like a series of experi-
and market and firm performance(Poppo and ments. Each case served to test the theoretical
Zenger, 1998), and the absence of estimates of insights gained from the examinationof previous
transactioncosts themselves (see Shelanski and cases, and to modify or refine them. This repli-
Klein, 1995, for a review). cation logic fosters the emergence of testable
theory that is free of researcherbias (Eisenhardt,
1989), and allows for a close correspondence
Summary between theory and data (Glaser and Strauss,
Each theoretical framework discussed above 1967). Such a groundingof the emergingtheory
makes valuable suggestions about possible in the data can provide a new perspectiveon an
sourcesof value creation.As we have seen, many alreadyresearchedtopic (e.g., Hitt et al., 1998).
of the insights gained from cumulativeresearch However,it is especiallyuseful in the early stages
in entrepreneurship and strategicmanagementare of researchon a topic, when it is not clear yet
applicable to e-business. However, the multitude to what extent the researchquestion is informed
of value driverssuggested in the literatureraises by existing theories(for a recentexampleof such
the question of precisely which sources of value an inductive study, see Galunic and Eisenhardt,
are of particularimportancein e-business, and 2001). Both motivationshold in the context of
whetheruniquevalue driverscan be identifiedin e-business. Furthermore,using case studies is a
the context of e-business. We have also drawn good researchstrategyfor examining 'a contem-
attentionto the fact that each theoreticalframe- porary phenomenon in its real-life context,
work that might explain value creationhas limi- especially when the boundariesbetweenphenom-
tations when applied in the context of highly enon and context are not clearly evident' (Yin,
interconnectedelectronicmarkets.We believe that 1981: 59). This difficulty is present in the e-
this reinforcesthe need for an identificationand business context.
prioritizationof the sources of value creationin
e-business. We begin this process by grounding
of e-business firms
a model of the sources of value creation in e- Population
business in using data on e-business firms. We define an e-businessfirm as one that derives
a significant proportion(at least 10%) of its
revenues from transactionsconducted over the
DATA AND METHOD Internet.This definitionof an e-business firm is
Research strategy quite broad. It includes, for example, Internet
Service Providers(e.g., EuropeanISP Freeserve),
A lack of prior theorizing about a topic makes and companiesthat have not aligned all of their
the inductivecase study approachan appropriate internalbusiness processes with the Internetbut
choice of methodology for developing theory that use the Internet solely as a sales channel
(Eisenhardt, 1989). Hence, to gain a deeper (e.g., companies such as the speech recognition
understandingof value creationin e-business,we softwareproviderLernoutand Hauspie). On the
conductedin-depth inquiriesinto the sources of other hand, it excludes providers of Internet-
value creation of 59 e-business firms. Our related hardwareor software, that is, firms that
researchanalysts, two of our former MBA stu- facilitate e-business but that do not engage in
dents carefullyselected from a pool of applicants the activity themselves (e.g., a backbone switch
based on their sound understandingof e-business manufacturer,such as Packet Engines Inc.).
transactions,investigatedeach firmusing approxi- Companies that derive all of their revenues
mately 50 to
open-ended questions guide their from e-business (so-called 'pureplays') are rela-
tively easy to identify using publicly available States or in Europe,(b) be publicly quoted on a
descriptionsof their majorlines of business (e.g., stock exchange, and (c) involve individualcon-
Amazon.com).In other instances,however, it is sumers in some of the electronic transactionsit
more difficultto establishwhethera firm derives enables. The internationalscope of our study
significantrevenues from e-business. This is the not only reflects the decreasing importanceof
case for many incumbents (e.g., the British geographicboundariesin virtualmarkets,it also
retailerIceland). It is often impossible to assert strengthens our theory development. Theory
if this criterionhas been met since companies building on value creation in e-business from
seldom reporttheir e-businessrevenuesas a sep- inductivecase studies is less idiosyncraticif one
arate category. In these cases, we used other allows for cases from differenteconomicenviron-
informationto determinethe company's fit with ments.9
our target population.For example, we checked We chose to include only public companiesin
whether at least two trade publicationssuch as our sampleto ensurethe availabilityand accuracy
the Wall Street Journal and the Financial Times of information.We are awarethat this limits the
referredto the company as an e-business, or a scope of our analysis, as there are many private
pioneer or early innovatorin the virtual market firms with interestingbusiness ideas. However,
space. unlike private firms, publicly traded companies
provide a wealth of data that can be collected,
organized, and analyzed. At this point, it is
Sample unclear whether or not this choice introducesa
For the United States, we created a list of e- large-companybias into our sample, and hence
businessesthat went public between2 April 1996 into our conceptual development,because there
(Lycos)8 and 15 October 1999 (Women.com are many large,privatee-businessoperations,and
Networks) using information available on several large, public firms not included in our
www.hoovers.com.This list includes about 150 sample (e.g., AOL and Yahoo).
firms,most of which are 'pureplays.' Our initial Includingonly public companiesin our sample
subsampleof 30 U.S. e-business companieswas may bias it towardssurvivingcompanies.While
then takenat randomfromthis list on the basis of limitationson the availabilityof data preventus
a uniformprobabilitydistributionover all sample from broadeningthe sample to firms that 'failed'
companies. The U.S. subsample represents a (accordingto some definitionof failure), we do
broad cross-sectionof firms (see Appendix).By not believe that the survivalbias affects the theo-
contrast,the challenge in creating the European retical development.First, some of the firms we
sub-samplewas in identifyingpublice-businesses. studied will likely fail eventually. Second, the
The number of Europeanfirms engaged in e- argumentcan be made for theoreticalratherthan
business,as well as the developmentof indicators random sampling of cases, and for studying
of Internetusage and e-business activity in Eu- 'extremesituationsand polar types in which the
rope, have lagged behind the correspondingfig-
ures in the United States in recentyears (Morgan
Stanley Dean Witter, 1999). Despite these 9 The decision to include U.S. as well as European firms in
difficulties,we establisheda sample of 29 public our sample has several implications. E-business activity in
European e-businesses (also listed in the Europe is dominated less by start-ups, as is the case in the
United States, and more by established companies (Morgan
Appendix).Companieswere found on all major Stanley Dean Witter, 1999). For example, the United King-
Europeanexchanges, as well as on new venture dom's Freeserve is a spin-off of Dixons, a large 'bricks-and-
markets(such as Germany'sNeuer Markt). mortar' retailer, and Spain's Terra Networks is a spin-off of
Telef6nica, a large telecommunication firm. An affiliation (past
To be eligible for inclusion in our sample, an or present) with established companies probably influences the
e-businesshad to (a) be based eitherin the United particular business models of respective e-business firms. For
example, some spin-offs may benefit from the alliance network
of their parent companies, while others may suffer from
8
The principal reason for choosing 2 April 1996 (date of imposed organizational constraints. However, a possible sam-
Lycos's IPO, which was followed a few days later by Yahoo's ple bias toward (mostly former) subsidiaries of established
IPO) as a start date for sampling was that this date marked companies should not affect our ability to develop a general
the beginning of a period of multiple IPOs of e-business framework for evaluating the value creation potential of e-
companies that occurred in quick succession. This enabled us business firms. In fact, such a general framework should be
to create a data set of sufficient size and breadth. independent of the mode of business creation.
process of interest is transparentlyobservable' which is availableto the public online. Data on

(Eisenhardt,1989: 537). companiesincludedin the data base adhereto a
As implied by sampling criterion (c), we single, U.S. standardset by the SEC. In Europe,
focusedour studyon e-businessfirmsthatenabled however, there is no central data depository.In
transactionsin which individualconsumerswere addition, company reporting requirementsvary
involved. These companies are hereaftercollec- across European countries, ranging from strict
tively referred to as 'with-C' companies. For (e.g., the United Kingdom)to relativelylax (e.g.,
example, our sample included so-called 'B-to- Italy). Europeanfirms also vary widely in their
C' (business-to-consumer) companies,which are accountingand disclosurepractices,makingcom-
companies that directly and exclusively engage parisonsacross firms difficult.This made the use
in transactionswith individual customers. We of multiple sources of informationparticularly
did not sample businesses that solely engaged in important.
commercialactivities with other businesses (so-
called 'B-to-B,' or 'business-to-business'
Data analysis
companies).We made this choice based primarily
on the fact that the quality of data availablefor In inductive studies, data analysis is often hard
'with-C' firms was higher than that availablefor to distinguishfrom data collection since building
'B-to-B' firms at the time this research project theory that is groundedin the data is an iterative
was launched.10 process in which the emergentframeis compared
systematically with evidence from each case
Data collection (Eisenhardt,1989). Some researchersargue for a
deliberate process of joint data collection and
We gathereddetailed data on our sample com- analysis (e.g., Glaser and Strauss, 1967). We
panies mainly from publicly available sources: employedthis joint process by frequentlymoving
IPO prospectuses (our major source), annual between the data and the emergingtheory as we
reports, investment analysts' reports, and com- developedour-model.The value drivercategories
panies' web sites. A structuredquestionnairewas derived from our preliminaryanalysis of the
used to collect informationabout: (a) the com- initial data clearly influencedthe design of the
pany (e.g., foundingdate, size, lines of business, subsequentquestionnairethat we used for further
productsand services provided,and some finan- data collection.11
cial data); (b) the natureand sequence of trans- We used standardtechniquesfor both within-
actions that the firm enables (e.g., questions case analysis and cross-caseanalysis (Eisenhardt,
included:'Whatis the company'srole in consum- 1989; Glaserand Strauss,1967;Miles and Huber-
matingeach transaction?'and 'Who are the other man, 1984; Yin, 1989). Within-caseevidence was
playersinvolved?');(c) potentialsourcesof value acquiredby taking notes ratherthan by writing
creation(e.g., questionsincluded:'How important narratives.For this purpose, research analysts
are complementaryproducts or services?' and answeredthe questions enumeratedin the ques-
'Are they part of the transactionoffering?');and tionnaire,integratingand triangulatingfacts from
(d) the firm's strategy (e.g., questions included: the various data sources mentioned above. As
'How does the company position itself vis-a- observed by Yin (1981: 60), 'The final case
vis competitors?').Most of the approximately50 studies resembled comprehensive examinations
questions enumeratedin the questionnairewere ratherthan term papers.' The authorsthen ana-
open-ended,which was consistent with our pri- lyzed these products sequentially and indepen-
maryobjectiveof developinga conceptualframe-
work that was informedby empiricalevidence.
Much high-qualitydata about U.S. firms was 1 We started with an initial version of the questionnaire that
obtained from the SEC's EDGAR data base, reflected a working framework we had already constructed.
This was intended to focus and to the
bring clarity questions
asked. This initial questionnaire had been pretested on several
cases. Subsequently, we modified, added, and dropped ques-
10We do not believe that our focus on 'with-C' firms tions about 2 months into the research project, and made
seriously
affects the theory development. The value driver categories similar revisions again about 1 month later. After every
identified in the analysis should also apply to 'B-to-B' models, revision, all cases that had hitherto been examined were
albeit perhaps with different weights. updated accordingly.
dently, and periodically discussed their obser- involved in a transaction.13Each of the four
vations in order to reach agreementabout the major value drivers that were identified in the
findings.These analyseswere the basis for gener- analysis-efficiency, complementarities,lock-in,
ating initial hypotheses about the value driver and novelty-and the linkages among them, are
categories, and for helping us gain insight into discussedbelow. We suggest that the presenceof
what makes e-business firms tick. these value drivers, which are anchoredin the
The final model was shaped throughintensive received entrepreneurshipand strategic man-
cross-caseanalysis.We first split the sample into agement theory, enhances the value-creation
two groups,with differentresearchersresponsible potentialof e-business.
for each set. Eisenhardt(1989) notes that this
strategy of dividing the data by data source is
valid for cross-case analysis. We then identified Efficiency
the predominantsources of value creation and The data analysis points to transactionefficiency
comparedthese patternsacross the subsamples. as one of the primaryvalue driversfor e-business.
In orderto corroborateour findings,we tabulated This finding,which is consistentwith transaction
the evidence underlyingthe sourcesof value cre- costs theory(Williamson,1975, 1983, 1989), sug-
ation as suggested by Miles and Huberman gests that transactionefficiency increases when
(1984).12 the costs per transactiondecrease, where 'costs'
Two key theoreticalinsights emerge from our are broadly defined (as elaborated in detail
data analysis. One is that four potential sources below). Therefore, the greater the transaction
of value creation are present in e-businesses, efficiency gains that are enabled by a particular
namelyefficiency,complementarities, lock-in, and e-business, the lower the costs and hence the
novelty. The other is that, e-business,the main more valuableit will be.
in
locus of value creation,and hence the appropriate Efficiency enhancements relative to offline
unit of analysis, spans firm and industrybound- businesses (i.e., those of companiesoperatingin
aries and can be capturedby the business model. traditionalmarkets),and relative to other online
In the next section we discuss the four value businesses (i.e., those of companiesoperatingin
drivers and the interdependenciesamong them. virtualmarkets),can be realized in a numberof
In the discussionsection, we then offer a precise ways. One is by reducinginformationasymme-
definitionof a businessmodel and show how this triesbetweenbuyersand sellersthroughthe supply
constructcapturesthe identifiedsources of value of up-to-dateand comprehensiveinformation.The
in a more comprehensiveway than more tra- speed and facility with which informationcan be
ditional units of analysis such as the firm, the transmittedvia the Internetmakes this approach
industry,the individual transaction,or the net- convenient and easy. Improvedinformationcan
work. also reduce customers' search and bargaining
costs (Lucking-Reileyand Spulber,2001), as well
as opportunisticbehavior(Williamson,1975). By
EMERGENT THEORY: SOURCES OF leveraging the cheap interconnectivityof virtual
VALUE CREATION IN E-BUSINESS markets,e-businessesfurtherenhancetransaction
efficiency by enabling faster and more informed
1
Figure depicts the four sourcesof value creation decision making. Also, they provide for greater
in e-businessthatemergedfrom the data analysis.
The term 'value' refers to the total value created
in e-business transactionsregardlessof whether 13 For example, Brandenburger and Stuart (1996) show that
the total value created in simplified supply chain with one
it is the firm, the customer,or any other partici- supplier, one firm, and one acustomer is equal to the customer's
pant in the transactionwho appropriatesthat willingness-to-pay minus the supplier's opportunity cost. This
value. We therefore adopt Brandenburgerand is derived from expressing total value created as the sum of
the values by each party. The customer's willing-
Stuart's(1996) view of total value createdas the ness to payappropriated
is defined as the amount of money at which the
sum of the values appropriatedby each party customer is indifferent between owning a product/service or
the money. Opportunity cost of the supplier is defined as the
amount of money at which the supplier is indifferent between
12
owning the resource (and hence deploying it in an alternative
See Table 1 below. use) or trading it for money.
* New transactionstructures
Novelty Newtransactional
content
? New participants,etc.
_ v
A f
Efficiency Lock-In
? Search costs | Switchingcosts
^ Selection range | * Loyaltyprograms
* Symmetric * DominantDesign
information * Trust
? Simplicity * Customization,
? Speed etc.
* Scale economies, Positive network
etc. externalities
Complementarities ? Direct
* Between productsand services for * Indirect
customers (verticalversus horizontal)
* Between on-lineand off-lineassets
* Between technologies
* Between activities
Figure1. Sourcesof value creationin e-business
selection at lower costs by reducing distribution customers, otherwise inefficiencies associated

costs, streamlining inventory management, simpli- with the implementation of a customer's decision
fying transactions (thus reduce the likelihood of may offset efficiency gains associated with the
mistakes), allowing individual customers to bene- customer's decision-making process.
fit from scale economies through demand aggre- Efficiency gains in highly networked industries
gation and bulk purchasing, streamlining the sup- are well documented in the management litera-
ply chain, and speeding up transaction processing ture. A study of highly networked Japanese firms,
and order fulfillment, thereby benefiting both ven- for example, suggests that information flows and
dors and customers. In a recent study, Garciano reduced asymmetries of information, among other
and Kaplan (2000) find that using an online rather factors, are important in reducing the potential
than an offline auction format for trading cars transaction costs associated with specialized assets
between businesses halves transaction costs. Mar- (Dyer, 1997). More generally, information tech-
keting and sales costs, transaction-processing nology is believed to lead to a reduction in the
costs, and communication costs can also be costs of coordinating and executing transactions
reduced in an efficient e-business, and the firm's (Clemons and Row, 1992).
value-creating potential can be enhanced through
scalability (i.e., increasing the number of trans-
actions that flow through the e-business platform). Complementarities
Autobytel.com is a case in point. Potential auto Complementarities are present whenever having
buyers are supplied with detailed and comprehen- a bundle of goods together provides more value
sive comparative shopping information on differ- than the total value of having each of the goods
ent models and the costs to the dealers of these separately. In the strategy literature, Branden-
models. Potential buyers can then quickly make burger and Nalebuff (1996) have highlighted the
well-informed decisions. The buying process is importance of providing complementary outputs
substantially simplified and accelerated, and bar- to customers.14They state that, 'A player is your
gaining costs are reduced. While vendors' mar-
gins on each sale might be lower, sales volumes 14
Complementarities can be defined with respect to outputs
increase at essentially no marginal costs. It should or inputs, that is, with respect to the determinants of a firm's
profit function. A profit function that is well behaved (i.e.,
be noted, however, that the overall efficiency gain concave, continuous, and twice continuously differentiable) is
enabled by Autobytel.com depends partially on complementary in its inputs if raising the level of one input
the quality of contributions of Autobytel.com's variable increases the marginal return to the other input
variable. This notion of complementarity goes back to Edge-
partners. Car dealers, for example, must be able worth, Milgrom, and Roberts (1990, 1995), who present a
to deliver without delays the products offered to generalization of this idea that is relevant for the strategy field.
complementorif customers value your product company that facilitates community building
more when they have the other player's product among Internetusers and exploits its customer
than when they have your product alone' base througha mix of e-business activities, such
(Brandenburgerand Nalebuff, 1996: 18). RBV as auctions, sales, and direct marketing.
theory also highlightsthe role of complementari- Xoom.comattractscustomersby offeringan array
ties among strategicassets as a source of value of free complementaryInternetservices, such as
creation(Amit and Schoemaker,1993); and net- home page building and hosting, access to chat
work theory highlights the importanceof com- rooms and message boards,e-mail, online greet-
plementaritiesamong the participantsin the net- ing cards, downloadablesoftware utilities, and
work (Gulati, 1999). Hence, complementarities clip art. These services are not directlyrelatedto
can be expected to increase value by enabling the productsXoom.com sells or to the auctions
revenue increases. they host. However, they fit well with the com-
The data analysis suggests that e-businesses munity aspect of Xoom.com since they facilitate
leveragethis potentialfor value creationby offer- communicationamong members.
ing bundles of complementaryproductsand ser- E-businesses may also create value by capi-
vices to their customers. These complementary talizing on complementaritiesamong activities
goods may be vertical complementarities(e.g., such as supply-chainintegration,and complemen-
after-salesservices) or horizontalcomplementari- tarities among technologies such as linking the
ties (e.g., one-stop shopping, or cameras and imaging technology of one business with the
films) that are provided by partnerfirms. They Internet communicationtechnology of another,
are often directly related to a core transaction therebyunleashinghidden value.
enabled by the firm. For example, e-bookers, a Our analysis also highlights the inter-
European online travel site, grants its customers dependency between the sources of value cre-
access to weatherinformation,currencyexchange ation. Efficiency gains made possible by infor-
rate information,and appointmentswith immuni- mation technology pave the way for the
zation clinics. These services enhance the value exploitationof complementaritiesin e-business.
of the core products(airlinetickets and vacation Weaving together the resources and capabilities
packages) and make it convenient for users to of distinct firms, a hallmarkof e-businesses, is
book travel and vacationswith e-bookers. economicallycompelling when transactioncosts,
The data also point to offline assets that com- and hence the threat of opportunism,are low.
plement online offerings. Customers who buy We note thatthe reverseis also true:complemen-
productsover the Internetvalue the possibilityof taritiesmay lead to increasedefficiency, at least
getting after-salesservice offered throughbricks- from a customer'spoint of view. Whencustomers
and-mortar retail outlets, including the con- have access to products and services that are
venience of returningor exchangingmerchandise. complementaryto the primaryproductof interest,
This complementaritybetween online and offline efficiencymay be enhanced,for example,through
businesses is the essence of 'click-and-mortar' reducedsearchcosts (e.g., when purchasinga car
offerings such as that provided by a company with the help of Autobytel.com,one is automati-
such as barnesandnoble.com. The complementar- cally offered car insurance, a complementary
ity between barnesandnoble.com and its bricks- product)and improveddecision-making.
and-mortarcounterpartcreates value for cus-
tomers by offering them the opportunity to
browse and orderonline, and to receive books in Lock-in
bricks-and-mortar stores. It also createsvalue for The value-creatingpotential of an e-business is
its business partnersby allowing them to utilize enhancedby the extent to which customers are
the interconnectivityof virtual marketsto cross- motivatedto engage in repeattransactions(which
market their productson computerscreens that tends to increasetransactionvolume), and by the
are placed in Barnes & Noble bookstores. extent to which strategicpartnershave incentives
The data furthersuggest that it is desirablefor to maintainand improvetheir associations(which
e-businesses to offer complementarygoods that may result in both increasedwillingness to pay
may not be directly related to the core trans- of customers and lower opportunitycosts for
actions. Consider, for example, Xoom.com, a firms). These value-creatingattributesof an e-
business can be achieved through 'lock-in.' Lock- example, E*Trade's web site contains a customiz-
in prevents the migration of customers and stra- able, one-stop 'market command center' that pro-
tegic partners to competitors, thus creating value vides frequently updated commentary on stock
in the aforementioned ways. Lock-in is mani- trading throughout the day, customized news,
fested as switching costs, which are anchored in alerts, and real-time stock-quotes. Other e-
Williamson's (1975) transaction cost framework, business sites offer customized 'one-click
and as network externalities, which has its roots ordering' as a standard feature. In addition, many
in network theory (Katz and Shapiro, online vendors use data-mining methods to per-
1985; Shapiro and Varian, 1999). It should sonalize products, information, and services.
also be noted that, as RBV theory suggests, These methods include the analysis of submitted
a firm's strategic assets, such as its brand customer information, click streams, and past pur-
name, and buyer-seller trust, both contribute to chases in order to set up personalized storefronts
lock-in. or create a personalized interface, conduct direct
The data analysis reveals several ways in which advertising, target emails, and facilitate cross-
customer retention can be enhanced. First, loyalty selling. For example, online electronics retailer
programs (Varian, 1999) rewarding repeat cus- Cyberian Outpost uses click analysis software and
tomers with special bonuses can be established. past purchase analysis for effective cross-selling;
U.S. retailer baresandnoble.com's rewards pro- even impulse items (i.e., 'add-ons') are rec-
gram in collaboration with Master Card is a good ommended to customers at the checkout. Per-
example. Bonus points collected via the use of sonalization can also be achieved with filtering
Master Card are redeemable towards baresand- tools that compare a customer's purchase patterns
noble.com reward certificates which in turn may with those of like-minded customers and make
be used to purchase baresandnoble.com products. recommendations based on inferred tastes (Smith
Second, firms can develop dominant design pro- et al., 1999). This mechanism exhibits the inter-
prietary standards (Teece, 1987) for business esting property that the more the customer inter-
processes, products, and services (e.g., Amazon's acts with the system, the more accurate the
patented shopping cart). Third, firms can establish matching results become. Customers then have
trustful relationships with customers, for example, high incentives to use the system. This creates
by offering them transaction safety and reliability a positive feedback loop (Arthur, 1990). More
guaranteed by independent and highly credible important for our discussion of e-business,
third parties. Consodata, a European direct mail- however, is the idea that increasing returns
ing firm, demonstrates this ideal by promoting (Arthur, 1996) and positive feedback may derive
in-house systems to protect data from misuse, from network effects (Katz and Shapiro, 1985;
but, more importantly, by accommodating inspec- Shapiro and Varian, 1999). These are discussed
tions by the French government agency CNIL below.
(Commission Nationale Informatique et Libertes). Virtual markets also enable e-business firms to
To the extent that customers develop trust in an create virtual communities that bond participants
e-business company through such measures, they to a particular e-business (Hagel and Armstrong,
are more likely to remain loyal to the site rather 1997). Such communities enable frequent inter-
than switch to a competitor. actions on a wide range of topics and thereby
Familiarity with the interface design of a web create a loyalty and enhance transaction frequency
site requires customer learning; once this learning (e.g., Verticalnet.com). We note how all of the
has begun, it inhibits customers from switching above measures use and leverage the unique
to other sites where their learning would have to characteristics introduced by virtual markets, such
begin again (Smith, Bailey, and Brynjolfsson, as high interconnectivity, speed of information
1999). This argument gains strength when oppor- processing, and lack of geographical constraints.
tunities for customization (initiated by the Given the enormous reach of virtual markets, e-
customer) and personalization (initiated by the e- business firms often connect numerous parties
business) are exploited. Our data suggest that e- that participate in commercial transactions. They
businesses enhance lock-in by enabling customers can thus be considered network generators. Net-
to customize products, services, or information to works may exhibit externalities in that the pro-
their individual needs in a variety of ways. For duction or consumption activities of one party
connectedto the networkhave an effect on the be the buyers and sellers. Here, the total value
production or utility functions of other parti- createdis a direct functionof networksize.
cipants in the network.This effect is not trans- Although some e-businesses (for example,
mitted through the price mechanism. Network those revolving aroundonline communitiesand
externalitiesare usually understoodas positive auctions) are more likely than others (for
consumptionexternalities in which 'the utility example, those focusing mainly on direct, online
that a user derives from consumption of the sales) to exhibit importantnetworkexternalities,
good increases with the numberof other agents e-businessoperationscan be designed to harness
consuming the good' (Katz and Shapiro, 1985: the power of this lock-in mechanism. Ama-
424). Henceforth,we will refer only to consump- zon.com, for example, has adoptedvarious com-
tion externalitieswhen discussingnetworkexter- munity features(Kotha, 1998) such as its 'com-
nalities. In the context of e-business, network munity of interests' allowing its customers to
externalitiesare present when the value created write book reviews. (This, by the way, is an
for customersincreaseswith the size of the cus- interestingexample of how highly networkede-
tomer base. Consider,for example, a community businesses can enable customers themselves to
site such as that createdby Fortunecity,where a create value.) Even stronger are the network
user benefits when there are more participants effects createdby online vendors of video game
with whom she or he can interactin chat rooms, software, such as Cryo-Interactiveor Game-
on bulletinboards,etc. After a new memberhas play.com,that providea web locationwhere cus-
joined the community,it becomes more attractive tomers can interact and play games (obtained
for other potential members to subscribe. from the web provider)with each other.
The opposite is also true-if a site is unattrac- Efficiencyand complementaritiesas sources of
tive and loses members, it becomes less value creation (as describedabove) can also be
attractivefor existing subscribers,who may drop helpful in fostering lock-in. The efficiency fea-
out. A dangerous downward spiral is set in tures and complementaryproduct and service
motion that, in the extreme case, can destroy offerings of an e-business may serve to attract
the business. and retaincustomersand partners.The higherthe
There may also be indirect network exter- relative benefits offered to these parties, the
nalities that arise when economic agents benefit higher their incentives to stick with or join the
from the existence of a positive feedback loop network established by the e-business. The
with another group of agents. Consider, for increasingreturnpropertiesinherentto network
example, online auctioncompaniessuch as eBay effects then magnifythe relativebenefitsoffered,
or QXL. A buyer on one of these auction sites thus triggeringpositive feedbackdynamics.
has no immediateadvantagefrom the presence Conversely, when an e-business creates lock-
of additionalbuyers. On the contrary,other buy- in, this can also have positive effects on its
ers who are willing to purchasethe same mer- efficiency and on the degree to which it provides
chandisemay preventthe desiredtrade.However, for complementarities. For example,many auction
the presenceof more buyers (a signal of current sites enable buyers to rate sellers. This feature
and futuremarketliquidity)makes it more attrac- increases buyers' trust in the fairness of trans-
tive for potentialsellers to put their productsup actions and thereforefosters stickiness.This fea-
for sale at that particularsite. This, in return, ture also provides a strong incentive for repeat
enhancesthe site's attractivenessto potentialbuy- sellers to refrain from cheating, which clearly
ers. Buyersthus benefitindirectlyfrom increasing enhances transaction efficiency. Moreover, a
the numbers of other buyers. The same logic strongpotentialfor lock-in providesan incentive
holds for sellers. for high-profilepartnersto contributecomplemen-
The indirect network effect, which Katz and tary productsand servicesbecauseof the promise
Shapiro(1985) termthe 'hardware-software para- of high-volume(repeat)business. There are thus
digm,' can be attributedto the complementary important relationships between lock-in,
natureof some of the major componentsof the efficiency, and complementaritiesas sources of
networkin which an e-businessfirmis embedded value creation. The potential value of an e-
(Economides, 1996). In an auction setting, the business depends on the combinedeffects of all
complementarycomponentsof the networkwould these value drivers.
Novelty with a novel business method (such as

Priceline.com's)makes it easier to create switch-
The value creation potential of innovationshas ing costs by capturing 'mindshare,' and by
been articulatedby Schumpeter(1934). While the developingbrandawarenessand reputation.Also,
introductionof new products or services, new e-business innovatorscan gain by learning and
methodsof production,distribution,or marketing, accumulatingproprietaryknowledge,and by pre-
or the tapping of new markets have been the empting scarce resources (e.g., eBay.com's pro-
traditionalsourcesof value creationthroughinno- prietarydata set on sellers' auctionhistory)."5
vations,our dataanalysisrevealsthate-businesses Novelty and lock-in, two of the four value
also innovatein the ways they do business, that driversin our model, are linked in two important
is, in the structuringof transactions.For example, ways. First,e-businessinnovatorshave an advan-
eBay was the first company to introduce cus- tage in attracting and retaining customers,
tomer-to-customerauctions on a large scale. In especially in conjunctionwith a strong brand.
this architecture,even low-value items could be Second, being first to marketis an essentialpre-
successfullytradedbetweenindividualconsumers. requisiteto being successful in marketsthat are
Priceline.com introduced reverse markets, characterizedby increasingreturns(Arthur,1996;
wherebyindividualbuyersindicatetheirpurchase Shapiroand Varian, 1999). First movers are in a
needs and reservationprices to sellers. Autoby- good position to initiate the positive feedback
tel.com revolutionized the automobile-retailing dynamics that derive from network externalities
process in the United States through linking (Katz and Shapiro, 1985; Arthur 1990), and to
potentialbuyers,auto dealers,financecompanies, achieve a critical mass of suppliersand/or cus-
and insurance companies, thus enabling round- tomers before others do. In 'winner-takes-most'
the-clock one-stop car shopping from home. markets,it is imperativeto enter a new market
These companies all introduced new ways of first (Shapiroand Varian, 1999).
conductingand aligning commercialtransactions. Novelty is also linked with complementarities.
They create value by connecting previously The main innovationof some e-businessesresides
unconnectedparties, eliminatinginefficiencies in in their complementaryelements, such as the
the buying and selling processesthroughadopting resources and capabilities they combine (e.g.,
innovative transactionmethods, capturinglatent Schumpeter, 1934; Penrose, 1959; Moran and
consumerneeds (such as haggle-freecar purchas- Ghoshal, 1999). CyberianOutpost,a U.S. Inter-
ing from the convenienceof your home), and/or net-only computerretailer,lets customers select
by creating entirely new markets(e.g., auctions computer configurationsalong with accessories
for low-ticket items). and peripheralsolutionsby giving them access to
The unique characteristicsof virtual markets an up-to-datedata base containingover 170,000
(i.e., the removal of geographicaland physical products, including informationon their func-
constraints,possible reversalof informationflows tionalityand compatibility.The database contains
from customersto vendors,and othernovel infor- information on many complementaryproducts
mationbundlingand channelingtechniques)make from partnerfirms (for example, computerhard-
the possibilitiesfor innovationseem endless. For ware manufacturers,accessories producers,and
example, e-business firms can identify and software developers).Each product is presented
incorporatevaluablenew complementaryproducts
and services into their bundle of offerings in 15 In some market spaces such as Internet-based retailing ('e-
novel ways. Anotherdimensionof innovationin tailing') a number of start-up firms that were early movers
e-business refers to the appropriateselection of are currently faced with important difficulties (see, for
example, the recent high-profile bankruptcies of Boo.com,
participatingparties.For example,firmscan direct Garden.com, and MotherNature.com). At the same time, late
and intensifytrafficto their web site by initiating movers who extended their 'bricks-and-mortar' business to
affiliate programs with third parties, who are embrace the Internet like Wal-Mart, Lands End or Staples
are able to effectively leverage their strong brand name and
compensatedfor enablingthe executionof trans- offline operations in the virtual market space, thus unlocking
actions from their own web sites. the value provided by strong complementarities between
Therecan be substantialfirst-moveradvantages online andthis offline activities, assets, and capabilities. Our model
of late movers in e-tailing through
for e-business innovators (Lieberman and the importanceadvantage
explains
of complementarities as a source of value
Montgomery, 1988). Being the first to market creation in this particular market space.
to interestedbuyerswith possible complementary elty. However, as Table 2 shows, the theoretical

solutions, includingwarrantyoptions. Of course, lenses that are commonly used in the fields of
the database also containsinformationon substi- strategic managementand entrepreneurshipfor
tute products.From the customer's perspective, viewing and explainingwealthcreationemphasize
however,informationaboutany of these products distinctsourcesof value. In our analysis,each of
is complementarybecause it enables them to the identifiedsources of value creation (each of
make better choices. CyberianOutpostis thus a which cuts across established theoretical
good example of a novel e-business architecture frameworks) commands equal attention. Our
that is based almost exclusively on the logic of analysis thus suggests that no single theoretical
harnessingcomplementaritiesfor customers. frameworkdiscussed in this paper (i.e., value
Finally, there is also an importantrelationship chain analysis, Schumpeterianinnovation,RBV,
betweennovelty and efficiency.Certainefficiency strategic network theory, transaction cost
features of e-businesses may be due to novel economics) should be given priority over the
assets that can be created and exploited in the others when examiningthe value creationpoten-
context of virtual markets. For example, Art- tial of e-businesses.In other words, our analysis
net.com,a Europeancompanythat enablesonline calls for an integrationof the variousframeworks,
art auctions, reduces the asymmetry of infor- in particularfor the linking of strategic man-
mation between the buyers and sellers of art agement and entrepreneurship theories of value
(traditionallya source of severe inefficiencies) creation (Hitt and Ireland, 2000; McGrathand
throughmaintainingand expandinga data base MacMillan,2000). Scholars in both fields have
of transactions(including informationon price) recentlymade considerableprogressin advancing
that is accessible to its clients. This information this idea. For example, Gulati (1999) and Afuah
service, which allows participantsin auctionsto (2000) have successfullybegun to integrateRBV
benchmarkcurrenttransactionsagainsthistoricart and strategic network theory, emphasizing the
sales, is novel in the art auction business. It importanceof resourcesand capabilitiesof net-
also increases transactionefficiency by reducing work partnersfor a firm's performance.Jones,
marketfailuresthatare due to informationalprob- Hesterly, and Borgatti (1997) have initiated the
lems. integrationof transactioncost economicsand net-
Table 1 illustrates, in summary form, the work theory, arguing that because they enable
results of our in-depth, case-based analyses of flexibility, enhance cooperation,and create trust,
the sources of value creation of three of our networks arise under conditions of asset speci-
sample firms.The table depicts the specific ways ficity, demand uncertainty,and task complexity
in which novelty, lock-in, complementarities, and and frequency.These works are promising and
efficiency are manifested in these particularfirms. importantsteps towards an improvedtheoretical
While some traditionalstrategyframeworkssuch understandingof the phenomenonof wealth cre-
as RBV (e.g., Barney, 1991) focus on the com- ation. However, as our analysis shows, there are
petitive advantageof firms, and hence on value abundantlessons to be learned from studies of
appropriation,our model, which emerged from e-businessesin action.
the analysis of the data, is concernedwith total The second theoreticalinsight emanatingfrom
value creation. We believe that value creation the preceding section refers to the inter-
strikes at the heart of the strategicmanagement dependenceof the sources of value and to the
and entrepreneurship fields, as it is an essential locus of value creationin e-business.As we have
prerequisite for value appropriation(see also seen, the presence of each value driver can
Porter, 1985; Brandenburger and Stuart,1996). enhance the effectiveness of any other driver.
This gives even more weight to our call for an
improved integrationof the various theories of
DISCUSSION value creationin orderto yield a more complete
picture of the functioning of e-businesses and
Two major insights emerge from the preceding capturethe various sources of value creation.
section. The first is that four potentialsources of One stepping stone on the road towards an
value creationare presentin e-businesses,namely integratedtheory of value creationwould be the
efficiency, complementarities,lock-in, and nov- definitionof a unit of analysis that capturesthe
o Table 1. Value sources attributes of selected e-business firms
ol
Efficiency Complementarities Lock-in
Autobytel.com (ABT) * Consumersbenefit from * Complementaryservices * Repeat purchases supporte

informed decisions enabled offered by business model by strong incentive schem
0
(Automobile retailing) by rich online content, participants(cars, insurance, (reward points)
valuation reports, photos of financing) * Affiliated dealers have hig
(U.S. firm) vehicles, and inspection * Company combines the switching costs because of
reports for used vehicles reach and richness of virtual investments in the Extran
* Dealers benefit from lower markets with the bricks-and- connection and subscriptio
0
r inventory costs due to mortar necessities (viewing, contracts
automatedonline order test drive, delivery, service) * Products and services
taking, higher volume, lower * Hence, ABT achieves offered to end-users are
selling costs, lower importantvertical and personalized (click stream
marketing,advertising, and horizontal complementarities analysis, cookies, targeted
personnel costs emails, 'Your Garage')
* Productresearch is faster
than with offline models
Cyberian Outpost * Customerscan make * Online presence has no * Customers can customize
informed decisions through 'shelf space' constraints, products by comparing
(OrderingPCs, software use of extensive information therefore a wide range of product features and
solution) * Online presence allows the complementaryproducts is choosing according to thei
company to offer a larger offered preferences
(U.S. firm) range of products than * Large number of * Affiliate programs enable
offline competitors (over participantsand goods virtual store creation on
170,000 products) and enable cross-selling individual affiliates' pages
powerful search capabilities * Vertical and horizontal * Click Miles program is
* Warehouse, shipping, complementaritiesare offered: for each purchase
purchasing,and order- importantfor this business subscriberreceives points
processing information are model (never achieved on
integratedin order to such scale in bricks-and
deliver 'the next day' mortar firms)
Ricardo.de * Transactionactors are either * Participantsin business * Offers loyalty program

"I
r,
identified or reviewed, model offer many * Partnerspromote transacti
(Auctions) thereforeclients can make complementaryproducts safety and reliability throu
informed decisions * Company sometimes takes goods insurance, password
(Europeanfirm) * Informationasymmetry possession of items offered and encryption technologie
reduced through photo and in auctions, thus provides * Participantlock-in is creat
w product descriptions complementaryproducts through reputation,buildin
* Clients find online bidding itself upon transactionshistory,
C-
easier then the offline * Strong supply chain and participantrating syste
bidding integration
Table 2. Theoretical anchoring of sources of value creation in e-business
Efficiency Complementarities Lock-in Novelty
Value chain analysis Medium Medium Low Medium

Schumpeterian innovation Low Low Low High
Resource-based view Low High Medium Medium
Theory of strategic networks Medium Medium High Medium
Transaction cost economics High Low Medium Low
Note: Tableentriesdescribethe degreeto which the identifiedsourcesof value in e-businessare viewed, directlyor indirectly,
by differenttheoreticalframeworksin strategicmanagementand entrepreneurship as importantfor value creation.
various interdependent sources of value identified anism for enabling transactions. The choice of
in this paper. Note that the different theoretical transaction structure influences the flexibility,
approaches reviewed above suggest distinct units adaptability, and scalability of the actual trans-
of analysis that are commensurate with the actions. Finally, transaction governance refers to
alleged main locus of value creation. In the value the ways in which flows of information,
chain framework, it is the firm's activities, in resources, and goods are controlled by the rel-
Schumpeter's theory of economic development, it evant parties. It also refers to the legal form
is the firm (and in particular the entrepreneur), of organization, and to the incentives for the
in RBV, it is the resources and capabilities that participants in transactions.
constitute the firm, in strategic network theory, it This definition of a business model is consis-
is the network of firms, and in transaction cost tent with the importance of transaction efficiency
economics, it is the transaction that is both the (emphasized by transaction cost economics), nov-
unit of analysis and the presumed locus of value elty in transaction content, structure and gover-
creation. Using any of these theoretical frame- nance (Schumpeterianinnovation), complementari-
works in isolation would result in some crucial ties among resources and capabilities (advocated
aspects of value creation in e-business either by RBV), and network effects (inherent in stra-
being ignored or not being given due importance. tegic networks). It captures the sources of value
The question thus arises as to the appropriate in e-businesses identified in this paper and is
unit of analysis for understanding how e-business hence applicable in virtual markets in general
firms create wealth. (see Table 3). We believe that the business-model
Based on our analysis of the sources of value construct is useful because it explains and predicts
creation in e-business, and drawing on the an empirical phenomenon (namely, value creation
received theories of strategy and entrepreneurship, in e-business) that is not fully explained or pre-
we propose the business model as a unit of dicted by conceptual frameworks already in exis-
analysis. tence (Shane and Venkatraman, 2000).
The business model construct builds on ideas
Definition: A business model depicts the con- advocated by the main theoretical frameworks of
tent, structure, and governance of transactions strategic management and entrepreneurship
designed so as to create value through the research. First, it is consistent with Schumpeter's
exploitation of business opportunities. (1942) idea that innovation is an act of 'creative
destruction.' In the context of the business model,
Transaction content refers to the goods or innovation refers not only to products, production
information that are being exchanged, and to the processes, distribution channels, and markets, but
resources and capabilities that are required to also to exchange mechanisms and transaction
enable the exchange. Transaction structure refers architectures. Innovative business models such as
to the parties that participate in the exchange the ones adopted by Priceline.com (with its pa-
and the ways in which these parties are linked. tented 'name your own price' exchange
Transaction structure also includes the order in mechanism) or Autobytel.com (with its innovative
which exchanges take place (i.e., their attempt at re-intermediating transactions among
sequencing), and the adopted exchange mech- car buyers, car dealers, service and information
0
(0
,IC
Table 3. Source of value creation and the business model construct
Efficiency Complementarities Lock-in

8
0.
0
Business * Exchange mechanism * Cross-selling S Transaction reliability
model * Transaction speed * Activities of participants, e.g., 0 Affiliate programs
0 structure * Bargaining costs supply chain integration 0*
Direct network externalities
* Costs for marketing, sales, * Combination of on-line and 0 Indirect network externalities
transaction processing, off-line transactions 0 Transaction safety mechanism
communication Learning investments made
a- * Access to large number of
0- by participants
products, services,
information
* Inventory costs of
participating firms
* Transaction simplicity
* Demand aggregation
* Supply aggregation
* Scalability of transaction
volume
Business * Information made available * Combination of on-line and * Promotion of trust through
model as a basis for decision- off-line resources and third party
content making; reduces asymmetry capabilities * Participants deploy
of information * Access to complementary specialized assets (e.g.,
* About goods products, services, and software)
* About participants information * Dominant design
* Transparencyof transactions, * From firm * Customized and/or
i.e., information that is * From partner firms personalized offerings and
provided about flows of * From customers features
goods * Vertical products/services
* Horizontal products/services
* Technologies of participants
0
Business * Incentives to develop co- * Loyalty programs
model specialized resources * Information flow security and
governance * Alliance capabilities of control processes
partners * Customers control use of
r, personal information
0l
W * Importance of community
concept
I
providers,and car manufacturers) have the poten- largercustomerbase (von Hippel, 1986). In fact,
tial to disrupt existing industry structuresand by electronically supplying informationin real
therebypose a serious threatto incumbents. time, customers can even 'co-create value'
Second,the notionof the businessmodel draws (Prahaladand Ramaswamy, 2000), as vendors
on argumentsthat are centralto the value chain can better tailor their offerings to the customer.
framework(Porter, 1985), in particularon the This is why business models, while anchoredon
ideas that processes (e.g., activity chains) and a particularfirm that exploits a business oppor-
multiple sources of value (e.g., cost leadership tunity, are often customer-centricin their design.
and differentiation)matter.However, because of Such business models can be hypothesized to
the conceptualdifficultiesthat arise in the context create more value for and with the help of cus-
of virtualmarketswith processesthatare centered tomers. Further,the customer-centricview of a
on product flows (Rayport and Sviokla, 1995; business model also helps in sharpening the
Stabell and Fjeldstad,1998), we proposeto com- boundariesof the network.Within the Gulati et
plement the value chain perspectiveby concen- al. (2000) view of a network, the strategically
tratingon processesthat enabletransactions.That importantties are those which would contribute
is, a business model does not follow the flow of in some way to satisfy the customer'sneeds.
a productfrom creationto sale, but describesthe Table 4 illustrates how the business model
steps that are performedin order to complete constructrelates to strategicnetworktheory. We
transactions. view the business model as an extension of a
Third, the business model perspectiveoffered strategicnetwork.It draws on networktheoryby
herein builds on the resource-basedview of the building on the insight that unique combinations
firm (Wernerfelt, 1984; Barney, 1991; Peteraf, of interfirm cooperative arrangementssuch as
1993; Amit and Schoemaker,1993). Clearly,the strategic alliances and joint ventures can create
value embeddedin the business model increases value (Doz and Hamel, 1998; Dyer and Singh,
as the bundle of resources and capabilities it 1998). While the strategicallianceandjoint ven-
encompassesbecomes more difficult to imitate, ture perspectives suggest that these are usually
less transferable,less substitutable,more comple- strategicchoices made as extensions to a firm's
mentary, and more productivewith use (rather core competencies,the business model perspec-
than less productivewith use, as is the case with tive views interfirm cooperative arrangements
capital assets). The business model perspective (which might include equity investmentsin part-
therefore takes into considerationthe ways in ner firms) as necessary elements to the firm's
which resourcescan be valuable,and is consistent ability to enable profitabletransactions.16
with the VRIO frameworkoffered by Barney Lastly, we build on Williamson's(1975) focus
(1997). on the efficiency of alternativegovernancestruc-
Fourth,from strategicnetworktheorywe adopt tures that mediate transactions,to suggest that
the central ideas that there is a link between in additionto efficiency enhancementsthere are
network configurationand value creation (e.g., additionalfactorsthatcontributeto value creation,
Burt, 1992) and that the locus of value creation namely:novelty, lock-in of customers,and com-
may be the network rather than the firm. The plementarities.Also, value can be createdthrough
spectrum of potential alliance partners any combinationof transactionswithin a firmand
encompassessuppliers,complementors,and cus- throughthe market.
tomers with which the firm must cooperate or Note that each business model is centeredon
compete. Brandenburgerand Nalebuff (1996) a particularfirm.In otherwords,a particularfirm
refer to the latter idea as a 'value net,' whereas
in the context of alliance formationwithin the
strategic managementliterature,it is commonly 16 This is not to
say that e-business firms solely rely on
referredto as the 'relationalview' (e.g., Dyer interfirm cooperative arrangements to organize transactions.
The example of Amazon.com mentioned earlier shows that
and Singh, 1998). It is worth emphasizingthat the firm made the strategic choice to organize warehousing
customerscan play a criticalrole in value creation internally. However, at the same time, Amazon.com relies
(as lead users, for example). They may work on thousands of interfirm cooperative arrangements with its
'affiliate' partners. We observe that this kind of external
with the firm to better assess their needs, acting organization through interfirm cooperative arrangements is
as beta sites before the productis released to a becoming increasingly important in virtual markets.
Table4. Sourcesof value addressedby strategicnetworktheoryand business-modelconstruct
Content Structure Governance
Strategicnetwork * Resourcesthat actors * Networksize * Trust

theory can access ? Networkdensity * Reputation
* Centralityof position
* Natureof ties (weak,
strong,bridging)
Business model * Informationand goods * Networksize * Locus of controlof
construct that are being exchanged * Ways in which parties flows of information,
* Resourcesand are linked and goods, and finances
capabilitiesrequiredto exchangesare executed * Natureof control
enable exchanges * Orderand timing of mechanism,e.g.
exchanges * trust
* Marketmechanism * incentives
* Flexibilityand
adaptabilityof
transactionstructure
is the business model's main reference point. This engage in a transaction by downloading a virtual
is why one can refer to a particular business car lot and filling in an online purchase order.
model as 'firm x's business model.' However, Following that, an Autobytel.com sales consultant
the business model as a unit of analysis has a contacts the consumer within 24 hours to review
wider scope than does the firm, since it various options such as at-home test drives
encompasses the capabilities of multiple firms in (provided by a partner, Enterprise Rent-A-Car),
multiple industries. A business model perspective or at-home delivery (provided by another partner,
on value creation in virtual markets therefore Movecars.com). In addition, Autobytel.com's
seeks to answer the following questions: (1) How Customer Care Center will suggest possible
do the participants to a transaction, especially the vehicle financing, leasing, and insurance options.
firm, which is the reference point of a business Buyers interested in obtaining credit may apply
model, enable transactions? and (2) How is value directly through the web site. Autobytel.com
created in the process of enabling transactions? passes their request on to a financing partner
We believe that our definition of a business model (such as Chase Manhattan) who will contact the
is applicable to firms doing business in virtual consumer and eventually grant a credit. In the
markets as well as to more conventional busi- last step, the customer will either pick up the car
nesses. at the dealership, or it will be delivered to her
As an illustration of the concept outlined or his home. This rounds off the one-stop car-
above, we give the example of Autobytel.com, a purchasing process, which is the opportunity that
company listed on NASDAQ, which provides Autobytel.com's business model addresses. In this
consumers with automotive solutions. In one line process, the full set of transactions in which the
of business, Autobytel.com (through its Autobytel company is involved is important, including the
DIRECT unit) acts as a broker on behalf of making of a customer's decision as well as the
its affiliated car dealers, finance companies, and order fulfillment, namely the implementation
insurance companies who, among others, consti- actions required for that decision to be satisfied.
tute important business model participants. The Autobytel.com takes responsibility for transaction
architectural configuration of the business model handling and closing, and for the coordination of
can be sketched as follows. Dealers upload infor- the transaction with its business model partners.
mation on their inventory directly onto Autoby- However, important roles, activities, and capabili-
tel.com's web site, providing information on pric- ties remain with the latter, for example order
ing and vehicle features. Potential auto buyers fulfillment. Major sources of value created by
Autobytel.com'sbusiness model include speed, with a mode for generatingrevenues(e.g., Green,

convenience and ease of searching, evaluating 1999). In order to avoid furtherconfusion, we
and choosing a vehicle (efficiency),reducedbar- offer the following definitionof 'revenuemodel.'
gaining, marketingand sales costs (efficiency),
and provisionof complementaryproductssuch as Definition: A revenue model refers to the speci-
financingand insurance(complementarities). fic modes in which a business model enables
With the theoreticalfoundationsof the business revenue generation.
model construct anchored in the value chain
framework,Schumpeter'stheory of innovation, E-business firms generate revenues through
the resource-basedview of the firm, strategic subscription fees, advertising fees, and trans-
network theory and the transactionperspective, actionalincome (includingfixed transactionfees,
we can now give a definitionof the value that referralfees, fixed or variablesales commissions,
is createdthrougha business model. In doing so, and mark-upson direct sales of goods). They
we generalize from Brandenburgerand Stuart sometimes use variants of these basic revenue-
(1996). According to these authors,total value generatingmodes, and they often use them in
createdcan be expressedas the sum of the values combination.As our definitionsshow, the busi-
appropriatedby each party. We extend their ness model and the revenue model are comple-
approach by positing that total value created mentaryyet distinct concepts. A business model
througha business model equals the sum of the refers primarilyto value creationwhereas a rev-
values appropriatedby all the participantsin a enue model is primarilyconcerned with value
business model, over all transactionsthat the appropriation.
business model enables. To summarizethis discussion,we believe that
The perspectiveof the businessmodel is nearly the business model concept may enable scholars
absent from the academic literature.There are, of strategicmanagementand entrepreneurship to
however, a few exceptions. Venkatramanand address a unique set of questions pertainingto
Henderson(1998) define a business model as a value creation that cannot be sufficiently
coordinatedplan to design strategy along three addressedby prior frameworks.We also suggest
vectors:customerinteraction,asset configuration, that as a firm's scope and its boundariesbecome
and knowledge leverage. Hamel (1999) relates less clear throughthe advent of virtual markets
the high capitalizationof Silicon Valley firms to and through the impact of sophisticatedinfor-
a certainbusinessmodel ratherthanto the talents mation technology, strategic analyses of e-
of the entrepreneurs.Prahaladand Ramaswamy business ventureswill have to move beyond the
(2000): 81) state that 'the unit of strategicanaly- traditionalconception of the 'firm' as the unit
sis has moved from the single company to ... an of analysis. Scholars of strategic management
enhancednetworkof traditionalsuppliers,manu- increasinglyrecognize that the source of value
facturers,partners,investorsand customers.'And creation may lie in networks of firms (Bettis,
Timmers (1998): 4) defines a business model 1998; Dyer and Nobeoka, 2000; Gulati et al.,
as an 'architecturefor the product, service and 2000). We build on this line of reasoning to
informationflows, includinga descriptionof the suggest that value is createdby the way in which
variousbusinessactorsand their roles; a descrip- transactionsare enabled.In e-businessesin parti-
tion of the potentialbenefitsfor the variousbusi- cular, enabling such transactionsrequiresa net-
ness actors; and a description of the sources work of capabilitiesdrawn from multiple stake-
of revenues.' holders including customers, suppliers, and
These authorsoffer interestinginsights about complementors.Business models may thus span
business models, which broadly support our industryand firm boundaries.
conceptualizationof the term.However,the theo-
retical foundationsof their business model con-
cept are not fully developed. The same can be CONCLUSIONS
said about business models in the nonacademic
literature, where ambiguity, contradiction,and The rapid pace of technological developments
misconception about the concept prevail. For coupled with the growth of e-businesses gives
example, a business model is often conflated rise to enormousopportunitiesfor the creationof
new wealth. In this paper,we have attemptedto interfirmnetworks17 and the importanceof adapt-
contributeto theorydevelopmentby investigating ing business models are increasingly acknow-
the theoreticalfoundationsof value creationin e- ledged in the strategyand entrepreneurship fields,
business. The focus of this paper is on new furtherdevelopmentof methodologicalapproaches
wealth creation,which has occupiedmuch of the to the study of e-businessdynamicsand business
entrepreneurship literature.We draw on a wide model design is needed.
body of literaturein entrepreneurship and stra-
tegic managementand use cross-case analysis of
a unique data set we developed, in order to ACKNOWLEDGEMENTS
identify common patternsof value creationin e-
business. The analysis led to the developmentof We are most gratefulto the SMJ Special Issue
the value-driversmodel, which includesfour fac- co-editorsand two anonymousreferees for their
tors that enhance the value creationpotentialof guidanceand patience,and for their constructive
e-business:efficiency, complementarities, lock-in, suggestionsand commentson earlierversions of
and novelty. this manuscript.We thank Iwona Bancerek,Jon
Our analysis and theoretical development Donlevy,Dovev Lavie, and AlasdairMacauleyfor
attempt bridge the strategicmanagementand theirresearchassistance.RaffiAmit acknowledges
to
the entrepreneurship literatures.Specifically, we generous financialsupportfrom the Whartone-
have groundedthe developmentof the theory in business research center (a unit of WeBI), the
the receivedstrategyand entrepreneurship research SniderEntrepreneurship ResearchCenter,the Rob-
in
and in the data set, respectively. Using the ert B. Goergen Chair Entrepreneurship at the
grounded theory development approach, we Wharton School, and the Social Sciences and
observedthatnone of the receivedtheoriesin and HumanitiesResearch Council of Canada (grant
of itself could explain the sources of new value number412 98 0025). ChristophZott gratefully
creation in e-business. Rather, the value-drivers acknowledgesfinancialsupportfrom the 3iVentur-
model suggests that an integrativeperspectiveto elab, eLab@INSEAD,and from the R&D Depart-
value creationis needed,a perspectivethat draws ment at INSEAD.We also acknowledgethe con-
on the extensiveresearchon value chains,Schum- tributionsof JenniferWohl, JanetGannon,and the
peterianinnovation,the resource-based view of the W. MauriceYoung Entrepreneurship and Venture
firm, interfirm strategicnetworks, and transaction Capital Research Center at the Universityof Bri-
costs economics.We suggest that researchon e- tish Columbia,with which both authorswere pre-
business and, more generally,on competitionin viously affiliated.In addition,we acknowledgethe
highly networkedmarkets,will benefit from an valuable feedback received from participantsat
integrativeapproachthat combines both strategy the 2000 SMS Conferencein Vancouver,and at
and entrepreneurship perspectives. the KauffmanFoundation'Creatinga New Mind-
This paper is a first step in attemptingto set Conference'in KansasCity. We receiveduse-
understandthe strategicissues faced by e-business ful feedback on earlier versions of this paper
firms in the emerging context of the Internet.It from HowardAldrich,CharlesBaden-Fuller,Izak
raises a number of interesting and challenging Benbasat, Max Boisot, Mason Carpenter,Yves
paths for futureresearchincludingsuch questions Doz, Bo Erikson, Martin Gargiulo, Sumantra
as: (1) What are the sources of competitive Goshal, Anita McGahan, Ian MacMillan, Paul
advantagein online marketsversus offline mar- Schoemaker,Craig Smith, Belen Villalonga,Bob
kets? and (2) Are strategyperspectivesand tools de Wit, George Yip, and from participantsat a
thatwere formulatedbased on a competitiveland- faculty seminarat the WhartonSchool.
scape inhabitedby offline firms still relevantin
the new world of e-business?Our papersuggests
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APPENDIX 1: U.S. Firms
Company Core product/ Country Foundation IPO date No. of Where

business year employees traded
1-800- Flowers U.S.A. 1992 08/03/99 2100 NASDAQ

FLOWERS.COM
Alloy Online Portal U.S.A. 1996 05/14/99 120 NASDAQ
Amazon.com Books U.S.A. 1994 05/15/97 7600 NASDAQ
Ask Jeeves Search engine U.S.A. 1996 07/01/99 416 NASDAQ
Autobytel.com Automobiles U.S.A. 1995 03/26/99 255 NASDAQ
barnesandnoble.com Books U.S.A. 1997 05/25/99 1237 NASDAQ
Beyond.com Computer accessories U.S.A. 1994 06/17/98 389 NASDAQ
CareerBuilder Job portal U.S.A. 1995 05/12/99 179 NASDAQ
Careinsite Healthcare portal U.S.A. 1996 06/16/99 160 NASDAQ
CBSsportsline Sports content U.S.A. 1994 11/13/97 453 NASDAQ
Cyberian Outpost Hardware, software U.S.A. 1995 08/05/98 234 NASDAQ
retailing
E*TRADE Online brokerage U.S.A. 1982 08/16/96 1735 NASDAQ
eBay Auctions U.S.A. 1995 09/24/98 138 NASDAQ
eToys Toys U.S.A. 1996 05/20/99 940 NASDAQ
fashionmall.com Clothing and U.S.A. 1994 05/21/99 43 NASDAQ
accessories
Fatbrain.com Books and U.S.A. 1995 11/20/98 315 NASDAQ
information
Healtheon Healthcare portal U.S.A. 1995 02/11/99 1825 NASDAQ
iTurf Community/retail for U.S.A. 1995 04/09/99 153 NASDAQ
youth
Log On America ISP U.S.A. 1992 04/22/99 13 NASDAQ
MapQuest.com Mapping U.S.A. 1996 05/04/99 335 NASDAQ
Medscape Medical portal U.S.A. 1996 09/28/99 298 NASDAQ
musicmaker.com Customized CDs U.S.A. 1997 07/07/99 73 NASDAQ
N2H2 Interet filtering U.S.A. 1995 07/30/99 179 NASDAQ
Net2Phone Internet telephony U.S.A. 1997 07/29/99 333 NASDAQ
NextCard Online credit U.S.A. 1996 05/14/99 287 NASDAQ
Priceline.com Reverse auction U.S.A. 1997 03/30/99 373 NASDAQ
Streamline.com Delivery goods U.S.A. 1993 06/18/99 350 NASDAQ
Talk City Communities U.S.A. 1996 07/20/99 197 NASDAQ
VerticalNet Trade communities U.S.A. 1995 02/11/99 669 NASDAQ
Xoom.com Retail/auction/advertisingU.S.A. 1996 12/09/98 92 NASDAQ
APPENDIX 1 (Continued): E.U. firms
Company Core product/ Country Foundation IPO date No. of Where traded
business year employees
AB Soft Communications France 1987 12/03/97 69 Nouveau

software Marche
Amadeus Airline tickets Spain 1987 10/19/99 2,860 Madrid
Artnet.com Art Germany 1989 05/17/99 97 Neuer Markt
Beate Uhse Erotic goods Germany 1946 05/27/99 706 Frankfurt
Boursedirect Online brokerage France 1996 11/10/99 22 Nouveau
Marche
Buecher.de Books Germany 1996 07/05/99 45 Neuer Markt
Commtouch E-mail Israel 1991 07/13/99 214 NASDAQ
NM
Consodata Consumer data France 1995 10/07/99 220 Nouveau
Marche
Cryo-interactive Computer games France 1992 12/08/98 218 Nouveau
Marche
e-bookers Travel booking U.K. 1999 11/11/99 160 NASDAQ
NM/Neuer
Markt
Fortunecity Community Germany 1996 03/19/99 164 Neuer Markt
Freeserve ISP U.K. 1998 07/26/99 16 NASDAQ
NM
Gameplay.com Computer games U.K. 1999 08/02/99 37 LSE
i:FAO Travel booking Germany 1977 03/01/99 112 Neuer Markt
Iceland Group Grocery U.K. 1970 10/16/84 11,895 LSE
ID Media Community/software Germany 1988 06/17/99 99 Neuer Markt
Infonie/Infosources ISP France 1995 03/20/96 450 Nouveau
Marche
Lerout & Hauspie Speech-related Belgium 1987 06/23/97 2,500 EASDAQ/
software NASDAQ
NM
QXL.com Auctions U.K. 1997 10/07/99 105 LSE/NASDAQ
NM
Ricardo.de Auctions Germany 1998 07/21/99 73 Neuer Markt
Scoot.com Directory services U.K. 1993 03/10/97 1,000 NASDAQ
NM
Sportingbet Online betting U.K. 1998 02/22/99 33 OFEX
Terra Networks ISP Spain 1998 10/29/99 928 Madrid/NASDAQ
NM
The eXchange Financial services U.K. 1991 08/06/99 235 LSE
Tiscali ISP Italy 1997 10/27/99 178 Nuovo
Mercato
Topjobs.net Job portal U.K. 1996 04/28/99 64 NASDAQ
NM
Town Pages Directory services U.K. 1995 05/05/99 270 AMEX
Vocaltec Internet telephony Israel 1994 02/07/96 343 NASDAQ
Copyright ? 2001 John Wiley & Sons, Ltd. Strat. AMgmt.J., 22: 493-520 (2001)

Value Creation in E-Business

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Value Creation in E-Business

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Value Creation in E-Business

Author(s): Raphael Amit and Christoph Zott

VALUE CREATIONIN E-BUSINESS

We explore the theoretical foundations of value creation in e-business by examining how 59

INTRODUCTION likely that over 93 percent of U.S. firms will

Key words: value creation; e-business; business model

Copyright ? 2001 John Wiley & Sons, Ltd.

ture,and governanceso as to createvalue through As an electronicnetworkwith open standards,

be a sourceof transactionalefficiencies.However, inquiry. The analysts wrote up the answers to

process of interest is transparentlyobservable' which is availableto the public online. Data on

Figure1. Sourcesof value creationin e-business

selection at lower costs by reducing distribution customers, otherwise inefficiencies associated

Novelty with a novel business method (such as

to interestedbuyerswith possible complementary elty. However, as Table 2 shows, the theoretical

Efficiency Complementarities Lock-in

Autobytel.com (ABT) * Consumersbenefit from * Complementaryservices * Repeat purchases supporte

Ricardo.de * Transactionactors are either * Participantsin business * Offers loyalty program

Table 2. Theoretical anchoring of sources of value creation in e-business

Efficiency Complementarities Lock-in Novelty

Value chain analysis Medium Medium Low Medium

Efficiency Complementarities Lock-in

Content Structure Governance

Strategicnetwork * Resourcesthat actors * Networksize * Trust

Autobytel.com'sbusiness model include speed, with a mode for generatingrevenues(e.g., Green,

APPENDIX 1: U.S. Firms

Company Core product/ Country Foundation IPO date No. of Where

1-800- Flowers U.S.A. 1992 08/03/99 2100 NASDAQ

APPENDIX 1 (Continued): E.U. firms

AB Soft Communications France 1987 12/03/97 69 Nouveau

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