This report was established to investigate the concept of the business model concerning internet startups as well as its relationship with other important components especially the business strategy. The study first looks at the relationship from a theoretical perspective to identify the various elements of internet startups that are important to the concept of business models. The study further collects information and data on the trends of success and failures of these ventures and the factors behind the trends.
In discussing the findings, the study balances the aspects of business strategy with the choices made on business models. The study is not complete without the analysis of these findings such that the business model is evaluated according to issues about its application in the online environment. Finally, the lessons learned from the success and failures of internet startups are highlighted in form of recommendations to entrepreneurs deciding to enter the online market.
​Introduction
​Background
The concept of the Business Model appeared with internet startups in the early 19th century. This philosophy described the effort of entrepreneurs to model their ventures to make them more easily understandable by potential stakeholders. Like other concepts of internet trends, the use of the Business Model has widened, though its meaning is not universally accepted by its users. At present, however, a real research community has emerged sharing a universal interest in this concept. It appears to suggest that Business Model is not just a trend. The fact that researches on the concept are being published in popular scientific reviews such as Management Science and Strategic Management Journals is also an encouraging indicator.
According to MacKenzie (2006), a model is not a mere camera but can be an engine. Economic models can silhouette the real economic world as alternative models for financial markets. Thus, the efforts of developing desirable business models affect the practical world implementation of businesses. The concept implies a methodical approach to designing and evaluating new business ventures, especially technology-based initiatives. For instance, a business model for a technology firm is the framework that arbitrates the process of value creation between the economic and technical domains, choosing and refining technologies and putting them into specific designs to be offered to the marketplace (Chesbrough & Rosenbloom, 2002).
Despite the concept of the business model is potentially relevant to all firms, an investigation of the organization, strategy, and economic literature found limited papers on the business model. Most of them were done in the context of e-commerce or new approaches to business enabled by information technology. Studies on e-commerce models have focused mostly on two corresponding streams: the definition of elements of business models and classifications of business models (see figure 1).
For instance, Timmers (1998) defined a business model as to include the architecture of the good, service, and data flow, a definition of the gains for the business player involved, and an account of the sources of revenue. Even though this definition does not restrict the idea of a business model to e-business, it applies the concept to that domain through two dimensions: the degree of innovation and functional integration.
Since Timmers’ definition of business model, there have been many continuous attempts to define the concept in a business context (Mahadevan, 2000; Amit & Zott, 2001; Shafer et al. 2005; Morrisa et al. 2005; Osterwalder et al. 2005). The most recent attempt to define the concept was by Christensen et al. (2008). According to the researchers, the business model is defined to consist of four interlocking components (Customer Value Proposition, Profit Formula, Key Resources, and Key Processes) that create and deliver value.
By taking a minimalistic approach to defining the components of the business model, several sub-models can be identified: Virtual Model, Stakeholder Model, Process Model, and Financial Model. This reflects the opinion made by Magretta (2002) that the business model narrates a logical story that explains the stakeholders of a firm (Stakeholder Model), the value they derive from the business (Value Model), and the way to make revenues (Financial Model) which provide the value (Process Model).
Regarding the Value Model, the most important component of the business model, the e-commerce business models for internet startups are interpreted to contain value models which suggest the values being in harmony with new markets, integrating information technology and ethical responsibility among other different values as its key values. Pater (2006) suggests a structure for assessing the total scheme of business technologies describing the physical, virtual, and non-conventional financial values with basis on the value chain involved. This research, however, does not review or evaluate how to develop a business model in detail.
​Purpose of the research
This paper aims to take up the use of the theoretical business model by analyzing how the application of this concept assists management in avoiding potential disastrous internet startups. So far, some business model studies have attempted to describe the confrontation between the concept and internet startups’ business world, with an exception of Wirtz, Oliver, and Sebastian (2010). The study has conducted interviews with many entrepreneurs investigating business model relevance to the success of startup businesses.
The originality of this research is that it investigates the internet startups’ interest in and attitude towards different applications of business model concepts. In intensive research on previous studies and statistics on internet startups, the paper captures the opinion of business analysts and consequently analyzes the research findings. Arguably, the research has a unique intention of investigating the consequences of business models on new internet ventures with an emphasis on conceptual advice and lessons learned from the failure and success of such ventures concerning the issues raised in developing an internet venture.
​Mode of data collection
This report applies the concept of data mining in collecting information from various sources including the internet, libraries, and individual observations. This is an iterative process in which progress is described by discovery through manual or automatic methods (Han, Kamber & Pei, 2011). This mode is important because the research is an exploratory analysis in which there are no pre-determined ideas about the outcome. This method is particularly the search for new, nontrivial, and valuable information in various sources of information. There is an effort to balance the human knowledge and the large volume of information available for researchers.
​Theoretical application of business models
​The usefulness of business model to internet startups
Since 1990, the widespread use of business models by business practitioners has increasingly attracted researchers (Shafer et al. 2005). Their reputation has followed the success and failure of their most popular users: internet startups. The failure of startups has been somewhat associated with the uncertainty of the business models which “seem to refer to a slack formation of how firms do businesses and generate income” (Porter, 2001, p.73). When responding to such criticism, researchers have tried to stabilize the concept by fixing a meaning thereof.
Many of these views share a common philosophy of the business model as a representation of realism that exists afar the firm. Such a viewpoint of what the concept means and how it can offer a precise illustration of the causal logic of value creation of a company does not answer the criticism. Thus, the business model is seen as the method of conducting business through which a firm can sustain itself by focusing on the value proposition, estimating cost structure, identifying market segments, and estimating profit potential (Dubosson-Torbay et al. 2002).
Regarding entrepreneurship, the importance of business models does not stem from its ability to realistically describe the company. Instead, its usefulness lies in its predictive and explicative power regarding the value generated by the new business (Amit & Zott, 2001). Nonetheless, the focus on its instrumental efficiency raises one important question: what is the impact of modeling and planning on the new venture regarding robustness and profitability?
On that point, the literature on entrepreneurship includes extensive research on business plans. They have been seen as an essential management instrument or tool for creating a partnership. Delmar and Shane (2003) have the opinion that business planning assists company founders turn broad objectives into solid milestones, predict problems and information needs, and correct deviations from goals quickly. On the other hand, Karlsson and Honig (2007) emphasize the limitation of a business plan as a monitoring instrument by illustrating that, once developed, business plans are no longer applied by entrepreneurs for management purposes.
From other viewpoints, business planning ruins resources and time which may perhaps be more profitable to the business if used for more relevant market activities. Delmar and Shane (2003) regard business planning as a legitimizing approach through which business founders render the new business more dependable for investors and therefore facilitating access to outside resources. The issue of the usefulness of business models has been investigated through the focus of its performance efficiency. For example, qualitative studies of the relationship between business plan and survival or productivity of the company have been conducted (Delmar & Shane, 2003). Nevertheless, empirical findings on the performance efficiency of business planning do not provide consistent results.
​Business models and strategy
According to the classical point of view, strategy defines the relationship between a venture and its environment. In the following literature, the concern of strategy with futurity is precisely identified, just as is the need for an enterprise to devise effective strategies to sustain a competitive position. Strategy development also depends on methodical procedures. The position-based viewpoint, among others, indicates the significance of an effective network and the capacity, as the key competence of the enterprise to rapidly organize these procedures to achieve the changing needs of the venture (Karami, 2007).
The attitude of the enterprise towards discovering and managing risks should also be considered as a characteristic of an effective strategy. These are the vital performance traits identified from the study of strategies that are crucial to any enterprise whether networked or not. Other factors are identified through business models.
In an obligatory exploration of the relationship between strategy and business models, two authorities have endeavored to comprehend the connection between the two theories. Elliot (2002, p.7) regards business strategies as stipulating how business models could be utilized in the market to make a distinction between the enterprise and its competitors. In a broader sense, Magretta (2002, p.3) asserts that an effective business model is crucial to any successful enterprise, whether it is a new or an established business.
In simple terms, the two authors agree that a business strategy is different from a business model in that the former approach relates to the creation and sustenance of an effective competitive advantage. They argue that strategy defines how a firm can perform better than competitors; it again holds beliefs of differentiation. According to Osterwalder et al. (2005), business models link strategy to business processes. They contend that business models link planning to the implementation echelons of a business.
The research on business models has been reduced further to their components. These components reveal how businesses structure can apply their models within the networked economies. Business models indicate how internet companies plan to make revenue in the long-term. The different components must cooperate if they have plainly defined connections. Just like in the definition of the concept, there is a shortage in the literature of conformity on the major components of business models. The evaluation of Afuah and Tucci (2001) is important in that it links the components to the strategy used by the organization.
Therefore, business models in essence shape the particular value-creation behavior of a viable web-enabled firm. Their product is the profit-generating ability of the business. Just like strategy deals with futurity, so does a business model that has an unconcealed fervor for customer-centricity as the basis of value creation. Typified by innovation, economic innovativeness, alliances, and functional integration, the differentiating traits of business models emerge different from those of strategy, yet are in the same way significant contributors to effective internet-enabled performance.
As the above discussion suggests, business models are not complete on their own. Certain unambiguous considerations are missing in the business model concept. Factors not easily recognized are strategic intention, objective setting, sustainable competitive advantage, industry positioning, and environmental analysis, all of which apply to an effective strategy. To discourage accusation of frugality the research on which this work is founded, the paper continues with a further investigation of internet business ventures, outside the spheres of business models and strategy to the innovation aspect of internet-enabled ventures.
​Business model and innovation
The connections between technology and the economy have been highly studied under the context of innovation. Innovation means the successful selling of new ideas. It is described as the process commenced by the individual entrepreneur. From the perspective of bigger firms, the locus of innovation is completely relocated. The open innovation model is dominant in which Chesbrough (2003) identifies the surfacing of new players who contribute to three major activities associated with the open innovation model: the generation, the funding, and commercialization of innovation.
Within the open innovation model, the venture founder becomes the main figure in the course of innovation alongside other players including big companies. While the conventional literature on entrepreneurship focuses on the individual, recent researches suggest that technology venturing is a broader process that involves many players (Garud & Karnoe, 2003). An entrepreneurial agency is dispensed across players. In essence, technology venturing involves three different roles – the generation, the funding, and commercialization-which appoint the commitment of a variety of players in the enterprise creation project.
As one particular type of high technology venture, research-based spin-offs have emerged as the object of developing interest from scholars and policymakers as they aim at generating wealth from research funded by the public by integrating new knowledge resulting from science in profitable technologies, goods, and services. They have emerged to be a significant aspect of the process of technology transfer and question the connection between economy and science in a specific way (Mustar et al. 2006). They address specific problems associated with the nonmarketable environment from which they emerge.
Scholars debate whether and how the spin-off ventures generate wealth and handle problems like scarce resources. These ventures face intricacies in establishing a market presence, just like other new technology-based ventures, but they encounter a scarcity of resources in addition. Several resources have been identified including social, human, and financial resources (Wright et al. 2004).
Lack of resources experienced by new ventures appears as a key constraint to the establishment of this enterprise and thus external funders have been bestowed with a vital role in the creation of these ventures. Social resources defined as the financial and industry contacts of a firm are also important to the creation of new ventures as they facilitate accessing relevant resources. An analysis of ventures based on resources points out the vital role of venture capital enterprises in the startup process. The matter shows how social ties manipulate the process via which founders surmount information unevenness among themselves and prospective investors to get financing. Some researchers have studied how venture capitalists select new ventures intending to explain the reason some entrepreneurs may gain funding from external sources (Eckhardt et al. 2006).
​Business model as entrepreneurs’ market devices
If the literature illustrating the innovation models has made a substantial contribution to the research of entrepreneurship and innovation by widening the scope of evaluation beyond the individual and therefore accounting for the variety of players involved, these studies still restrain agency for individuals and organizations without investigating the objects that circulate in the systems of innovation and the plans that are employed by entrepreneurs. An example of such a tool is the business model discussed earlier. As noted, previous studies have not investigated the tool as an object commonly used by players involved in internet startups, with an exception of one of its kind: the business plan.
According to Karlsson and Honig (2007), there is an outspread use of business plans by new ventures and a lack of studies on them. Their researchers aimed to fill the gap by inquiring about the usefulness of the tool. Finally, they identified a loose combination between the primary business plan and the present circumstance in the firm after five years. Without screening or describing the device in critical detail, they dispensed a monitoring role to the device and assessed its efficiency in this context.
Therefore, the arguments that business models elicit among management researchers resemble the ones established by other kinds of economic tools such as financial analysts. Beunza and Garud (2007) conducted a sociological study and identified a disagreement between two intense interpretations: one that regards analysts’ reports as unprejudiced, objective accounts of the economic performance of a company and one that exposes analysts objectively while pointing to their responsibility in social systems of collective influence and beliefs.
They further suggest that analyst serve the need of financial calculations, although not a straightforward manner. Analysts’ reports provide calculative frames: components of comparability and commensurability that outline the area of references on which investors might draw. Therefore, they appear as market devices (Callon et al.2007).
In their paper, Doganova and Eyquem-Renault (2009) adopted a similar advance to the business model and examined them as market devices. They defined the idea of market devices as the material and discursive groupings that arbitrate the creation of markets. According to them, the market creation path of entrepreneurs is a series of attempts that consist of encounters with others whose inter-assessment and enrolments are sought.
The flow of business models is not limited to the system of a single business venture. When it circulates from one firm to another, the model becomes an exemplar to be compared or imitated. When designing a venture, business founders do not begin from scratch. They consider what exists and define their models concerning those existing as it is hard to innovate both the business model and technologically. Thus, the business model becomes part of a collection from which founders can draw. They are performative in the sense that they shape the process of imitation and new ventures to come.
Due to their circulation, some models become operating exemplars or stencils which support replication or comparison by investors, entrepreneurs, partners, and customers (Baden-Fuller & Winter, 2007). Therefore, they serve as contributions to the calculations involved in specific business models. Such realistic business models are presented as stylized descriptions in articles on successful ventures. Business models as devices for collective exploration play a performative role: as scale models, they operate new ventures by bridging them into continuation; as demonstrations, they perform narrations and calculations that are offered to the public; as templates, they enhance the imitation process and hence shape future ventures.
​Research findings and discussions
​Internet startups failures and success
With initial economic returns from the internet startups failing to rationalize their supercilious equity valuations and the mass jubilation of the new economy rapidly turned to gloom and doom. Principally, this was marked by the crash of the NASDAQ stock market in 2002 (Atkinson, et al. 2010). It became fashionable to believe that the novel economy was a fable spun by an over-imaginative media.
The evolution of the internet and its dot-com ventures followed a trajectory like the development of the automobile. However, over the last 20 years, the turning point between the technological evolution phases happened to the dot-com economy. It became apparent that some business models could succeed and others could die. Nevertheless, now, throughout the deployment period, the internet is just on its way to restructuring the economy and steering growth, as indicated in part by the increasing productivity compared to the past pre-internet recessions.
The failure and success of the earlier internet startups were influenced by factors that were sometimes beyond the scope of management. For instance, several technologies that are taken for granted today such as web browsers, low-cost storage, media compression and algorithms, flash scripting, web design, and construction, had not matured fully to the point of mass-market use. Since the underlying internet infrastructure had not diffused sufficiently, subscribers did not have technologies, in particular, the internet connectivity speeds to access the web functionalities and services envisioned by pioneers.
Such cases are Boo.com failures after showering $100 million of capital, but only influencing a small number of consumers since unmetered dial-up access had just been introduced in Europe. Other earlier failed businesses include Webvan.com, pest.com, and Broadcast.com in which their e-business models indeed delivered their customers to competitors who crafted more sustainable business models. A good example of an internet startup that failed to achieve exceedingly high initial expectations yet survives up to date as an ongoing concern with an effective business model is Brivo Systems (Atkinson, et al. 2010).
As expected, the number of internet ventures has increased tremendously over the past ten years. This is attributed to advancements in information technology as well as consumer behaviors that have been shaped by the trend. Unfortunately, the rate of internet startups failing to succeed is still high. A personal survey conducted on 200 Web 2.0 startups by Eklund (2011) indicated that the internet-based ventures have a 59% chance of surviving, 27% chance of complete failure, and 14% possibility of being acquired by a major company.
Marmer, Hermann, and Berman (2011) divided the internet startup lifecycle into six stages called Marmer Stages through which they identify the major challenges for each start-up. Upon these stages, they summarize their major findings of research conducted on internet startups in Silicon Valley (see appendix 1). The key challenges at every stage are indicated in the following table and graph:
Table 1.
These findings indicate that the success or failure of internet startups depends more on business policies including strategies and business models. Gloor and Cooper (2007) argue that the survival of internet startups lies with the ability of the venture to make profits. About 90% of startups who invest heavily in the venture and fail to make a profit will probably leave the marketplace.
However, as basic as the idea of profitability is following the development of the new economy, it is just an opening point to a deeper understanding of business in the online environment. The emerging question is; what should an internet startup do to be profitable and further, to get a return more than the cost of initial investment? It is evident that the answer perhaps not astonishingly lies in the bringing of the online environment back to initial principles, the strategy, and the business model of the enterprise.
​Factors to consider when developing successful internet startups
Like all firms, the success of internet startups depends on four fundamental components of the strategy and business models: customer, competitive advantage, capability, and internal consistency.
​Customers
At the center of all business, ventures are customers. Without the people to buy products or services at a price more than the total cost, no profits can be made by any venture. For internet startups employing a business-to-consumer (B2C) model, in particular, there is a basic need to create and retain a customer base. Internet-based B2C firms face substantial startup costs from developing distribution and logistics stores and proficiency, developing website capabilities, and attaining customer awareness (Sam & Makor, 2011).
In addition to these costs which are comparatively fixed in nature are the variable costs arising from business operations such as merchandise, marketing, payroll, and order accomplishment. Whilst pricing levels must cover the variable costs, profitability relies on creating enough revenue to pay back the fixed expenses. Therefore, customers are the core of B2C business models; scale is vital for sustenance and it means sufficient customers spending sufficient money to balance all the numbers.
Unfortunately, the scale essential tends to develop some severe dysfunction. First, firms seeking scale face the risk of overstating revenue and understating profits. The craving for revenue growth at web-based firms is in an actual sense quite parallel to the emphasis on market-share at all film studios. In the two cases, revenues are considered as an imperative measure of success, yet it is possible to experience revenue explosion without any profitability. Second, the imperative of scale is inclined to function against the successful establishment of niche strategies. Besides the need for some competitive advantage, internet startups targeting very constricted niches stand a little chance of survival since the important fixed costs do not shrink enough to allow for the highly reduced total income potentials of such firms.
The third weakness of scale importance relates to the expense and challenge of obtaining customers. Internet startups as an almost unknown actor in the market, it is vital to position their merchandise to warily segmented and targeted customers. Indeed, B2C companies have an even more fundamental task of acquiring customers (Sam & Makor, 2011). This is where internet retailers have messed usually underestimating the expense of customer acquisition and then taking on wary practices such as running unfocused and irrelevant advertising, paying excessive money to promote brands, purchasing banner ads, and relying on enormous discounts.
These problems have raised the question about the intrinsic superiority of e-business models. In addition, they ignore the challenge that all firm face-customer service. Internet businesses as they separate customers from products or services must particularly confirm to customers that they can be trusted. However, as with other businesses, creating customer confidence and trust is hard. It requires extra effort and probably a mentor to the business. Studies have shown the impact of mentors on internet startup funding as shown in figure 4.
​Capabilities
All firms are required to create internal capabilities (processes, systems, and routines) that assist in promoting revenue and cutting costs. While they may run the scope from market to speed to corporate culture to organizational behavior, they tend to depend on one key ingredient at their center: the capacity to transform inputs efficiently to outputs that create value for customers. Whilst competitive advantage requires a firm to develop capabilities that cannot be duplicated, many internet startups have failed in developing even the fundamental capabilities required for survival. Starting with back-office functions to service accomplishment, distribution, procurement, and inventory management and sustaining a customer base demand strong capabilities that develop gradually.
Many online firms start with the goal of changing the world, but the truth of establishing effectual routines and functions becomes much complex and difficult. For B2C firms, the challenge of meeting the needs of the customer is ambiguous (Sam & Makor, 2011). The basic reasons behind making online purchases are price, speed, and convenience yet others attribute of buying experiences such as trust and service are imperative. These require remarkable execution skills and capabilities in customer service. Internet firms have no unique immunities to the obstacles that bar the creation of efficient capabilities.
​Competitive advantage
This important pillar arises when a firm’s internal capabilities provide superior satisfaction to customers when compared with other competitors. Competitive advantage just like competency is of bedrock significance. Unfortunately, the problem of internet startups is that they tend to provide little security from the attack of similar or superior products from competitors even when they have developed the necessary capabilities (Sam & Makor, 2011). The very source of this weakness is the inability to establish a barrier to entry since early entry or new idea is not enough to discourage other competitors from investing in the same business.
The number of internet firms in many industries has swollen with the haste of funding ability. Key players have entered into the internet environment as well, becoming key actors quickly because of intrinsic advantages such as customer position, financial position, established infrastructure, and firm size. What kind of competitive advantage do internet startups have over big firms? Statistics indicate that 14% of them will be acquired by major companies while 27% might fail due to various challenges (Eklund, 2011). Funding is identified as a key challenge to startups as depicted in figure 4. However, startups have the advantage of the inability of the large firms to adapt to the online environment leaving a wide-open arena for them.
​Internal consistency
For any successful strategy, there is internal consistency with the operative framework. This means that capabilities fit market changes and internal systems promote those capabilities. Take the case of companies employing business-to-business models. The main purpose of these firms is to enable customers to drive down prices imposed by vendors. This model is highly attractive from the consumer perspective and the internet can increase competition amid vendors. Unfortunately, for vendors, the move towards such exchanges is pressurizing and disruptive as well as restraining trade. Many internet exchanges find it hard to acquire suppliers. Most B2B being driven by price are completely tailored to lower vendor margins. Therefore, other supplies are ganging up just like consumers.
Moreover, questions about internal consistency and logic also emerge from many B2C startups. For instance, some startups selling consumer goods enter the market with the idea of selling to consumers directly such that they can circumvent the distribution channel, remove overheads and offer greater portfolio, landing these ventures in the cute mark of low prices and high margins. Besides having few barriers to entry, the internet business of consumer goods applying such a business model is predicated on two somewhat naĂŻve assumptions.
First, key manufacturers surrender control of distribution to the new ventures leaving the inexperienced ventures to carry on with the business. Second, a myriad of other startups will be attracted to the business. Unfortunately, these businesses are strategically focused on solving a convenience problem yet a successful strategy focuses on assisting customers to solve relevant problems.
In addition, the low pricing strategy is completely imitable and thus not a competitive advantage. There is a rise of comparison-shopping tools and is outstandingly simple for customers to look for the lowest price offered for almost all products offered through the internet. Although low-cost producer enjoys several advantages, few internet startups are likely to acquire the resources necessary to meet this goal. Therefore, it is rather weak to compete with price in an online environment, though a myriad of startups is doing exactly that. The current market environment and its dynamics militate against a low-pricing strategy indicating that the internet startups’ business models require internal consistency as well as customers, competitive advantage, and capabilities to succeed.
​Analysis
​Business model analysis
​Alignment to goal
This refers to the choices of a business model that deliver outcomes that move the firm towards attaining its objectives. An internet startup may have an outstanding business model but if the firm’s goal is different from the outcomes of its business model, the alignment to goal fall short and the model is not the best. Possible goals for internet startups include profit maximization and a better online environment among others.
For an instant, some online businesses are more concerned with the creation of value to customers than profit maximization. Others are more concerned with increasing the number of visitors to their websites than with the creation of value. For firms with multiple goals and objectives, the balance between these goals is the overall goal. Note that, in many cases, goals are not choices but outcomes: a firm that tries to increase profits, for example, is not picking profit; they arise simultaneously from choices made by the firm.
In many successful online businesses, alignment to the goal is apparent. For instance, the goal of Amazon.com of high growth and profitability in online books requires low costs. All that Amazon includes in its business model is geared towards bringing low cost. In some situations, the connection is not very direct. Amazon’s goal of creating value for customers is an indirect outcome of their choices. While creating value through efficient and quick services to customers is directly related to Amazon’s choices and the overall goal, creating value by making the firm the best place to work adds to sustenance and growth of employment with no direct connection to the goal.
​Reinforcement
This refers to choices balancing each other well in an organization. Reinforcement closely relates to the popular factor of success of internal consistency (Porter, 1996). For instance, low price and intense advertising may balance in the sense that the consequence of low price on customer acquisition is likely to be bigger when there is intense advertising. Similarly, the consequence of intense advertising is larger when prices are low. Some internet startups lack reinforcement leading to failure sometimes while others have reinforcement and succeed as a result.
An apparent illustration of lack of reinforcement could occur if an internet startup selling books decided to deliver products faster than established firms like Amazon. Increasing delivery speed would require increasing the number of delivery channels in different geographical zones, the additional provision of agents, vessels, and mailing boxes, and perhaps airplane deliveries. These choices could challenge the low-pricing structure. As an effect, the firm would be unable to sustain its low prices; sales would reduce, affecting economies of scale, initiatives, and reputation.
For instance, consider high-powered funding initiatives, a choice emerging from large effort application to raise funds. A consequence of these initiatives is that they result in a lower willingness to track metrics. In firms with business models that do not depend on performance metrics, high-powered funding initiative will typically be appropriate. Unfortunately, for internet businesses where capital firms look at metrics when funding, high-powered funding initiatives will lead to some firms not tracking their performance.
Mermler, Hermann, and Berman (2011) found that 61% of internet startups are more likely to acquire funds if they measure metrics (see figure 5). Therefore, the absence of such reinforcement means the presence of opportunities to advance the business model by halting some choices and including new ones. Because business models grow through time, identifying tensions earlier is basic to control their development.
​Virtuousness
This refers to the existence of positive feedback loops (virtuous cycles) that assist business models to acquire strength in due course. Indeed, virtuousness is a forceful description of reinforcement. A business model bestowed with positive feedback loops that lead to better achievement of goals often means growth. Growth occurs as inflexible outcomes directly related to objectives becoming stronger. Some examples include virtuous cycles that create bargaining power or network consequences like in the case of online selling sites. Many cycles in online businesses run through speed and low cost. As an outcome of the cyclic iteration, internet businesses can reach their goals of high profitability and low cost easily.
Porter (1996) warns entrepreneurs concerning the ‘growth trap’ or the notion that a passion for growth without assessing how it enhances the creation of competitive advantage could lead to the destruction of the very same advantage. Although growth per se could be a weak goal to pursue, a ramification of a good business model is growing. Somehow, virtuousness and growth are unbreakable. The crucial goal must never be growth, but to pursue a strategy that creates positive feedbacks that assist a firm to build and incarcerate value in due course.
​Robustness
This refers to the capacity of business models to maintain their effectiveness in due course. There are four generic coercions to sustainability; imitation, slack, hold up, and substitution (Teece, 2010). Robustness can therefore be checked by evaluating the ability of a business model to keep away from each force. Imitation refers to the drive of competitors to copy a firm’s successful business model. In the case of online businesses, it is apparent that many of the rigid outcomes are hard to copy. Reputation for reasonable speed takes time to grow; an established base of young browsers is not easy to create especially when it must be snatched from aggressive competitors. Rigid consequences work as obstacles to replication in this case and are even stronger when the outcomes are part of positive feedback loops that spin quickly.
Hold up is another threat to sustainability which refers to stakeholders and competitors capturing value created by the firm through the practice of bargaining power. It is especially threatening when the organization has capitalized on relationship-based assets that make it difficult to evade or find different trading partners. Protection against this threat can be created through choices relating to the control of assets and activities. The other threat is slack referring to organizational complacency. The protection against the threat arises from the proper mix of enticement and monitoring.
The fourth threat is substitution which refers to a reduced value recognized by customers due to the existence of other products. For instance, internet business is a direct substitute for brick-and-mortar stores. To deal with this threat, effective business models usually have competitive sensors that alert their existence. Conclusively, effective business models must satisfy the criteria highlighted in the above discussion.
​Business lessons
​Establishing a first-mover advantage
The real problem with this lesson is that first-mover might mean very little in the actual sense: what matters is the power of strategy and effectiveness of the business model (Mehadevan, 2000). In this case, a strategy becomes the ingredients of a business model that entails the integration of various functions through a process (see appendix 2). The first entrepreneur to implement a dumb idea has achieved nothing.
For instance, in some cases, an entrepreneur with exceptional new internet skills, being first becomes very powerful. In other cases such as when an entrepreneur’s strategy is just to sell online products, being first has very little effect. An entrepreneur can safely ignore the idea of first-mover advantages and be more concerned with the intrinsic strengths or weaknesses of the business model and strategy.
This lesson is best explained by considering two business cases. Amazon.com is concerned with becoming the first major actor offering books through the internet. However, the firm’s profit struggle has indicated that leading made little impact. If an entrepreneur has an innovation, for instance, the business model for Toys “R” Us, being the first is powerful. But there is a difference: Toysrus got a patent for its model, in this manner making it the first as well as the only firm to use such a model. Because no one could copy its model, it was able to penetrate many markets. Amazon.com will never sell books alone, so its profits are always subject to pressure. For a first mover to be effective there must be a way to stop new entrants.
​Attracting partners
As long as internet startups can impress others, they will build the venture. When they cannot, they will do themselves good by leaving the market. Startups whose ventures look just like other e-business pawns, appearing to be perfectly brilliant might lose partners after all. Indeed, the alliance is a good idea, except that no startup knows who will succeed in the early days. In circumstances of fast change, even a partnership with a major firm may not lead to the promised success. The fundamental business model and strategy, not just their partnerships, must be more cautiously understood. For alliances in which the ‘give and take’ are not balanced, most of them if not all will not survive.
​Creating a powerful image
According to George and Adam (2011) entrepreneurs concentrate on the exact development of a molded image to plead to a constantly fickle audience instead of concentrating on technology that requires protection. Some startups discover how costly it is to squander for large public and capture just a little slice. Outwit inherent in most advertising makes it a weak instrument for shaping a startup’s image. What then underlies image creation? Startup business plans should be developed such that they find a more effective way than just spending money on the issue. The marketing plan should also create a carefully envisioned approach to allow for the venture image to be built efficiently.
​Conclusion
The concept of a business model is relevant to internet startups just like any other startup business. These ventures find the use of the business model attached to the process of business planning where they act as essential tools for turning objectives into milestones. For them, strategies are shaped by the business model such that they form a collection that contributes to effective internet-based performance. Business models are platforms for innovative ideas and act as entrepreneurs’ marketing devices in the sense of analogs to business analyst practices. The conceptual business model is thus important in facilitating factual resources to internet startups that influence the practical application of the domain beyond that of strategy and innovation.
The success and failure of business startups are real and evidenced by early entrepreneurs as well as emerging business ventures. The advancing web technology reduced many of the earlier barriers to success but also introduced new ones that relate to the competition for numerous opportunities. This has led to an increasing number of internet business failures due to poor business models, lack of funds, or competition from bigger firms. Therefore, the answer to the success of internet startups lies in the bringing of the online environment back to initial principles, the strategy, and the business model of the enterprise.
Most important is to focus on the fundamental components of an effective strategy: customer, capabilities, competitive advantage, and internal consistency. On the other hand, the business model should align with goals, reinforce choices, include virtuous cycles, and be robust enough to make a substantial impact. Through these weapons, internet startups will be able to exploit first-mover advantage, attract partners, and create a powerful image which is essential to develop and sustain the businesses.
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​Appendices
Appendix 1
Appendix 2
