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Organizational Dynamics

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Organizational Dynamics, Vol. 33, No. 2, pp. 161–173, 2004
ß 2004 Elsevier Inc. All rights reserved.
www.organizational-dynamics.com
E-Business Strategies and Internet
Business Models:
How the Internet
Adds Value
G.T. LUMPKIN
T he Internet continues to grow and evolve
as a vital resource with which companies
can upgrade their capabilities and grow their
businesses. Shop.org and Forrester Research
predict that, at its present growth rate, on-line
retail sales in the United States will top the
$100 billion mark in 2004 which represents 4.5
percent of total retail sales. Business-to-busi-
ness (B2B) e-commerce is expected to grow
worldwide to $4.3 trillion by 2005 according to
International Data Corp (IDC). The phenom-
enal success of young companies such as
eBay, Google, and Amazon are also indicative
of the Internet’s potential.
The impact of the information technology
revolution, however, goes beyond the Inter-
net. At a more basic level, it is the shift from
analog to digital technologies that is respon-
sible for so many new information technology
(IT) capabilities. Analog was once the primary
technology for conveying information such as
music recordings, voice communications, and
television signals. Many technologies have
made the switch from analog to digital—
phones, photographs, television signals, and
even books—and the trend suggests digitiza-
tion is here to stay. As a result, digital tech-
nology capabilities which, in essence, make
the Internet possible, are altering the way
business is conducted. According to digital
economy visionary Don Tapscott:
The Net is much more than just
another technology development;
ISSN 0090-2616/$ – see frontmatter
doi:10.1016/j.orgdyn.2004.01.004
GREGORY G. DESS
the Net represents something quali-
tatively new—an unprecedented,
powerful, universal communica-
tions medium. Far surpassing radio
and television, this medium is digi-
tal, infinitely richer, and interactive
. . . Mobile computing devices,
broadband access, wireless net-
works, and computing power
embedded in everything from refrig-
erators to automobiles are conver-
ging into a global network that will
enable people to use the Net just
about anywhere and anytime.
These technology-driven initiatives—the
Internet, wireless communications, and other
digital technologies—are having a significant
impact on the economy. They have done so by
changing the ways businesses interact with
each other and with consumers. This has not
only created an environment in which busi-
nesses must perform at a higher level—faster,
cheaper, smarter—but also it has created
many new business opportunities.
Even so, many firms are still struggling
with the basic issue of how to use the Internet
and digital technologies for their best advan-
tage. Despite the visible and noteworthy suc-
cesses such as eBay and Google, other Internet
companies continue to struggle including
‘‘here-to-stay’’ giants such as Time Warner.
The weak economy is partially to blame
for faltering Internet businesses. However, a
161
more fundamental reason is that companies
are still not clear how the Internet adds value.
In this article we look at how companies
are leveraging the unique features of digital
technology to create competitive advantages.
Two aspects of this approach stand out. First,
there are several strategies that Internet-
based businesses can use to improve their
value propositions. These include four Inter-
net-specific activities that are providing firms
with new capabilities—search, evaluation,
problem-solving and transaction. These
value-adding activities are enhanced further
by managing three different types of Internet
content—customer feedback, expertise, and
entertainment programming. Second, these
value-adding strategies are best understood
in the context of business models that are
specific to the Internet environment. Thus,
we will consider seven Internet business
models that have emerged and proven suc-
cessful, and outline how value-adding activ-
ities and content are best used in the context
of each of the Internet business models.
INTERNET ACTIVITIES THAT
ADD VALUE
In his article, ‘‘Strategy and the Internet,’’
Michael Porter has emphasized that Internet
technology becomes strategically significant
only when its practical application creates
new value. How are firms using the Internet
to add value? By allowing companies to
conduct business on-line and use digital
technologies to streamline operations, the
Internet is helping them develop new value
propositions. Fig. 1 illustrates four related
value-adding activities that are being revo-
lutionized by the Internet—search, evalua-
tion, problem-solving, and transaction. In
this section, we address how companies
can use these capabilities to add value and
create competitive advantages.
Search Activities
Search refers to the process of gathering
information and identifying purchase
options. The Internet has enhanced both
the speed of information gathering and the
breadth of information that can be accessed.
This enhanced search capability is one of the
key reasons the Internet has lowered switch-
ing cost—by decreasing the cost of search.
These efficiency gains have greatly benefited
buyers. Suppliers also have benefited. Small
suppliers that had difficulty getting noticed
can more easily be found. Large suppliers
can publish thousands of pages of informa-
tion for a fraction of the cost that hard-copy
catalogs once required. Additionally, on-line
search engines have accelerated the search
process to incredible speeds.
Consider the example of Google, a
search engine developed as a project by
two graduate students, which became the
number-one search service in just four years.
Why? Because it is capable of incredible

FIGURE 1 INTERNET ACTIVITIES THAT ADD VALUE

Product-Related

Evaluation

Search Transaction
Service-Related

Problem-Solving

162 ORGANIZATIONAL DYNAMICS

things: Using 10,000 networked computers,
it searches 3 billion Web pages in an average
of 500 milliseconds. To do the same search
manually, by thumbing through 3 billion
pages at the rate of 1 minute per page, would
take 5,707 years. This ability has made Goo-
gle an essential tool for many businesses. As
a result, Google has built a powerful adver-
tising business. Mark Kini, who runs a small
limousine service in Boston, spends 80 per-
cent of his advertising budget on Google and
other search engines. ‘‘It’s how we survive
the recession,’’ says Kini.
Thus, enhanced Internet search capabil-
ities make it possible for firms to find critical
information much more rapidly and have
greatly increased the possibility that one firm
can be located by another firm or by custo-
mers wishing to conduct business with it.
Evaluation Activities
Evaluation refers to the process of consider-
ing alternatives and comparing the costs and
benefits of various options. On-line services
that facilitate comparative shopping, provide
product reviews, and catalogue customer
evaluations of performance have made the
Internet a valuable resource. For example,
bizrate.com offers extensive product ratings
that can help evaluate products. Sites such as
CNET that provide comparative pricing have
helped lower prices even for quality pro-
ducts that have traditionally maintained pre-
mium prices. Opinion-based sites such as
epinions.com and planetfeedback.com pro-
vide reports of consumer experiences with
various vendors.
Enhanced evaluation is a capability that
adds value to the process of selling products
or manufactured goods. Many Internet busi-
nesses, according to digital business experts
Ming Zeng and Werner Reinartz, could
improve their performance by making a
stronger effort to help buyers evaluate pur-
chases. Even so, only certain types of products
can be evaluated on-line. Products such as
CDs that appeal primarily to the sense of
sound sell well on the Internet. But products
that appeal to multiple senses are harder to
evaluate on-line. This explains why products
such as furniture and fashion have never been
strong on-line sellers. It’s one thing to look at a
leather sofa, but to be able to sit in it and touch
and smell the leather on-line is impossible.
Problem-Solving Activities
Problem-solving refers to the process of iden-
tifying problems or needs and generating
ideas and action plans to address those needs.
Whereas evaluation is primarily product-
related, problem-solving is typically used in
the context of services. Customers usually
have unique problems; such problems, there-
fore, are typically handled one at a time. For
example, on-line travel services such as Tra-
velocity help customers select from many
options to form a unique travel package.
Furthermore, problem-solving often involves
providing answers immediately (compared to
the creation of a new product). Firms in indus-
tries such as medicine, law, and engineering
are using the Internet and digital technologies
to deliver many new solutions. Some of these
are quite remarkable. Exhibit 1 describes how

Exhibit 1
Eli Lilly: Virtually Seeking Solutions—Worldwide
In 2001, pharmaceutical giant Eli Lilly was anticipating a big drop in sales. That was the year the patent
expired on its blockbuster drug Prozac, which accounted for 34 percent of Lilly’s annual sales. But rather than
launch a new drug, Lilly launched an Internet business—InnoCentive, LLC.
InnoCentive, as the name implies, provides incentives for innovation. It does so by providing a platform for
scientists from around the world to work in virtual communities to solve complex problems. The effort does not
just benefit Lilly, but provides a virtual, open source research and development (R&D) organization that any
member company can use.

163
 Here’s how it works: Drug companies, called ‘‘Seekers,’’ put up ‘‘Wanted’’ posters describing problems
that need addressing. Bounty-hunting scientists, labeled ‘‘Solvers,’’ sign confidentiality agreements that gain
them admission to a secure project room where they can access data and product specifications related to the
problem. If they solve the problem, they get a reward—around $25,000–$30,000 depending on the problem.
According to InnoCentive president and chief executive officer (CEO) Darren J. Carroll, what Lilly has done is
unusual for two reasons. First, by creating a global community of scientists, ‘‘We’re punching a hole in the side of
the laboratory and exposing mission-critical problems to the outside world,’’ says Carroll, ‘‘It’s using the Net to
communicate, collaborate, and innovate.’’ Second, it makes it possible for scientists to essentially become
freelancers. According to Carroll, ‘‘Free agency has never been an option in the hard sciences—until now.’’

Eli Lilly & Company has used the Internet to
form a virtual platform where top scientists
help drug companies solve complex pro-
blems.
Many products involve both a service
and a product component; therefore, both
problem solving and evaluation may be
needed. Dell Computer’s Web site is an
example of a site that has combined the
benefits of both. By creating a Web site that
allow for customization of individual com-
puters, they address the unique concerns of
customers ‘‘one computer at a time.’’ But the
site also features a strong evaluative compo-
nent because it allows users to compare the
costs and features of various options. Shop-
pers can even compare their customized
selection to refurbished Dell computers that
are available at a substantially lower cost.
Transaction Activities
Transaction refers to the process of complet-
ing the sale, including negotiating and agree-
ing contractually, making payments, and
taking delivery. Numerous types of Inter-
net-enabled activities have contributed to
lowering this aspect of overall transaction
costs. Managing costs, and even changing
the cost structures of certain industries, is a
key feature of the digital economy. Applica-
tions of Internet-based technologies have
already had an enormous impact. Giga Infor-
mation Group, Inc. estimates that the cost
savings from business use of e-commerce
will reach $1.25 trillion by the mid-2000s.
There are numerous examples of how the
Internet is both lowering the cost of and
speeding up the transaction process. Auc-
tions of various sorts, from raw materials
used in manufacturing to collectibles sold
on eBay, facilitate the process of arriving at
mutually agreed-on prices. Services such as
Paypal provide a third-party intermediary
that facilitates transactions between parties
who have never met. Amazon’s One-Click
technology, which allows for very rapid pur-
chases, and Amazon’s overall superiority in
managing order fulfillment has made its
transactions process rapid and reliable. In
fact, Amazon’s success today can be attrib-
uted to a large extent to the fact they have
sold this transaction capability to other com-
panies such as Target Corp., Toys ‘‘R’’ Us
Inc., and Borders Books & Music.
These four factors are primary ways
that organizations go about adding value.
Exhibit 2 describes several examples of how

Exhibit 2
Value Adding in the Auto Industry
The auto industry jumped on the Internet bandwagon in a big way. One of the early successes was
Autobytel, and many on-line auto sales Web sites quickly followed. The majority of them have now fizzled
away. The big auto makers also made huge investments in the Internet. Ford was especially aggressive and

164 ORGANIZATIONAL DYNAMICS

 launched several Web sites—Trilogy.com, CarOrder.com, FordDirect.com—most of which never amounted to
anything. But that was in the late 1990s, when it was still unclear how best to use the Internet. Now the
automakers—and the auto-buying public—have found ways to use the Internet profitably. Here are a few
examples:
Search Ebay, the on-line auction giant that makes searching for products of all sorts fast and
simple, has become a player in the used car business. Beginning with a few private individuals, the auto
auction business took off unexpectedly, so the company formed eBay Motors, which contributed about $100
million to eBay’s total revenue of $1.2 billion in 2002. eBay’s technology speeds the process of on-line
search, and buyers who may have been reluctant to shop for cars on-line are comforted by eBay’s
reputation. eBay and other on-line auto-sales sites make searching for insurance and auto financing easier
as well.
Problem Solving To help its dealers manage inventories more effectively, General Motors
Corp. developed SmartAuction. For vehicles that are coming off lease, SmartAuction notifies customers
to bring in cars for an inspection before the lease expires. The condition of the car is logged into the system
and sent to GM dealers who use it to purchase cars electronically. The system helps dealers find cars that fit
their target audience, manages the auto-titling process, and shortens the time cars are carried in inventory.
Evaluation In the early days of the Internet, most thought that cars would never sell on-line because
customers like to kick the tires and take a test drive. This is often still true. But customers who go for a test
drive, and have also already researched the car on-line, usually save money when they buy. Economists
researching this phenomenon have labeled it the ‘‘information effect’’—auto shoppers who first gather
information on-line are better able to evaluate their purchase.
Transaction Auto referral services such as CarsDirect have streamlined the transaction process by
brokering purchases between dealers and consumers. Through these companies, both new and used cars
can be purchased on-line, sight unseen. One shopper, who bought a used car on-line, flew to Fort Worth,
Texas to pick it up, and drove it 18 hours back home to Ohio said, ‘‘in retrospect, I had more information
about this vehicle than if I had gone onto a dealer’s lot and started haggling over price.’’ On-line auto
shoppers typically save money due to the ‘‘contract effect’’ which occurs because third-party auto referral
services monitor the quality of the information provided by dealers and facilitate the transaction.

the automobile industry and car buyers have
used each of these four activities to benefit
their own value-adding efforts.
Content as a Source of
Competitive Advantage
There are other factors that can be important
sources of competitive advantage. One of the
most important of these is content. The Inter-
net makes it possible to capture vast amounts
of content at a very low cost. REI.com, for
example, a provider of recreational equip-
ment and apparel, has over 78,000 items
described on its 45,000-page Web site. But
firms have not always managed content in
ways that add value. Garden.com, a site that
started strongly in 1999 and raised enormous
venture capital, spent millions on creating
detailed and attractive content. But the
expense did not generate sales. Content only
adds value if it contributes to the overall
value proposition. As a result Garden.com
failed in early 2001 (but the name is still being
used by the Burpee company, a 125-year-old
supplier of garden products who bought
rights to the name).
Three types of content can improve the
value proposition of a Web site—customer
feedback, expertise, and entertainment pro-
gramming:
 Customer feedback: Buyers often trust
what other buyers say more than a com-
pany’s promises. One type of content that
can enhance a Web site is customer testimo-
nials. Remember the leather sofa in the exam-
ple above? Even though individuals can’t
feel and smell a sofa on-line, the unbiased
165
testimonials of other buyers can build con-
fidence and add to the chances that the pur-
chaser will buy on-line ‘‘sight unseen.’’ This
is one way that content can be a source of
competitive advantage. Being able to interact
with like-minded customers with shared
interests by reading their experiences or
hearing how they have responded to a new
product builds a sense of belonging that is
otherwise hard to create.
 Expertise: The Internet has emerged as a
tremendously important learning tool. Fifty-
one percent of users compare the Internet to a
library. The prime reason many users go to the
Web is to gain expertise. Web sites that pro-
vide new knowledge or unbiased information
are highly valuable. Additionally, the pro-
blem-solving function often involves educat-
ing consumers regarding options and
implications of various choices. For example,
LendingTree.com, the on-line loan company,
provides a Help Center that includes ex-
tensive information and resources about
obtaining loans, maintaining good credit,
sharing expert knowledge help build commu-
nity in industry or professional groups.
 Entertainment programming: The Inter-
net is being used by more and more people
as an entertainment medium. With technol-
ogies such as streaming media, which
allows the Internet to send television-like
images and sound, computers can provide
everything from breaking news to video
games to on-line movies. In fact, a study
by the Pew Internet & American Life Project
indicates that among people using high-
speed broadband service, TV viewing is
down, and on-line activity has increased.
One reason is because the technology is
interactive which means that viewers don’t
just passively watch but use the Web to
create art or play on-line games. Businesses
have noticed this trend, of course, and are
creating Web content that is not just infor-
mative but entertaining. Exhibit 3 tells how
on-line game developer Skyworks Technol-
ogies is using games to increase product
sales.

Exhibit 3
‘‘Advergaming’’: Making Advertisements Interactive and Fun
Video games were popular well before the Web came along. But new digital technologies have made it
possible to feature some of the best games on-line. Combine this with advertisers’ need to use the Net’s
interactivity to make on-line ads more interesting and what do you get: Advergaming—on-line games that
weave advertisements into the experience. Here are some examples:
 A game designed for Pepsi involves an auto race in which the goal is to recover a stolen shipment of
Mountain Dew Code Red. The top 100 gamers received a free case of the soft drink.
 Some games make you buy something to play. To play the Pebbles Big Barney Chase game, players
must answer a question; to learn the answer, you have to purchase a box of Post Cereal.
 Candystand.com, a Web site developed by Skyworks to promote Life Savers for Kraft Foods, features
dozens of card, racing, and arcade games and ranks as the sixth most popular gaming destination on the Web.
According to Skyworks Technologies founder Garry Kitchen, advergaming can leave a deeper and more
positive impression than television commercials. The idea is catching on—in a recent year, Skyworks made
$4.3 million in revenues. Industry analyst Kent Allen of the Aberdeen Group expects the trend to continue,
especially among consumer packaged-goods marketers. ‘‘The consumer guys are starting to understand
advergaming,’’ says Allen. ‘‘They’re realizing it’s a great way to connect with people.’’

and so forth. Further, the expertise function These three types of content—customer
is not limited to consumer sites. In the case feedback, expertise and entertainment
of B2B businesses, Web sites that facilitate programming—are potential sources of
166 ORGANIZATIONAL DYNAMICS
competitive advantage. That is, they create
advantages by making the value-creation
process even stronger. Or, if they are
handled poorly, they diminish perfor-
mance. Quality content that is strategically
deployed provides companies with a way to
effectively differentiate their product or ser-
vice offerings. This can be especially impor-
tant in an on-line environment where the
opportunities to differentiate may be con-
strained compared with the opportunities
to compete on the basis of low costs.
Next, we turn to the topic of Internet
business models. How the Internet creates
value depends to a great extent on how a
value proposition is enacted. Business mod-
els provide a guide to the effectiveness of the
value-adding process.
INTERNET BUSINESS MODELS
The Internet provides a unique platform or
staging area for business activity which has
become, in some ways, like a new market-
place. How do firms conduct business in this
new arena? One way of addressing this ques-
tion is by describing various Internet busi-
ness models. A business model is a method
and a set of assumptions that explains how a
business creates value and earns profits in a
competitive environment. Some of these
models are quite simple and traditional even
when applied in an Internet context. Others
have features that are unique to the digitally
networked, on-line environment. In this sec-
tion, we discuss seven Internet business
models that account for the vast majority
of business conducted on-line.
 Commission-based models are used by
businesses that provide services for a fee. The
business is usually a third-party intermedi-
ary and the commission charged is often
based on the size of the transaction. There
are many different types of commission-
based businesses. The most common type
is a brokerage service such as a stockbroker
(e.g., ameritrade.com) or real estate broker
(e.g., remax.com). This category also includes
auction companies such as eBay. In exchange
for putting buyers and sellers together, eBay
earns a commission. Reverse auctions run by
companies such as FreeMarket.com have
also gained importance by generating sub-
stantial savings in procurement costs for
business-to-business users.
 Advertising-based models are used by
companies that provide content and/or ser-
vices to visitors and sell advertising to busi-
nesses that want to reach those visitors. It is
similar to the broadcast television model in
which viewers watch shows produced with
advertising dollars. A key difference is that
on-line visitors can interact with both the ads
and the content. Large portals such as yahoo.-
com are in this category as well as specialty
portals such as iNest.com, a portal that pro-
vides services for buyers of newly constructed
homes. ePinions.com, a recommender system,
is just one example of the many types of
content that are often available.
 Markup-based models are used by busi-
nesses that add value in marketing and sales
(rather than production) by acquiring pro-
ducts, marking up the price, and reselling
them at a profit. Also known as the merchant
model, it applies to both wholesalers and
retailers. Amazon.com is the most well-
known example in this category. It also
includes bricks and mortar companies such
as Wal-Mart Stores, which has a very suc-
cessful on-line operation, and vendors whose
products are purely digital, such as fonts.-
com, which sells downloadable fonts and
photographs.
 Production-based models are used by
companies that add value in the production
process by converting raw materials into
value-added products. Thus, it is also
referred to as the manufacturing model.
The Internet adds value to this model in
two key ways: first, it lowers marketing costs
by enabling direct contact with end users.
Second, such direct contact facilitates custo-
mization and problem-solving. Dell’s on-line
ordering system is supported by a state-of-
the-art customized manufacturing process.
Travelocity uses its rich database of travel
options and customer profiles to identify,
produce, and deliver unique solutions.
167
  Referral-based models are used by
firms that steer customers to another com-
pany for a fee. One type is the affiliate model
in which a vendor pays an affiliate a fee each
time a visitor clicks through the affiliate’s
Web site and makes a purchase from the
vendor. Many name brand companies use
affiliate programs. For example, Wedding-
Channel.com, which provides a bridal reg-
istry where wedding guests can buy gifts
from companies such as Tiffany’s, Macy’s
or Crate & Barrel, receives a fee each time
a sale is made through its Web site. Another
referral-based example is Yesmail.com,
which generates leads using e-mail market-
ing.
 Subscription-based models are used by
businesses that charge a flat fee for providing
either a service or proprietary content. Inter-
net service providers are one example of this
model. Companies such as America On-line
and Earthlink supply Internet connections
for fees that are charged whether buyers
use the service or not. Subscription-based
models are also used by content creators such
as The Economist or New York Times. Although
these recognizable brands often provide free
content, only a small portion is available free.
The Economist, for example, advertises that 70
percent of its content is available only to
subscribers.
 Fee-for-service-based models are used
by companies that provide ongoing services
similar to a utility company. Unlike the com-
mission-based model, the fee-for-service
model involves a pay-as-you-go system. That
is, activities are metered, and companies pay
only for the amount of service used. Applica-
tion service providers fall in this category.
For example, eProject.com provides virtual
work space where people in different physi-
cal locations can collaborate on-line. Users
essentially rent Internet space, and a host of
tools that make it easy to interact, for a fee
based on their usage.
It is important to keep in mind that many
companies combine these models to achieve
competitive advantages. For example, a com-
pany such as LendingTree not only sells
advertising but also earns a commission as
168 ORGANIZATIONAL DYNAMICS
a third-party intermediary and earns fees by
referring viewers to other sites through its
affiliate programs. As noted earlier, Ama-
zon.com not only earns revenues by reselling
marked-up merchandise but also has gener-
ated income by charging fees for providing
expertise based on its transaction capabil-
ities. Major manufacturers such as Ford
Motor Co. and Dell Computer not only use
their sites to manage procurement with sup-
pliers, but also to advertise their services and
provide consumers with information that is
used to order customized products.
Table 1 summarizes the key feature of
each Internet business model, suggests what
role content may play in the model, and
addresses how the four value-adding activ-
ities—search, evaluation, problem-solving,
and transaction—can become sources of
competitive advantage.
Clearly, Table 1 provides a framework
for exploring means by which a company can
enhance its sources of competitive advan-
tage. By using Internet-specific value-adding
activities in the context of viable business
models, many new avenues for using the
Internet to add value may come to light.
Firms seeking to add value by using Internet
capabilities might ask:
 How has the Internet affected our
value-adding processes? Is there some
aspect of our value chain that needs to
be reevaluated or realigned? Are we
relatively strong in our use of the
Internet, or has it exposed new weak-
nesses that are making us vulnerable?
 How might our firm make better use
of search, problem-solving, evalua-
tion, or transaction capabilities to
improve its value proposition or save
costs internally?
 How can we enhance the content of
our Web site with testimonials, exper-
tise, or entertainment programming in
order to strengthen the usefulness of
the Internet?
 Has the digital economy created new
opportunities that our firm can seize
by deploying its unique competencies
and capabilities? Conversely, do we
 TABLE 1 INTERNET BUSINESS MODELS
SOURCES OF COMPETITIVE
TYPE FEATURES AND CONTENT ADVANTAGE
Commission-based Commissions charged for brokerage or intermediary Search
services. Adds value by providing expertise and/or Evaluation
access to a wide network of alternatives. Problem-solving
Transaction
Advertising-based Web content paid for by advertisers. Adds value by Search
providing free or low cost content—including Evaluation
customer feedback, expertise, and entertainment
programming—to audiences that range from very
broad (general content) to highly targeted
(specialized content).
Markup-based Reselling marked-up merchandise. Adds value Search
through selection, distribution efficiencies, and by Transaction
leveraging brand image and reputation. May use
entertainment programming to enhance sales.
Production-based Selling manufactured goods and custom services. Search
Adds value by increasing production efficiencies, Problem-solving
capturing customer preferences, and improving
customer service.
Referral-based Fees charged for referring customers. Adds value by Search
enhancing a company’s product or service offering, Problem-solving
tracking referrals electronically, and generating Transaction
demographic data. Expertise and customer feedback
are often included with referral information.
Subscription-based Fees charged for unlimited use of service or content. Evaluation
Adds value by leveraging strong brand name, Problem-solving
providing high quality information to specialized
markets or access to essential services. May consist
entirely of entertainment programming.
Fee-for-service-based Fees charged for metered services. Adds value by Problem-solving
providing service efficiencies, expertise, and Transaction
practical outsourcing solutions.

face new threats because of the adop-
tion of Internet technologies by our
competitors?
 In addition to what we are now doing
with our Web site, how might we
utilize other business models and/or
combine complementary activities to
add greater value?
Questions such as these can help man-
agers evaluate new avenues for adding value
from using digital and Internet technologies.
Additionally, there are a number of illustra-
tive examples of firms that have used these
value-adding techniques in unique ways.
An interesting example is the fast-grow-
ing company salesforce.com, a provider of
sales management services. Many companies
have jumped into the sales management
field, referred to more broadly as customer
relationship management (CRM). But sales-
force.com has taken a slightly different
approach. Instead of installing software on
each user’s PC, salesforce.com rents out its
service for $65 to $125 per user. Users access
the software by going on-line; accounts are
managed and maintained on the Internet.
According to Marc Benioff, CEO of salesfor-
ce.com, ‘‘We’re a utility . . . We’re like elec-
tricity. You only pay us if you use us.’’ Thus,
salesforce.com has utilized a fee-for-service
business model to create a business system
that is seriously challenging Oracle and Sie-
bel Systems, its close competitors. With other
enterprise software, there is typically a large
upfront expense and additional training and
consulting is required to get it working. This
169
makes the salesforce.com solution especially
attractive to small and young firms that are
trying to hang on to their cash. The company
has become successful by developing a sim-
ple business model which provides a solu-
tion that is both differentiated and relatively
low cost to the longstanding problem of sales
management. It is creative combinations
such as this that are helping Internet compa-
nies develop strong new value propositions.
There is a contrasting view, however, to
the perception that enlightened applications
of Internet technologies are creating value. At
the industry level, what may be good for a
few companies has been devastating for
others. That is, there are whole industries
that have lost value because of adopting
Internet solutions.
Consider the following example: Makers
of color-printed cardboard boxes such as
those used to package frozen dinners and
breakfast cereals have been forced, in
essence, to participate in reverse auctions
in order to make sales. Reverse auctions
get their name from flipping the traditional
‘‘one-seller, many-buyers’’ model to create
auction systems where many sellers bid for
the business of one buyer. With traditional
auctions, the bidding drives prices up; but
with reverse auctions bidding drives prices
down. In many industries, including the
printed cardboard box industry, this bidding
process has driven prices down to levels that
were unthinkable prior to the advent of Inter-
net-based auction processes. Some Internet
observers claim that Internet-enabled reverse
auctions not only create economies, but also
allow small suppliers who would not other-
wise have a chance to participate to be
included in the bidding. But cardboard box
companies and manufacturers of many other
industrial products claim that these Internet
techniques have increased the bargaining
power of buyers to such a degree that their
industry has been seriously compromised.
The long-term impact of this intense price
competition is uncertain, but to the extent
that it damages whole industries, it is doubt-
ful whether the net effect will be to create
value across the whole economy.
170 ORGANIZATIONAL DYNAMICS
Thus, the Internet is having a strong
impact on many business sectors. In some,
it is clearly creating opportunities to attract
customers and generate new revenues. But
successfully creating wealth requires that
companies identify which technologies and
solutions can be enacted to add value. Mon-
itoring the effect of these technologies and
the changes that they stimulate will become
an increasingly important task for strategic
managers as firms adjust to the new practices
and possibilities of the Internet-enabled digi-
tal economy.
CONCLUSION
The Internet and digital technologies have
created new opportunities for firms to create
value. This paper has examined ways in
which companies are using the Internet to
add value. Four value-adding activities that
have been enhanced by Internet capabilities
were addressed—search, evaluation, prob-
lem-solving, and transaction. Search activities
include processes for gathering information
and identifying purchase options. Evaluation
activities refers to the process of considering
alternatives and comparing the costs and ben-
efits of various options. Problem-solving
activities include identifying problems or
needs and generating ideas and action plans
to address those needs. Transaction activities
involve the process of completing a sale,
including negotiating and agreeing contrac-
tually, making payments, and taking delivery.
These four activities are supported by three
different types of content that Internet busi-
nesses often use—customer feedback, exper-
tise, and entertainment programming.
Internet business models provide a con-
text for enacting value-adding activities.
Seven business models have been identified
that are proving successful for use by Internet
firms. These include commission, advertising,
mark-up, production, referral, subscription,
and fee-for-service based models. Strategic
use of value-adding activities, as well as the
seven business models, can help firms build
competitive advantages and contribute to
profitability. Firms have also found that com- the practices and models that will enhance
binations of the Internet business models can and not detract from a firm’s value proposi-
contribute to greater success. tion is central to using the Internet to create
Firms that want to benefit from these wealth.
new value-adding approaches need to ask
how the Internet is affecting their current
operations and how they might effectively
implement Internet capabilities. Identifying

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 SELECTED BIBLIOGRAPHY
Michael E. Porter popularized the concept of
the ‘‘value chain’’ in his seminal book, Com-
petitive Advantage (New York: Free Press,
1985). Here, he described two different cate-
gories of activities: primary activities
(inbound logistics; operations; outbound
logistics; marketing and sales; and service)
and support activities (procurement, technol-
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relationships among activities within a firm as
well as between the firm and a more encom-
passing value chain that includes suppliers,
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Charles Stabell and Oystein Fjeldstad, in Stra-
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Porter’s seminal work by describing value
shops, value chains, and value networks to
broaden Porter’s framework beyond manu-
facturing firms and include organizations that
predominantly use intensive technologies
(e.g., hospitals) and mediating technologies
(e.g., real estate brokerages). Fig. 1 draws on
the work of Stabell and Fjeldstad, as well as
insights from Ming Zeng and Werner Rein-
artz, in California Management Review (Winter
2003) who addressed the role of the Internet in
the value-adding process. Michael Porter also
addressed how the Internet influences the five
competitive forces in ‘‘Strategy and the Inter-
net,’’ Harvard Business Review (March 2001).
For a fuller discussion of the seven busi-
ness models that are addressed in this paper,
refer to Allan Afuah and Christopher L.
Tucci, Internet Business Models and Strategies,
G.T. (Tom) Lumpkin is an associate professor of management and
entrepreneurship at the University of Illinois at Chicago. His primary
research interests include entrepreneurship, strategic management, and
172 ORGANIZATIONAL DYNAMICS
2nd ed. (Burr Ridge, IL: McGraw-Hill, 2003).
Table 1 draws on insights from these authors
as well as the work of Paul Timmers, Electro-
nic Commerce (New York: John Wiley & Sons,
Ltd., 1999) and Michael Rappa, ‘‘Business
Models on the Web,’’ http://digitalenterpri-
se.org/models/.
For more information about Lilly’s Inno-
Centive program, refer to: B. Breen, ‘‘Lilly’s
R&D Prescription,’’ Fast Company, 2002; and
www.innocentive.com. Information about
‘‘advergaming’’ can be found in M. Athitakis,
‘‘The Entertainer,’’ Business 2.0, May, 2003; P.
Suciu, ‘‘Mobility Takes the Forum,’’ GameSpy,
May 2, 2003; and, www.skyworkstech.com.
Information about how the auto industry uses
the Internet to add value was drawn from V.
Postrell, ‘‘How Much is that Civic On-Line?’’
New York Times, April 24, 2003; M. Stepanek,
M ‘‘New Routes in the Internet Car Business,’’
CIO Insight, January 23, 2003; and N. Wing-
field and K. Lundegaard, ‘‘eBay is Emerging
as Unlikely Giant in Used-Car Sales,’’ Wall
Street Journal, February 7, 2003.
Some of the other articles and/or Web
sites that we have drawn on include: ‘‘B2B
E-Commerce Headed for Trillions.’’ CyberA-
tlas, March 6, 2002 (www.cyberatlas.com);
www.shop.org.; P. Evans and T. S. Wurster,
Blown to Bits (Cambridge, MA: Harvard Busi-
ness School Press, 2000); Q. Hardy, ‘‘All Eyes
on Google,’’ Forbes, May 26, 2003 (www.for-
bes.com); C. Bayers, ‘‘The Last Laugh,’’ Busi-
ness 2.0, September 2002; A. Weintraub, ‘‘E-
Assets for Sale —Dirt Cheap,’’ BusinessWeek
e.biz, May 14, 2001; and L. Tischler, ‘‘Vote of
Confidence,’’ Fast Company, December 2002.
the strategic implications of the Internet. Lumpkin received his Ph.D. in
business administration from the University of Texas at Arlington
(tlumpkin@uic.edu).
Gregory G. Dess is the Andrew R. Cecil Professor of Applied Ethics at
the University of Texas at Dallas School of Management. His primary
research interests are in the areas of strategic management, organization–
environment relationships, and knowledge management. Dess received
his Ph.D. in business administration from the University of Washington.

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