8.4 Business Models

There are many business models. One well known model is that by Shikar Ghosh (1998) {1}, which recognizes eight elements:

1. Value proposition: benefits the customer enjoys when buying from a company.
2. Revenue model. how the money is made.
3. Market opportunity: the nature and size of a company's marketplace.
4. Competitive environment: other companies occupying the same marketplace.
5. Competitive advantage: advantages a company enjoys over its competitors.
6. Market strategy: how a company will target its customers and promote its products.
7. Organizational development: a company's management structure.
8. Management team: experience and skills of a company's leaders.

Another is the contemporary focus on value: businesses must generate value in some way, to: {2} {3}

1. Owners, whether proprietor, partners or share holders, in the form of dividends, a stronger balance sheet and/or share value.
2. Customers in better goods and services: more choice, value for money, help and after-sales service.
3. Employees as salaries and more worthwhile jobs.
4. Communities as better public or charitable services, and more prosperous environments.
5. Trades and professions as increased skills, techniques and public standing.
6. Host nation as prestige, competitiveness and trade balances.

Definition

A business model describes the rationale of how an organization captures, creates and delivers value. Such a model has to be intuitive and cover all matters of interest, i.e. encompass the necessary and sufficient conditions of company operation. The concept should be simple, complete and relevant, without oversimplifying the complexities of how enterprises actually function.

Osterwalder and Pigneur's Model

A successful concept creates a shared language by which existing businesses can be fully understood, evaluated and strategic alternatives devised. The Osterwalder and Pigneur model {4} recognizes nine basic elements or building blocks: these are:

Osterwalder and Pigneur's concept, which is adopted in this book, has been applied and tested around the world and is already used in organizations such as IBM, Ericsson, Deloitte, the Public Works and Government Services of Canada. Their business model identifies and examines nine key elements where problems and opportunities may lie.

All companies must conform to the model, but some of the more noteworthy examples of its elements are:

Customer Segments

Google makes money from one customer segment (Google Ads) while subsidizing another two segments (Google search and AdSense).

Apple evolved into a company selling PCs, tablets, phones, music and software, all to different customer segments.

Seascape e-Art misinterpreted keyword research and supposed customer segments that did not exist.

Wal-mart aims its products at the price-conscious customer.

GlaxoSmithKline repositioned its Ropinirole drug for treatment of Parkinson's disease as an effective treatment for Restless Leg Sydrome.

Liquidation found customers for items surplus to demand.

Dell lost market share to HP and Apple by not finding new market segments.

Proctor & Gamble found new market segments with its Tremor and Vocalpoint services.

Zappos targeted customers wanting quality shoes at a reasonable price.

Netflix focused on very small sector of the entertainment market.

Customer Channels

Commerce Bancorp reached out-of-hours customers and busy mums by keeping retail rather than banking hours.

Craigslist expanded from an email listing to an Internet-based classified ads.

Amazon expanded from selling books to general retail and other services.

Andhra Pradesh bypassed centuries of corruption to open free channels between government and citizens.

Intel marketed its chip to PC purchasers.

Ipswich Seeds eventually found new customer channels (online catalog).

OpenTable used the Internet for its restaurant reservation booking service.

Proctor & Gamble marketed Chlorox as a 'green' product.

Fine Arts Ceramics found new customer channels through third-party auction sites.

Customer Relationships

Tesco succeeded with a 'customer first' policy.

Cisco collaborated with customers to see off the competition with innovative technology.

Lulu's PoD services empowered authors.

Lotus Notes was continually re-engineered to maintain its customer base.

Fiat canvassed car buyers and built what was wanted.

Eneco sold a commodity as a premium service to flower-growing companies.

Easy Diagnosis provided a free expert system as a loss-leader for its IT services.

Small, personal companies may weaken their customer relationships by going online.

Key Resources

Google used customer data collected from search engines and its Analytics program to develop its Ad service.

SIS Datenverarbeitung employed its programming expertise to re-engineer an ERP system.

GlaxoSmithKline monetized unused internal assets as a patents pool on neglected tropical diseases.

Amazon developed sophisticated technology which it then offered in cloud services.

Skype employed largely free resources to undercut telecom prices.

EasyDiagnosis employed its medical knowledge to create an online medical diagnosis expert system.

Aurora Health Care analyzed its medical records with business intelligence systems to offer a superior service.

Key Activities

Apple makes tablet computers and smart phones.

Commerce Bancorp provided banking services.

Lotus makes software.

Fiat makes motor cars.

Dell makes computers.

GlaxoSmithKline makes drugs.

Cisco makes routers and other IT equipment.

Liquidation auctions excess supplies.

SIS Datenverarbeitung provides information technology products and services.

Key Partnerships

eBay forged relationships with 60 website, including AOL and PayPal.

Proctor & Gamble 'Connect & Develop' policy expanded internal research through outside partnerships.

GlaxoSmithKline operates closely with the FDA.

Fiat links to key suppliers through private industrial networks.

Wal-mart has key partnerships with suppliers.

PayPal has a key partner in eBay.

Dutch flower growers have a key partner in Eneco.

Zipcar has key partnerships with environmentally-conscious city authorities.

By using a business model, Ronald Chan identified three new key partners.

Value Proposition

Amazon retails books and other products at competitive prices, all with purchaser reviews.

Netscape made the first browser and opened up the Internet.

Nespresso developed coffee machines for the mass market.

Netflix provides on-demand Internet streaming video.

Microsoft developed Visual Basic for fast and accurate program coding.

Eneco moved from being a fixed cost gas supplier to providing a service for commercial greenhouses.

Nitendo offered its wii game controller.

By trial testing, Harold Ingleton identified new value propositions for his customers.

GlaxoSmithKline repositioned its Ropinirole drug for treatment of Parkinson's disease as an effective treatment for Restless Leg Sydrome.

Cost Structure

Skype uses the Internet and does not have to manage its own network.

Early dotcom companies spent more on advertising than profits warranted.

OpenTable used the Internet to bring preexisting services together.

Apple adjusted its prices for the iPod as new models were made available.

Halberd Engineering divided into two companies with different cost structures.

Netscape was an innovative company but its cost structure soon became unviable.

Revenue Streams

Nitendo reinvested its revenue streams in low-tech games.

Amazon reinvested book sale revenues into general retail and then computing services.

Dale Abrahams had no significant advantages in any business element, and so lost money.

Intel spent billions of its revenues on marketing its logo to PC purchasers, but got the money back through premium-priced chips.

PayPal had to spend lavishly on marketing a 'sure fire thing'.

Other Models

Business models are not exclusive. Much can also be learned from other models and analyses.

SWOT

SWOT refers to factors external to the company by which its strategic outlook may be assessed: strengths (S), weaknesses (W), opportunities (O) and threats (T). {9}

Examples: Amazon, Inc., Craigslist, Tesco plc, and PayPal,

Pestel Analysis

Similar to the SWOT analysis, but here the factors assessed are political (P), economic (E), social (S), technological (T), environmental (E) and legal (L). {10}

Examples: Amazon and Tesco plc.

Value Vectors

When able to do so, customers opt for better value, but that better value can be price, performance, or relational value. {11}

Price value covers: 1. Best price for a standard product, and 2. Acceptable quality.

Performance value covers: 1. Better functionality, 2. Innovative features, 3. Improved quality, 4. Superior design.

Relational value covers: 1. Personalized treatment, 2. Products tailored to the customer's needs, 3. Integrated solutions, 4. All-round service excellence.

Value vectors change as a market matures, the relational value often becoming more important.

Example: Commerce Bancorp.

Value Chain Analysis

To assess its competitive advantage, a company can be modeled as a chain of value-creating activities, typically input logistics > operations > outbound logistics > marketing & sales >.services. {12}

Example: Tesco plc.

Porter's Five Force Analysis

Porter's Five Forces is a business strategy framework developed by Michael E. Porter of the Harvard Business School in 1979. Since 'pure competition' in an ideal market would drive the profits of all participating companies down to zero, the model identifies five forces that prevent this undesirable result: supplier power, threat of new entrants, threat of substitutes, buyer power and rivalry. {13}

Example: Apple iPod.

Questions

1. What are business models? What are their strengths and weaknesses?
2. Compare and contrast three business models.
3. Describe Osterwalder and Pigneur's business model.
4. Briefly illustrate five applications of Osterwalder and Pigneur's business model.
5. What is SWOT analysis?. Give an example of its use.
6. Describe a practical application of Pestel analysis.
7. Explain why vector values change as a market matures.
8. Describe the value business model, and its application in value chain analysis.
9. Examine the Apple iPod product with Porter's Five Force Analysis.

Sources and Further Reading

1. Making business sense of the Internet by Shikar Ghosh. Harvard Business Review (March April 1998).
2. Understanding the Concept of Value by Mark Holleman. A Business Blog. Febrary 2011.
3. The Concept of value by Kevin Vincent. MLMKnowHow. 1998.
4. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. by Alexander Osterwalder and Yves Pigneur. Wiley 2010.
5. E-Commerce 2010 by Kenneth C. Laudon and Carol Guercio Traver. Pearson 2010. Section 2.
6. Research on Internet business models. Internet Business Models. Good listing of books and academic papers on Internet business models.
7. Business Models by Design. DMI.Org.
8. Terrific survey of free business models online. Chris Anderson's Blog. March 2009.
9. SWOT Analysis. QuickMBA. 2010. Handy introduction.
10. PESTEL analysis of the macro-environment. Oxford Univ. Press. 2007. Straightforward account.
11. Creating value from the inside out by John Guaspari. Quality Digest. 2001. An application to the 'internal customer.'
12. The Value Chain. QuickMBA. Simple introduction.
13. Porter's Five Forces: a Model for Industry Analysis. QuickMBA. 2010. Reasonably detailed treatment.