Learning objectives • What constitutes a business model • Why understanding and articulating a business model is vital to an organisation achieving profitability and sustainability • The essential components of a business model, and some generic business models
Learning objectives • How managers can use business models and the implications of business models for managerial decision making and action taking • The relationship between business models and organisational strategy
Introduction • Internet (& associated technologies) form foundation of global communication & information infrastructure • transforming industries & changing way business is conducted • need to investigate new models of business that effectively utilize potentiality of Internet & associated technologies • “gold rush”mentality of mid-late 1990s serious search for frameworks/models to analyze & define e-commerce landscape
What is a business model? • A business modelis a description of how a business works • its value chain, process interactions, cost structure, and revenue sources, how it will achieve profitability and sustainability. BUT the term ‘business model’ is becoming a buzzword, and thus routinely misappropriated
What is a business model? • Why focus on business models? • traditional, industrial age concept of how business was conducted is very clear We understand: * how business is structured * types of people/skills needed * roles filled * how business makes money * how business delivers value to customers, suppliers, partners, owners I sell cars. I work for an insurance company.
What is a business model? • Internet “disrupts” our understanding & presents new possibilities/potentialities • new (additional) channel for procuring & distributing goods & services • highly interactive with new capabilities
What is a business model? • new business models needed to shape business practices in new business environment • Value proposition (value delivered to customers), capabilities, sources of costs & revenues are generally less familiar & obvious, & therefore need further analysis & articulation
What is a business model? • Business models defined… “an operating business model is the organisation’s core logic for creating value…since organisations compete for customers & resources, a good business model highlights the distinctive activities and approaches that enable the firm to succeed – to attract customers, employees, and investors, and to deliver goods & services profitably.” (Linder & Cantrell 2000:2)
What is a business model? • Business Model defined… “a business model is nothing else than the architecture of a form and its network of partners for creating, marketing and delivering value & relationship capital to one or several segments of customers, in order to generate profitable and sustainable revenue streams” (Dubosson-Torbay et al. 2002:7)
What is a business model? • Function of Business Models • Articulate value proposition • Value created for customers by goods/services (via use of technology) • Identify market segment • Define structure of internal value chain required to create & dist8ribute offering
What is a business model? • Function of Business Models • Consider cost structure and profit potential, given value proposition and value chain structure • Describe position of firm within value network • Formulate competitive strategy
Customer management • Embraces a number of aspects associated with customers & relationships that organisation maintains with customers • Customer identification • Which customer segment(s) do we serve? Are our customers organisations or end consumers?
Customer management • Value proposition • Defines & describes the value an organisation delivers to its customers • Stems from perceptions of customers as to what is important • Understanding & servicing customer requirements • Developing brand awareness
Product & service portfolio • What portfolio of products and/or services and/or experiences does an organisation offer its customers? • Broad or narrow range? • Stand-alone or tightly integrated? • Where on the product lifecycle are an organiZation’s products, services and experiences?
Processes & activities • What core business processes and activities does an organisation require in order to deliver the value proposition to its customers? • How should a business be configured? • Do these processes and activities imply a need to develop external linkages to ensure delivery of value proposition, or can/should they be performed internally?
Resources, capabilities & assets • What resources, capabilities, assets do we need to deliver value proposition? • In-house or outsource? • How do we recruit & train human resources needed for success?
Suppliers and Business Networks • Do we need close relationships with other organisations in order to deliver the value proposition to customers? • How to find & manage the resultant strategic business network (SBN)? • Will SBN enhance our ability to be responsive, flexible, agile in changing & competitive environment?
Financial Viability • Profitability & sustainability • Incoming revenues must exceed costs over time • Typically costs are incurred before revenues are received • Challenge is to manage cash flows to ensure sustainability
Financial Viability • Sources of revenues? • Selling goods, services • Selling advertising space, sponsorship • Commissions, subscription fees • When will revenues be generated? • How moneys apportioned across SBN?
Financial Viability • Costs • Identify total costs (all costs associated with design, developments and/or procurement of goods & services, and all costs incurred in delivering on value proposition of customers) • Where are costs incurred? • Understanding costs is essential to establishing pricing mechanisms & policies
Financial Viability • Risk considerations • What assumptions are being made about revenues streams, costs, sales volumes? With what degree of uncertainty?
Financial Viability • Established price customers are willing to pay? • When are goods / services expected to be profitable? • Have all costs been identified? All revenues? Opportunities to leverage knowledge, technology or physical assets? • Has risk been considered?
Examples of business models • Importance of business models • A good business model does not guarantee success • Must be implemented via appropriate strategies & effectively managed • Provides a coherent framework for managers to think about elements of business & to avoid overlooking elements critical to success • Given 6 elements, there are many ways of combining these to form organisational blueprints
Examples of business models • Direct-to-Customer model • Basis of commercial transactions over the Internet • Describes process of selling direct to customer via organisational website • Incorporates both supply-oriented transactions (organisation is in role of buyer) & demand-oriented transactions (organisation is in role of seller)
Examples of business models Direct-to-Customer model Place, and/or space S B Communicate directly * wholesaler (Ingram books) * retailer (Wal-Mart) * producer (Gillete, Nike) * individual * business
Examples of business models • Direct-to-Customer model • Customer management • Does moving online increase potential market, or does it cannibalise existing market? • Does online service increase satisfaction & loyalty? • What is the customer value proposition? How is it enhanced or supported through moving online? • Product & service portfolio • Are an organisation’s goods & services suited to selling online?
Examples of business models • Direct-to-Customer model • Processes & activities • Need for excellent order fulfilment & delivery • Are new processes & activities implied by the move online? • Is there a risk of channel conflict as a result of moving online? • Resources, capabilities, assets • Required IT capabilities? • Warehousing, logistics capabilities for online trading?
Examples of business models • Direct-to-Customer model • Suppliers & business networks • Alliances needed with external providers of components of the value proposition? • Skills needed to form and manage relationships? • Financial viability • Sources of revenue (online sales, selling advertising space, referrals?) • Sufficient financial resources for investments in IT & systems integration?
Examples of business models • Intermediary model • An intermediary serves to mediate transaction between buyer(s) and seller(s) • Role of intermediary varies according to circumstances
Examples of business models Intermediary model S B Communicate indirectly S B I B S Intermediaries: *broker / infomediary *auction *portal *B2B marketplaces * individual * business * individual * business
Examples of business models • Intermediary model • Types of intermediaries • Broker or infomediary • Auctions • Portals • Marketplaces or hubs
Examples of business models • Intermediary model • Customer management • Understanding range of services required of intermediary & valued by customers is essential to success • Recognise potential for conflict between desires of buyers and needs of sellers • Product & service portfolio • Intermediary model often involves services only • ‘value’ attached to services must be capable of generating a stable source of revenue
Examples of business models • Intermediary model • Processes & activities • Need for excellence in gathering and managing information & knowledge (about buyers & sellers requirements, about industry, about range of products & services, etc) • Excellence in integrating processes of buyers and sellers required • Resources, capabilities, assets • May be providing infrastructure to trading parties • Must be structured to allow intermediary to retain control of transactions • May require integration across organisational boundaries
Examples of business models • Intermediary model • Suppliers & business networks • May require extensive use of business networks & alliances (e.g. portals) • Need to make decisions about which services provided internally as opposed to external providers • Financial viability • Revenue streams from transaction fees, subscription fees, provision of online content, advertising • Major costs stem from building robust infrastructure & marketing • Must achieve critical mass of buyers and sellers to ensure transaction volume and future viability
Examples of business models • Content Provider model • provides content based on expertise, on-sold to third parties, or made available free of charge (e.g. weather forecasts, news) • Revenues generated through sales of content, or through selling advertising space on popular sites • often a variant of Direct-to-Customer model
Implications for managers • Simple framework of business models helpful for enhancing understanding and dialogue among managers • Serves to align organisational members to organisational mission
Implications for managers • Sound, coherent, articulated business model essential for any business • Must be complemented by strategy that takes into account competition, industry forces & the like • Business model defines what an organisation is all about, what is does, how it makes money • Strategy articulates how it will achieve goals and targets
Implications for managers • But… • Different researchers & writers do not always approach the concept of a business model in a similar way… • Consider the views of: • Harvard Business School (Applegate) • Aust. Graduate School of Management (Weill & Vitale) • Gartner group (Taylor & Terhune) • Eisenmann (Harvard – 2002)