Business Models

Business Model

Business Model

Definition:

• Business Model

Business Model describes details of planned activities in business that involve with

·        purpose,

·        offerings,

·        strategies,

·        infrastructure,

·        organization structures,

·        trading practices,

·        operational processes, and

·        policies

designed to result in profits in a marketplace.

Business model is very important because business model is a main component of business plan and every good business must have a business model.

• Business Plan

Business plan is a formal statement that describes objectives of a company and how the company will achieve those objectives. And business plan also describes the company’s business model.

• E-commerce business model
E-commerce business model aims to use and leverage unique qualities of Internet and Web.

Key elements of business model:

Business model composes of different parts of activities that organizations use to earn revenues and there are 8 key elements of business model as following: (for most of the case study, students need to indentify the following key elements)

Laudon and Laudon (2009)

1. Value proposition

Value proposition describes the unique value of a company offers to its customers that can fulfill the needs of them. There are some questions that a company has to ask itself in order to create the value proposition such as:

• Why will customers want to do business with you instead of others?
• What can attract customers to buy your products or services?
• What does your company provide that others cannot?
• What can set your company different from your competitors?

For example: Why do customers choose to use Google instead of Yahoo or MSN?
What are advantages of Google over its rivals?

Examples of successful value propositions:
• Personalization/ Customization
• Reduction of product search costs
• Reduction of price discover costs
• Facilitation of transactions by managing product delivery

Therefore, values proposition represents a company’s uniqueness over its competitors. And if the company know its own value proposition for its business, the company is much more likely to succeed because the value proposition will separate the company from its competitors.

2. Revenue Model

Revenue model is the most important element of business model in professor’s opinion because revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital.

There are 5 major types of e- business revenue model as follows:

• Advertising revenue model
• Subscription revenue model
• Transaction fee revenue model
• Sales revenue model
• Affiliate revenue model

Example:

• What would be the revenue model for Google? AdWords and AdSense

• What would be the revenue model for HP? Sales of products (PC) and service

• What would be the revenue model for Microsoft?
Software and service

Laudon and Laudon (2004)

Advertising Revenue Model

The Advertising Revenue Model is very famous for e-commerce business and this type of revenue model is implemented from the business model of newspapers. The idea of this revenue model is to offer and sell space to companies or individuals that want to put their advertisings in the space over the internet such as Google, Yahoo, MSN, and Ask.com. These companies make money through the advertising revenue model.

For example, Google earns most of the revenue from “Google AdWords”. Google Adwords is a pay per click advertising program of Google that created for advertisers who want to post their advertisements to attract people who are looking for some information that advertisers offer. According to OrganicSpam.com, when a user searches Google's search engine, ads for relevant words are shown as “sponsored link” on the right side of the screen, and sometimes above the main search results.

Google- AdWords Advertising Revenue Model for Google.com

(Source: http://www.webddcenter.com/promoteweb/images/google_adwords.gif 11/17/09)

Yahoo - An Advertising Revenue Model for Yahoo.com

( Source: http://dataopedia.com/storage/24/yahoo.com.au.jpg 11/17/09)

Subscription Revenue Model

The idea of this revenue model is that a customer has to pay a subscription price in order to have access to the products or services. The model was first used in magazines and newspapers businesses but it is currently used by various types of businesses and websites such as Xdrive, and yahoo.

For example, Xdrive.com provides online storage for customers to upload their data and keep it on the internet to backup their valuable files. And another example would be companies who produce game online such as SIM and WARCRAFT games that offer game online but users have to subscribe first in order to get the games.

Xdrive – A Subscription Revenue Model

( Source: http://www.xdrive.com 11/17/09)

Yahoo – A Subscription Revenue Model for Yahoo Mail Plus

( Source: http://overview.mail.yahoo.com/enhancements/mailplus 11/17/09)

Transaction Fee Revenue Model

Transaction fee revenue model is very famous for B2C, C2C, and also B2B. The idea of this model is to match the buyer and seller together and a company will receive a fee for enabling or executing a transaction. The revenues will base on transaction fees and the amount of transactions. Examples of companies that use this model would be eBay (Become the biggest market in the world), and Paypal.

Participation: Bruno (ID) is both buyer and seller on eBay. He sells iPhone on eBay and buys some computer software on eBay because the price is normally cheaper.

Participation: Choomsak (5110212016) is a buyer on eBay. He bought Mac case on eBay.

eBay – A Transaction Fee Revenue Model

(Source: http://www.ebay.com 11/17/09)

PayPal – A Transaction Fee Revenue Model

(Source: https://www.paypal.com/am/cgi-bin/webscr?cmd=_home&locale.x=en_US 11/17/09)

Sales Revenue Model

A company that uses sales revenue model generating revenues based on selling goods, information, or services to customers such as Amazon, HP, Microsoft, Apple (product started from PC, iPhone and iTunes) that sell both product and service to the customers.

Amazon - A Sales Revenue Model

(Source: http://www.amazon.com 11/17/09)

Microsoft - A Sales Revenue Model

( Source: http://www.microsoft.com/en/us/default.aspx 11/17/09)

Affiliate Revenue Model

Affiliate revenue model is a model that can generate revenues by earning commissions from selling products and services of other companies or providing advertisements and links of others companies. And the revenues depend on the numbers of customers that view the links or the advertisements. A lot of big companies also use this type of revenue model such as MyPoints.com, Google (AdSense) eBay, and Amazon.

AdSense is an ad serving application run by Google Inc. Website owners can enroll in this program to enable text, image, and more recently, video advertisements on their websites. These advertisements are administered by Google and generate revenue on either a per-click or per-impression basis. Google beta tested a cost-per-action service, but discontinued it in October 2008 in favor of a DoubleClick offering (also owned by Google).
Source: http://en.wikipedia.org/wiki/AdSense

MyPoints - An Affiliate Revenue Model

(Source: http://www.mypoints.com/emp/u/index.vm 11/17/09)

3. Market Opportunity

Market Opportunity consists of 2 things which are market value and market share comparing to your competitors.

5 Forces Model is one of the tools that can use to analyze market opportunity. And market opportunity describes needs, wants, or demand trends that a company can take advantage of because they are not being addressed by the competitors. Any company has to be able to identify these questions as following:
• What is your market space?
• What is your market value of products and services?
• What is your market share comparing to your competitors?

For example, Google is a big company who offers search engine. Google has to identify many aspects for finding market opportunity such as:
• What the value for search engine market is
• How much it is
• What Google’s share is, comparing to its competitors

Marketspace

Marketspace is area of actual or potential commercial value in which company intends to operate.

Realistic market opportunity

Realistic market opportunity is defined by revenue potential in each of market niches in which a company hopes to.

Example of Market Opportunity

4. Competitive Environment

Competitive environment refers to a company’s external environment that consists of direct and indirect competitors that offer similar products and services and competing in the same market. And 5 forces model is one of the tools that can be used to analyze the competitive environment.

Competitive environment is related to:
• How many active competitors are in the market
• How large of the active competitors’ operations are
• How profitable of these competitors are
• What market share of each competitor is
• How they set up their prices

5. Competitive Advantage

A competitive advantage exists when the company is able to gain superiority or an advantage over its competitors by delivering the same products or services as its competitors to the customers but at a lower price or at greater value through differentiation. Therefore, competitive advantage will set the company different from its competitors.
Competitive advantage can refer to:
• The first mover in the market
• Having economy of scale in the company’s operations
• Having a unique organizational culture in the company
• Having access to valuable resources that others do not have
• Unfair competitive advantage
• Perfect market: No competitive advantages or asymmetries
• Leverage: When a company uses its competitive advantage to achieve more advantage in surrounding markets

6. Market Strategy

Market strategy is a detailed plan that describes a process of how a company intends
to enter a new market and attract customers, and concentrate on how its limited resources can increase sales and achieve a sustainable competitive advantage by fulfilling the customers’ satisfactions. Best business concepts will fail if not properly marketed to potential customers.

Market Strategy is related to:
• How do you plan to promote your products?
• How do you target your customers?

7. Organizational Development

Organizational Development can be described as a plan from top-down that relates to how a company organizes beliefs, attitudes, values, and structure of people and the company itself for the positive changing or to accomplish the work. In order to have a good organizational development, the company has to understand the nature of its structure and culture of the company first, and then the company will know what aspects of the organization need to be improved to get the work done and to achieve the success.
• Work is typically divided into functional departments.
• Hiring moves from generalists to specialists as company grows.

8. Management Team

Management team refers to employees in the company who have control in making the business model work. Before the company assigns the management team to work on the business model, it has to know the management team’s background, strong points and weak points in order to get the right management team to control the business model.
• Strong management team gives instant credibility to outside investors.
• Strong management team may not be able to salvage a weak business model, but should be able to change the model and redefine the business as it becomes necessary.

What is a mission statement, really? Why do we need it? How can it help our businesses?

 let’s look at Wikipedia’s definition of the mission statement:

“A mission statement is a brief statement of the purpose of a company…The following elements can be included in a mission statement.
• Purpose and values of the organization.
• Products, services, or market; or, who are the organization's primary "clients" (stakeholders).
• What are the responsibilities of the organization towards these "clients"?
• What are the main objectives supporting the company in accomplishing its mission?”

That seems like an awful lot of information to cram into a few sentences that sum up my business. In reality, there are several elements that encompass the foundation of my company, and describe how I want it to be perceived.

I propose that we break this concept down into three progressive pieces, or core elements:

Core Values – Who are we?
Core values identify 3-5 terms that describe the forces that drove you to form and grow your organization. If you are the founder, they are the same as or closely related to your personal values. Your values describe not only who you are as an organization, but also who you are not. They encompass your ethics, principles, and beliefs about your organization and its relationship to the world. Core values are immutable, values that remain the same for the life of your organization.

Example: "integrity, honesty, openness, personal excellence, constructive self-criticism, continual self-improvement, and mutual respect" - Microsoft

Integrity, honesty, mutual respect, and openness speak to how Microsoft wants to be perceived by the world, and provides a basic ethical code for employees. Personal excellence, constructive self-criticism, and self-improvement are more personal and specific. They communicate to employees the behaviors that are approved (and hopefully rewarded), and by extension those that are not.

Vision Statement - Why are we here?
Vision is the reason your company exists. The world changes, technology changes, so your vision statement need not refer to your product. It conveys why you are in this business (and not another). It ties directly back to your core values. If the market changed dramatically, your vision should remain intact because it speaks to what your company represents, not just what it does.

Example: “..to help people and businesses throughout the world realize their full potential.” - Microsoft

I like this vision because it’s about contribution. If the desktop computer was no more, and Microsoft’s software became obsolete, it wouldn’t affect this vision at all. Microsoft could completely change its product line and still be aligned with its vision.

Mission Statement - What do we do?
While your mission should refer more specifically to the type of business you do or products you sell, it can also encompass what you feel your organization's contribution will be to your industry, community, or to the world. Your mission statement may change if your company outlives the industry it started in, but it should still tie back to your core values and vision.

Example: “Google's mission is to organize the world's information and make it universally accessible and useful.”

This is a great mission statement – it’s succinct, but it provides a lot of information. If digital information changed, Google could change its product and still be aligned. But we can also see Google’s values implicit in this statement. Universal access to information implies that Google values equality and knowledge highly, and that it sees its community as the world, not the industry or country its based in.

You may want to combine aspects of these three elements into one statement that you use externally and internally, but it's important to differentiate between them during the development stage.

The Hard Part
So how do we go about defining these elements so they are resonant and meaningful? How do we avoid Dilbert-esque jargon, or overly lofty platitudes?

Start with yourself. If you don't understand what drove you to embark on the journey of entrepreneurship, you can't explain it compellingly to others. I've often asked entrepreneurs why they started their businesses, and the answer is very often "I wanted to make a lot of money." This is a cop out. There are much easier, less stressful ways to make money than starting your own company. Even if you don't know what it is, you have a compelling reason behind why you started your venture, why you're selling the specific product or service you offer, and why you think you can succeed at it. The key to expressing this begins with your own core values.

Many people find it helpful to define their own personal vision statement. There are a multitude of books, websites, and coaches available that can help. However, I believe that defining your personal core values is a better place to start. Looking at my core values, I begin to understand the career choices I made in the past, and recognize the underlying needs and assumptions that compelled me to create my own venture. This provides a framework through which I understand my motivations, and strengthens my ability to talk to others about my company's goals.

At that point, you may want to utilize an exercise from a book, or engage a consultant to help you further define your organizational values, vision, and mission. You if you want to communicate these elements publicly, or reserve them for your employees, shareholders, or customers. At the very least, I recommend that you have public mission statement, which may include elements of your values and vision.

Here are a few examples of compelling statements from well-known organizations:

Starbucks:
“To inspire and nurture the human spirit— one person, one cup, and one neighborhood at a time.”

Starbucks' statement is very clever - it describes how their product adds to people's lives, shows their focus on community, and has a little dash of humor.

Nike:
“To bring inspiration and innovation to every athlete in the world. If you have a body, you are an athlete.”

I love how this statement defines athlete to include everyone. I'm not so sure about innovation - hardcore athletes may be able to define innovation in their products, but I don't know if everyone can. Still, it communicates that innovation is a core value.

And here is an example of how not to write a mission statement:

“Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhone.”

A laundry list of accomplishments is not a mission statement. Mission statements are not used to promote your products; they describe your desire to make an impact, in your community, industry, or in the world.

Why do they matter?
Values, Vision, and Mission are crucial to setting a clear, understandable, and easily communicated direction for yourself, your partners and employees, and your investors and customers. It's not enough to feel passionate about your product or service, you have to consciously understand what drives you in order to communicate it to a diverse group of people.

In Maslow's Hierarchy of Needs, it's often expressed as a pyramid, with physical survival-based needs on the bottom, and the uniquely human need for self-actualization on top. You can visualize an organization's goals in a similar way:
While individuals begin by meeting their physical needs and eventually grow into higher modes of thinking, organizations are different. The more clearly you can articulate your high-level goals from the beginning, the less time and resources you will spend trying to fix poor communication, alignment, employee engagement, and unwanted cultural artifacts like destructive political networks. When you recognize the guiding force these Core Elements provide, your strategic goals and tactical plans will be more aligned, streamlined, and easier to communicate to you stakeholders.

Core Elements can also be the difference between corporate survival and failure during times of crisis. A well-known example of corporate values put to the test took place in 1982, when several people died from taking cyanide-laced Tylenol caplets. Tylenol is manufactured by Johnson & Johnson, whose company credo states that their first responsibility is to their customers. True to their values, Johnson & Johnson responded to the crisis by pulling 31 million bottles of their product from stores, and offering free replacements. While the short term cost to the company was high, the company's fast and comprehensive response soothed consumer fears, increased investor confidence, and paved the way for future growth.

In contrast, the Ford Pinto scandal of the 1970s illustrates a story of corporate values gone awry. When Ford leadership first learned of the faulty design that caused cars to catch fire when hit from the rear, they decided that the cost of paying damages to the families of those killed was more viable than redesigning the faulty fuel tank. Either Ford's values did not clearly emphasize ethical concerns, or they were not actively in use at the time. The botched response to the fires caused lasting damage to Ford’s reputation.

Organizational core elements inform all aspects of business decisions - internal and external.
Branding and identity, the cornerstone of effective marketing and sales, must be authentic and compelling to attract customers. When branding aligns with corporate behavior, it is a powerful force. When misaligned, it creates confusion or disillusionment in customers. Wal-Mart is known for providing great value to customers, but has a poor reputation for its relationship to suppliers and employees. By contrast, Southwest Airlines has a great customer service record, and is consistently cited is one of the best workplaces to in the country.

Similarly, internal communications and policies need to be aligned with core elements in order to be effective. Employment and hiring policies, compensation, training, and ethics must all reflect the organization's stated values and vision. Lack of alignment creates cognitive dissonance, or confusion and discomfort in employees who recognize that the organization doesn't "walk the walk." Employee engagement, efficiency, retention, and innovation are all effected by how authentically, clearly, and consistently the organization's core elements are communicated and demonstrated by leadership.

Summary
Organizational core elements: Values, Vision, and Mission are vital to your ability to communicate clearly and consistently with your customers, shareholders, community, and employees. Consciously understanding your personal values and goals, helps you articulate why your brought your company into existence, and how it contributes to the world it inhabits. Nothing is more compelling to your customers, or motivating to your employees than that.