CHAPTER 7: BUSINESS MODELS Flashcards
Business Model Overview
Importance of a Business Model:
- Helps analysts understand company operations, strategy, target customers, key partners, prospects, risks, and financial profile.
- Conventional Business Models:
Easily understood examples: manufacturer, wholesaler, retailer, restaurant chain.
- Impact of Digital Technology:
Changed operations and disrupted existing business models.
Led to the development of complex, specialized, or new business models.
What Is a Business Model?
Describes how a business is organized to deliver value to its customers.
Includes details on customers, service methods, key assets, suppliers, and supporting business logic.
- Purpose:
Explains what the company does, how it operates, generates revenue, and profits.
Highlights differences from competitors.
- Details:
Provides basic relationships between key elements.
For a full description, refer to a business plan (e.g., detailed financial forecasts).
Key Components of a Business Model:
- Value Proposition:
Attributes of products or services valued by target customers.
Leads customers to prefer the firm’s offerings over competitors.
Consideration of relative pricing.
- Value Chain:
Structure of the firm to deliver value.
Systems and processes that create value for customers.
Key Questions for Analysts
Target Customers:
Who are the firm’s target customers?
How does the firm keep its customers?
Offerings:
What product(s), service(s), or experience(s) does the firm offer?
How does it differentiate its offerings from competitors?
Sales and Distribution:
Where is the firm selling?
How does it reach its customers?
Pricing:
How much is the firm’s offer pricing relative to competitors?
Is the pricing strategy effective in attracting and retaining customers?
Organization and Execution:
How is the firm organized to execute its business model?
Does the firm have competitive capabilities to sustain its operations?
Financial Impact
Revenue Model:
How does the firm’s business model impact its revenue generation?
What are the main sources of revenue?
Cost Structure:
What is the cost structure of the firm?
How does it manage its costs?
Profitability:
What is the firm’s profitability?
How does the business model contribute to profit margins?
Asset Profile and Financial Structure:
What is the firm’s asset profile?
How is the financial structure supporting its operations and growth?
Business Model Features
Channel Strategy
Function: Selling/display. Handling inquiries. Order processing. Physical distribution. After-sale service
Assets: Warehouses, Retail stores, Sales force, E-commerce website
Firms: Retailers, Wholesalers, Agents, Franchisees,
Customers, Market: Who: Customers For Whom?
A. Geography
B. Segment(s)
C. Business (B2B) Retail (B2C)
Firm Offering: What: Offering What?
Product(s) Service(s)
A. Differentiation
B. Customer Needs
C. Channels: Where
Channels Where/How?
A. Direct (Physical)
B. Intermediary
C. Digital
When evaluating a firm’s channel strategy:
Distinguish between functions performed and assets involved.
Consider different firms that may be involved in these functions or own related facilities.
Channels: Where
Traditional Channel Strategy:
Flow of finished goods:
Manufacturer → Wholesaler → Retailer → End customer
Common in many product businesses.
- Direct Sales Strategy:
Manufacturer sells directly to the end customer, bypassing distributors and retailers.
Involves the company’s own sales force.
Historically expensive but cost-effective with e-commerce.
- Intermediaries:
Some intermediaries work on an agency basis, earning commissions without taking ownership of goods (e.g., auctioneers like Sotheby’s).
- Drop Shipping:
In e-commerce, goods are shipped directly from manufacturer to end customer without inventorying them.
- Omnichannel Strategy:
Utilizes both digital and physical channels to complete sales.
Example: “Click and collect” where customers order online and pick up in-store.
- Competitive Strategy:
Understanding how a firm’s channel strategy differs from competitors is crucial.
Example: Tesla’s direct sales strategy vs. traditional franchised dealer model in automotive industry.
EXAMPLE 1
Adidas Business Model
Adidas is the world’s second largest sportswear brand. The following excerpt from the 2019 Adidas annual report (www.adidas-group.com/media/filer_public/ a8/5c/a85c9b8e-865b-4237-8def-8574be243577/annual_report_gb-2019_en.pdf) provides a brief summary of its channel strategy:
With more than 2,500 own-retail stores, more than 15,000 mono-branded franchise stores and more than 150,000 wholesale doors, we have an unri- valed network of consumer touchpoints within our industry. In addition, through our own e-commerce channel, our single biggest store available to consumers in over 40 countries, we are leveraging a consistent global framework.
1. List and number the channels used by the Adidas business model.
Adidas Business Model Channels:
Own-Retail Stores
Mono-Branded Franchise Stores
Wholesale Doors
E-commerce Channel
KNOWLEDGE CHECK
- The Tesla and Hyundai no-dealer models are examples of an established distribution channel.
- A customer looking to buy a new car might do research online and enter her contact details in order to obtain product information; those details are a “customer lead” that is forwarded to a nearby dealer who might offer a test drive. Identify the channel strategy used in this business model.
A. “Bricks and mortar”
B. Third party
C. Omnichannel
C.
DIRECT SALES or Dis-intermediating
Pricing How Much?
Determines if the firm prices at a premium, parity, or discount relative to competitors.
Justifies its pricing based on differentiation in its business model.
Reflects the firm’s pricing power in the market.
Pricing How Much?
Companies can be classified into price takers and price setters based on their pricing power.
Price takers: Accept market prices, focus on cost advantage (e.g., Walmart).
Price setters: Command premium pricing due to high differentiation.
Pricing approaches:
Value-based pricing: Sets prices based on perceived customer value (e.g., Tesla’s total cost of ownership).
Cost-based pricing: Sets prices based on incurred costs (e.g., hourly rates for professional services).
Price Discrimination
Price Discrimination: Charging different prices to different customers to maximize revenue.
Strategies include tiered pricing, dynamic pricing, and auction/reverse auction models.
Pricing for Multiple Products:
Bundling: Combining products/services to encourage purchase (e.g., cable TV and internet).
Razors-and-blades pricing: Selling a product at a low price and its consumables at a high margin.
Optional product pricing: Offering additional features or services at a price.
Pricing for Rapid Growth:
- Penetration pricing: Sacrificing margins to gain market share (e.g., Netflix subscriptions).
- Freemium pricing: Offering basic services for free, with premium options for a fee (e.g., mobile apps).
- Hidden revenue business models: Providing free services while generating revenue from other sources (e.g., media with free content and paid advertising).
Business Organization and Capabilities: How
Value Chain: Refers to the internal systems and processes within a firm that create value for customers. It includes activities that add value but may not involve physical product handling.
Differentiation from Supply Chain: While a value chain focuses on activities within a single firm that create value, a supply chain encompasses all processes involved in creating and delivering a product, both internal and external to the firm.
Value Chain Analysis: Links a firm’s activities to its value proposition and profitability by:
Identifying specific activities performed by the firm.
Estimating the value added and costs associated with each activity.
Identifying opportunities for competitive advantage.
