A simplification of the business and its underlying logic We understand the gist of ideas much better than we do the details – so a business model helps us communicate to others
Stories that explain how the enterprise works Who is the customer What does the customer value How do we make money in this business
Ensures that the idea works together – there is logic in the linkage between elements of the business Eg. Last year’s luggage idea.
There are two tests that a successful business model must pass.
Do all the elements of the business work together - is it realistic?
Do the numbers make sense?
4 elements of a model – Source Notes on a business model analysis Revenue Key Expenses Key Success Factors Investment Size
Revenue Streams – single, multiple, free, loss leader e.g. What are the revenue streams for Facebook? Model – single or hybrid Subscription; transaction; advertising; How quickly will revenues increase? How long does it take to collect cash following a sale? eBay? What is its model? Are they likely to cover the loss leader?
Strategy is about how you are going to compete – your competitive environment – how you will engage with the external environment
Hambrick and Fredrickson – What is strategy -- VS COMPETITION Arena – where will be we compete Product Markets (Consumers/Customers) Geographies Core Technologies How will we stage Speed of intiatives Sequencing Vehicles Internal growth Joint ventures Licenscing Acquisitions Differentiation Image Customization Price Styling Product reliability
A model tells the story of your business – its operational and economic logic A business plan is the operational details of the business for a specific time period A business plan is the actions and activities that will be undertaken to achieve financial and strategic objectives It is usually bound by timelines, and by financial targets It is used to measure progress. It covers both internal and external elements of the business.
A business model is a tool, that complements both a business strategy and a business plan. It is an important tool because 1) it ensures that you understand the logic of your business; and, 2) it helps you communicate the logic of your business. Transaction costs reduced with technology Changed the economics of doing business Therefore business models changed to capture savings or create competitive advantage Led to globalization, increased competition Required innovaqtion
Transaction costs reduced with technology Changed the economics of doing business Therefore business models changed to capture savings or create competitive advantage Led to globalization, increased competition Required innovaqtion
Key competitor – newspapers Change to revenue model – Free plus upgrades
Gillette Source of revenue – the razor or the blades (continuous purchase)
iTunes Format, speed of product delivery Lower expenses – overhead; fixed cost of product
Google Rethinking advertising – the revenue model and distribution Model.
Dell Web as distribution channel; customization
Walmart Technology to reduce cost
Transaction based – intermediary – never takes possession of products sold KSF Community – large place to sell stuff Took the traditional Brick and Mortar auction house and made it virutal – reducing cost, risk; increasing cash flow – immediate/advance payment and increasing the size of client base
What is Facebook’s Business Model? Advertising? Is that enough to be profitable? Will advertisers generate enough business? Different environment than Google – google we’re looking for information, therefore related advertising is welcomed In Facebook – social media – not looking for info, looking for connection. Will advertising work? Example of the logic of the story maybe not fitting.
What is a Business Model
MOS 2296 Business Models Lecture 3 Colleen Sharen
Rethinking the Business Model Creates Advantage
Plenty of Fish (POF) <ul><li>What is the POF revenue model? </li></ul><ul><li>What are the key success factors of the POF business model? </li></ul><ul><li>Key Expenses of the model? </li></ul><ul><li>What are the models of its competitors? </li></ul><ul><li>Is the POF business model sustainable? </li></ul><ul><li>What alternatives might Fried consider? </li></ul><ul><li>As Fried, what would you do? </li></ul>
Sources <ul><li>Joan Magretta. “Why Business Models Matter”. Harvard Business Review . May 2002. </li></ul><ul><li>Richard Hamermesh, Paul Marshall, Taz Pirmohamed. Note on Business Model Analysis for the Entrepreneur. Harvard Business School. 2002. </li></ul><ul><li>Donald Hambrick and James Fredrickson. “Are you sure you have a strategy?”Academy of Management Executive. 2001. </li></ul>
Photo Attributions <ul><li>Female Model photo: Source Flickr, Creative Commons, Alaine Lorza http://www.flickr.com/photos/7876071@N06/ </li></ul><ul><li>Wooden Toy Model photo: Source Flickr, Creative Commons, </li></ul><ul><li>Puzzle Piece http://www.flickr.com/photos/wilhei/109403306/ </li></ul><ul><li>Quarterly revenue chart: Flickr, Creative Commons, Danny Sullivan http://www.flickr.com/photos/dannysullivan/375895619/ </li></ul><ul><li>Credit card photo: Flickr, Creative Commons, Andres Ruedea, http://www.flickr.com/photos/andresrueda/3274955487/sizes/l/ </li></ul><ul><li>Business Model Post It Notes photo: Flickr, Creative Commmons, Alex Osterwalder, http://www.flickr.com/photos/osterwalder/177179799/ </li></ul>