The document provides an overview of business models. It defines a business model as a company's plan for how it creates and delivers value to customers in order to earn a profit. The document outlines several common elements of business models, including who the customer segment is, what products/services are provided, how revenue is generated, and how the company differentiates itself. It also discusses various types of business models such as multi-component systems, advertising models, and time models. Overall, the document aims to explain the key components of business models and how they can be used by companies to compete in the marketplace.

1. Lecture 07
Strategic Management
NUML

2. Business Model
• Business Models provide insight on company polices and helps in
analyzing them.
• A business model is a company’s method for making money in the
current business environment.
• It includes the key structural and operational characteristics of a
firm—how it earns revenue and makes a profit.
• The simplest business model is to provide a good or service that
can be sold so that revenues exceed costs and expenses.
• Business models can be much more complicated depending on
business requirement.
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3. Business Model
• A business model is usually composed of five elements:
–Who it serves?
– What it provides?
– How it makes money?
– How it differentiates and sustains competitive advantage?
– How it provides its product/service?
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4. What is a Business Model?
• Business Model
–A business model describes that how an organization creates,
delivers, and captures value.
–A firm’s business model is its plan or diagram for how it
competes, uses its resources, structures its relationships,
interfaces with customers, and creates value to sustain itself on
the basis of the profits it generates.
–The term “business model” is used to include all the activities
that define how a firm competes in the marketplace.

5. Business Models
• There is no standard business model, no hard-and-fast rules
that dictate how a firm in a particular industry should compete.
• In fact, it’s dangerous for the entrepreneur launching a new
venture to assume that the venture can be successful by simply
copying the business model of another firm—even if that other
firm is the industry leader. This is true for two reasons.
• First, it is difficult to precisely understand all of the
components of another firm’s business model.
• Second, a firm’s business model is inherently dependent on
the collection of resources it controls and the capabilities it
possesses.
• However, over time, the most successful business models in an
industry predominate.

6. • To achieve long-term success though, all business models need to
be modified across time. The reason for this is that competitors can
eventually learn how to duplicate the benefits a particular firm is
able to create through its business model.
–In the late 2000s, for example, financial returns suggested that
competitors such as Hewlett-Packard had learned how to
successfully duplicate the benefits of Dell Inc.’s “build-to-order”
(BTO) business model.
• A business model innovation, refers to a business model that
revolutionizes how a product is produced, sold, or supported after
the sale.
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Business Models

7. Business Models
• A firm’s business model is developed after the feasibility analysis
stage of launching a new venture.
• The business model stage addresses;
• how to surround it with a core strategy,
• a partnership model,
• a customer interface,
• distinctive resources,
• and an approach to creating value that represents a viable
business.

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11. How Business Models Emerge
• The Value Chain
– A value chain is a set of activities that a firm operating in a specific
industry performs in order to deliver a valuable product or service for
the market.
– The value chain is the string of activities that moves a product from
the raw material stage, through manufacturing and distribution, and
ultimately to the end user.
– By studying a product’s or service’s value chain, an organization can
identify ways to create additional value and assess whether it has the
means to do so.
– Value chain analysis is also helpful in identifying opportunities for new
businesses and in understanding how business models emerge.

12. The Value Chain
• To analyze the specific activities through which firms can create a
competitive advantage, it is useful to model the firm as a chain of value-
creating activities. Michael Porter identified a set of interrelated generic
activities common to a wide range of firms.
 Inbound logistics include the receiving, warehousing, and inventory control
of input materials.
 Operations are the value-creating activities that transform the inputs into
the final product.
 Outbound logistics are the activities required to get the finished product to
the customer, including warehousing, order fulfillment, etc.
 Marketing & Sales are those activities associated with getting buyers to
purchase the product, including channel selection, advertising, pricing, etc.
 Service activities are those that maintain and enhance the product's value
including customer support, repair services, etc.
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15. 11 Business Models
1. Customer solutions
model
2. Profit pyramid model
3. Multi-component
system/installed base
model:
4. Advertising model:
5. Switchboard model:
6. Time model:
7. Efficiency model:
8. Blockbuster model:
9. Profit multiplier model:
10.Entrepreneurial model:
11.De Facto industry standard
model:
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16. 11 Business Models
1. Customer solutions model
• IBM uses this model to make money not by selling IBM products,
but by selling its expertise to improve its customers’ operations.
This is a consulting model.
• Similar models are applied in Warree Group, India ( a solar sector
giant)
• At Waaree, we treat customers as our partners. We believe in
working towards providing solutions that they have been
looking for and not just giving them our product, Hitesh Doshi,
Chairman & Managing Director, Waaree Group
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17. 11 Business Models
2. Profit pyramid model:
• General Motors offers a full line of
automobiles in order to close out any niches
where a competitor might find a position.
• The key is to get customers to buy in at the
low-priced, low-margin entry point (Saturn’s
basic sedans) and move them up to high-
priced, high-margin products (SUVs and
pickup trucks) where the company makes its
money.
• Examples include Wall street Journals
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18. 11 Business Models
3. Multi-component system/installed base model:
• Gillette invented this classic model to sell razors at break-even pricing
in order to make money on recurring sales of higher-margin razor
blades.
• HP does the same with printers and
printer cartridges.
• The product is thus a system, not
just one product, with one component
providing most of the profits.
• Also called Bait and Hook Model
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19. 11 Business Models
4. Advertising model:
• Similar to the multi-component system/installed base model, this
model offers its basic product free in order to make money on
advertising.
• Originating in the newspaper industry, this model is used heavily
in commercial radio and television.
• Internet-based firms, such as Google, offer free services to users
in order to expose them to the advertising that pays the bills.
• This model is analogous to Mary Poppins’ “spoonful of sugar
(content) helps the medicine (advertising) go down.”
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20. 11 Business Models
5. Switchboard model:
• In this model a firm acts as an intermediary to
connect multiple sellers to multiple buyers.
• Financial planners juggle a wide range of products
for sale to multiple customers with different
needs.
• This model has been successfully used by eBay
and Amazon.com.
• In Pakistan online shopping websites are its
example.
• Ali baba is a successful example.
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21. 11 Business Models
6. Time model:
• A company must be able to drive innovation in the market to be
successful with this model.
• Product R&D and speed are the keys to success in the time model.
Being the first to market with a new innovation allows a pioneer
like Apple to earn high margins.
• In the Time Profit Model, the majority of the profit is made at the
initial launch of a product before a competitor is able to introduce
a similar product and drive the price way down.
• Once others enter the market with process R&D and lower
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22. 11 Business Models
7. Efficiency model:
• In this model a company waits until a product becomes
standardized and then enters the market with a low-priced, low-
margin product that appeals to the mass market.
• This model is used by Wal-Mart, Dell, and Southwest Airlines.
8. Blockbuster model:
• In some industries, such as pharmaceuticals and motion picture
studios, profitability is driven by a few key products.
• The focus is on high investment in a few products with high
potential payoffs—especially if they can be protected by patents.
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23. 11 Business Models
9. Profit multiplier model:
• The idea of this model is to develop a concept that may or
may not make money on its own but, through synergy, can
spin off many profitable products.
• Walt Disney invented this concept by using cartoon
characters to develop high-margin theme parks,
merchandise, and licensing opportunities.
• Like Harley Davidson, originally builds motorcycles, but
their brand equity is so large, costumers buy anything and
everything with there brand name on it.
• These extra sources of revenue multiply the profit the
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24. 11 Business Models
10.Entrepreneurial model:
• In this model, a company offers specialized products/services to
market niches that are too small to be worthwhile to large
competitors but have the potential to grow quickly.
• This model has often been used by small high-tech firms that
develop innovative prototypes of software in order to sell off the
companies (without ever selling a product) to Microsoft or
DuPont.
• Whatsapp, drop box etc.
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25. 11 Business Models
11. De Facto industry standard model:
• In this model, a company offers products free or at a
very low price in order to saturate the market and
become the industry standard.
• Once users are locked in, the company offers
higher-margin products using this standard.
• For example, Microsoft packaged Internet Explorer
free with its Windows software in order to take
market share from Netscape’s Web browser.
• Microsoft operating systems are by far the standard
for the industry. All competitors must make their
products work with Microsoft, for example, Mac
laptops being able to operate windows office.
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26. Disintermediation Business Model
• Disintermediation is the removal of
intermediaries in a supply chain, or
"cutting out the middleman". Instead
of going through traditional
distribution channels, which had some
type of intermediate, companies may
now deal with customers directly. One
important factor is a drop in the cost of
servicing customers directly.
Other famous Business Model

27. Dell’s Business Model
•Almost all firms partner
with others to make their
business models work.
• In Dell’s case, it needs the
cooperation of its suppliers,
customers, and many others
to make its business model
possible.

28. Subscription Business Model
• The subscription business model is a business
model where a customer must pay a subscription
price to have access to the product/service. The
model was pioneered
bymagazines and newspapers, but is now used by
many businesses and websites.
• Freemium is a pricing strategy by which a product
or service is provided free of charge,
but money (premium) is charged for advanced
features or functionality.

29. • Franchising is the practice of selling the right to
use a firm's successful business model.
 the franchise is an alternative to building "chain
stores" to distribute goods that avoids the
investments and liability of a chain..
 A parent company allows entrepreneurs to use the
company's strategies and trademarks; in exchange,
the franchisee pays an initial fee and royalties
based on revenues.
Franchising

30. Brokerage Business Model
• The brokerage business model is used by companies that act as
third parties or "middle men" between the seller and the
purchaser of the product. This model is actively used in the real
estate business, stock market trading and business-to-business
trading like mergers and acquisitions.
Manufacturer/Merchant Model
• This is one of the oldest and most common business models in existence. In
this model, a manufacturer simply sells the goods he creates directly to
consumers or sells them to a merchant who then offers them to consumers
for a slightly higher price, thereby collecting a profit.

31. Business Model Innovation
When the game gets tough, change the game.
• Business model innovation (BMI) refers to a business's attempt to
reinvent itself in order to obtain a competitive edge and stimulate
company growth.

33. Business Model Innovation
Netflix is an example of a
business model
innovator.

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