Using a Business Model for Strategy Formulation
In a previous article, we looked at the types of business models and how an understanding of these can help businesspersons analyze their business ideas. We learnt that MIT has identified the four basic business models as Creators, Distributors, Landlords and Brokers. While creators and distributors sold full ownership rights to their customers, landlords sold only a right to use for a specific period or under certain conditions. Brokers did not sell directly but provided matchmaking services by bringing sellers and buyers together. In this article we look at how business modeling can help strategy development. A Sample Business Model Understanding concepts is easier with a graphic and we use the Business Model Canvas developed by Dr Alexander Osterwalder and Yves Pigneur. The canvas (image attached to this article) proposes nine building blocks that can define any business: Value Proposition: This is not just the product or service that you deliver to the client but the specific help you provide to the customer in getting what the person wants to do. Customer Segments: These are the groups of people or organizations who want to do the job that your value proposition helps with. Customer Relations: Customer relations are the activities and processes that help you acquire customers, provide satisfaction to them and retain them. Channels: Channels are the means that you use to sell to your customers and deliver your offer to them. Key Activities: The major activities involved in making, marketing and distributing your offer constitute the key activities. Key Resources: The physical, financial, intellectual and human resources that you need to carry on
the business are listed under this category. Cost Structure: The quantum and behavior of costs involved in setting up and running the business are indicated here. Revenue Streams: All the above goes to generate revenues for the business, and we look at the different types of revenue we can generate with the setup. How Business Modelling can help Business Strategy Development When you try to develop a business model as outlined in the previous section, you will be forced to answer key strategic questions such as: What job of the prospective customer are you trying to help with your value proposition? How? How large is the group of prospective customers who want to do the job? Can you create a viable business serving this group? How will you acquire customers, satisfy them and ensure that they come back for more business? How will you reach your prospects, sell your offer to them and deliver your product or service? What specific resources and activities will you need to organize to set up and run the business? How will you finance the costs for starting and running the business till cash inflows exceed your cash outflows? Will your cost structure generate profit margins at prices feasible in the market? What are the specific types of revenue that you can generate with the set up you create? Is it possible to attract more business by subsidizing one segment of customers? As will be evident from a careful review of the above questions, you will be answering the full range of strategic questions involved in converting your business idea into a viable business. Business Model Examples The renowned Google model involves creating a huge audience with a search engine that points Web searchers to relevant (and comparatively more dependable) resources in response to their queries, FREE. This audience and the sophisticated search technology made it possible for Google to attract paying advertisers whose ads are displayed to just the right segments of the audience through "contextual" ads. This business model example illustrates subsidizing one segment of customers to attract another, revenue generating, segment. The above model is also an example of a "multisided" business. In a multisided platform, you need more than one distinctive group of customers for the model to work. In the Google example, you need an audience of Web searchers to attract the advertisers, and Google has to attract both these groups with distinctive offers. The online auction business model popularized by eBay is another example. Each transaction on eBay is typically of comparatively small value and eBay gets only a commission on each. However, the huge number of transactions taking place on eBay generates substantial revenues for the company.
It is by answering in innovative ways the specific strategic questions raised by the business model that businesses like Google and eBay managed to succeed so dramatically. A business model explains how a business makes money with its idea. By looking at all the issues raised by the model and finding innovative (and better) ways of tackling these issues, you have the opportunity to create a business that can disrupt existing markets and achieve a dominant position. About the author Gopinathan T Do you like imagining possibilities, however fantastic they are? If so, let us talk... Popular stories Is Business Management Science or Art? Or Both? Fundamentals of Business Financial Management Market Orientation Focuses on the Customer