BUSINESS MODELS
MODELS
What is a MODEL ?
Model
in physical world
A small object, built to scale, representing a larger,
more complex object
Model
in world of mathematics
A set of parameters, assumptions, and relationships
that describe the structure and the workings of the
complex system
Model
in world of business
A description of a complex business that enables study
of its structure, the relationships among structural
elements, and how it will respond to the real world
Properties of models
•Enable study of structure of complex systems,
relationships among structural elements, assumptions,
and a description of the system in action
•Can be built before the real system to help predict
how it might respond if we change the structure,
relationships and assumptions
•Provide a baseline for evaluating progress
Business model elements
Assets
Revenue
Cost
Business model differentiators
Likely Assets
Likely Revenues
Likely Costs
On the Internet, people, partners, and business
development costs are universally high
Business model differentiators
Likely Assets
Likely Revenues
Likely Costs
Universals
• The sales forecast
• The inventory
• Cash
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Merchandising
Increase the value to the customer
Advertise
Product mix
Universals
Cash
– Have enough of it?
– How to get more?
– Able to generate it?
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Merchandising
Increase the value to the customer
Advertise
Product mix
Universals
Cash (or something equivalent) needed to stay in
business
•
•
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MAY HAVE PRODUCED TO MANY AND DID NOT SELL-CASH GOT ABSORBED IN
INVENTORIES
INVESTED MONEY IN A PLANT THAT’S TOO BIG AND CANNOT GENERATE
ENOUGH MONEY FROM IT
SOLD ON CREDIT TO DISTRIBUTORS AND RETAILERS AND GOT PAID LATE OR
NOT AT ALL
Universals
Cash (or something equivalent) needed to stay in
business
•
•
BORROWED HEAVILY TO OPERATE AND NOT ABLE TO CORRECT THE
PROBLEMS THAT CREATED THE NEED TO BORROW IN THE FIRST PLACE
TROUBLE TO REPAY THE LOANS
Universals
Cash (or something equivalent) needed to stay in
business
•
•
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RETURN ON SALES OR OPERATING MARGIN
RETURN ON ASSETS
CONSUMER (WHOEVER IT IS) FOCUSED SO THAT YOU HAVE TRUST AND
LOYALTY AND THEY CONTINUE TO BUY YOUR PRODUCT
Universals
What is the focus of this business?
Managing people
Making decisions rigorously
Understanding economics
Marketing management: leveraging customer value
Operations Management: freeing resources for new uses
Innovation and technology management
Accounting
Finance (assuming that markets are efficient)
Universals
Strategy: defining firm’s competitive position in
an industry and developing consistency of
purpose among the firm’s activities to achieve
that position
Strategic alliances
International business: operations in culturally
different places are inherently more difficult
than domestic operations
Revenue: an example
• Originally it was thought that advertising would support
free Web sites in the same way that advertising supports
free TV stations and free radio stations.
• Almost all commercial Web sites therefore adopted the
"free content with paid advertising" model.
• Unfortunately, this business model ended up being
completely wrong for the Web, and a huge number of
sites went out of business by using this model.
Revenue: an example
Why it did not work? Basic understanding of
business
• Web is nothing like TV or radio- it is much more
like a book or a magazine
• TV and radio are linear- with a linear medium
you can force the viewer/listener to pay attention
to an ad that interrupts the program
Revenue: an example
• For small sites, the reason that advertising does not
work is because you have to hire a sales staff to sell
advertising. Most importantly, advertisers are not
particularly interested in small sites.
• When you go to the book store, you never see free
books. It is also very rare to find books containing
advertising. Instead, people pay directly for the
information that books contain because the information
is valuable to them.
Revenue
• The challenge facing the e-businesses and mbusiness is to figure out the best business model
• The revenue model needs to involve perhaps
payment similar to the book revenue model, but
it also needs to accommodate the completely
infinite and fluid nature of the Web
Assignment 2
1 prepare detailed answer to this question:
• In your opinion, who are currently the winners in digital
business and why?
2. Point to http://www.ist.co.uk/deltastream/ and
answer the following:
• What services are offered? To whom?
•
•
Read SUN case study
What kind of software business is this? What is its
business model?
• Prepare an oral report
• Prepare (in groups) max. 2 pages evaluation of the site:
its content and its design