Business Models that Affect an Organizations Success - Case Study Example

WHY ORGANIZATIONS NEED BUSINESS MODELS By Why Organizations Need Business Models Introduction Froud (2006) defines a business model as the logic of the firm, the way a firm operates and how it generates value for its stock holders. Every model comprises of choices and consequences. Choices include assets, policies and corporate governance. Consequences result from the choices a firm make. For example, the choice of a firm to increase incentives to drive performance has the consequence of increasing employees’ efforts and thereby increases in productivity. The model often describes the rationale of how the firm creates, captures and delivers value to its stakeholders. In both practice and theory, the term refers to informal and formal descriptions that represented critical aspects of any business including purpose and vision, core nosiness processes, key customers, strategies, company infrastructure, structures and trading practices. There are different kinds of business models such as business to consumer (B2C), Business to business (B2B), peer to peer (P2P) and m-business models. The purpose of this paper is to assert that business models affect an organization’s success and discuss or explain why organizations need them (Froud, 2006). Key Ingredients of a Business Model These are the major components of a business model that facilitates its function, especially integration with business strategy and core business processes. They include, value proposition, revenue models, market opportunity, competitive environment, competitive advantage, market strategy, organization development and management team. Value proposition refers to ways in which a company’s products will fulfil customer’s needs such as customization, lower transaction costs. A model with successful value proposition will increase customer loyalty and retention. The revenue model describes how the organization will generate revenue and obtain a superior investment on capital (Rumelt, 2009). This may be achieved through advertising, subscription fees before rendering services, levying transaction fees, and how the company will obtain maximum sales. Market opportunity refers to how the model will position the company on its intended markets space and an evaluation of market potential for the company. According to Magretta (2002), business model key ingredient of competitive environment defines how the company positions itself to counteract competition from others selling similar products. It evaluates factors such as number of active competitors, their scale of operations and market share, pricing and profitability. A critical ingredient is the competitive advantage that is achieved when a company produces superior products at a lower cost more than its competitors. The advantage is achieved through control of superior raw materials or technology. Market strategy is an important component of a business model that details how the organization plans to penetrate new markets and gain customer share. Successful marketing strategy translates to increased profits and business success. Organization development is a component that describes how the model will organize work and coordinate activities aimed and achieving business success. The management team is an ingredient that is responsible for ensuring that the business model works and that activities are organized and well-coordinated to stream line business operations (Magretta 2002). Types and Examples of Business Models Afuah & Tucci (2000) explain that business to consumer (B2C) business models aim to maximize consumer experience by addressing their needs through customized good and services. The consumer is the main focus for these models and businesses aim at customizing their services and products to address specific needs and gain a competitive advantage. There are several B2C models that businesses use to maximize consumer expectations and achieve business success. The portal is a B2C model that offers powerful search tools and an integrated package of content and services. The consumers use it to search for products and services online. This saves them time and reduces product search costs and transaction costs. The E-tailer model is an online version of tradition retailers. It allows a consumer to buy items all types of retail goods online. It makes it easier for customers to make purchases at their comfort and convenience. It also enables them to visit online stores that provide goods and services they need without having to window shop for them (Afuah & Tucci, 2000).  According to Froud (2009) the content provider model is used by information and entertainment firms to provide digital content to consumers. This includes didoes, images, music, and databases to make it easier for customers to search for services and sample media entertainment before purchasing them. In B2B business models, businesses sell to other businesses. The models aim at facilitating efficiency in integrating core business systems and strategies to reduce costs and increase profitability. These models increase the efficiency of supply chain managements and customer relations systems. As a result of increased efficiency and synergy in working with other businesses in the industry, the business models revolutionize the industries, increase innovation and expand businesses (Froud, 2009). Other emerging business models include consumer to consumer models where customers get a platform to sell to each other and share information about products and services. This makes them more informed and help businesses to easily identify consumer needs and customize their goods to address them. M-commerce models leverages on usage of emerging new wireless technologies to sell products and services. This allows businesses to maximize on technological innovations to increase awareness of product and services and increase their sales and profits. Examples of common business models include the Value network mapping model. The model tracks and articulates the value of the core business process that leads to increased efficiency and profit maximization. Henry Chesbrough invented a business model to relate the role of business models in facilitating innovations. The strategy diamond is a tool developed by Hambrick & Fredrickson. The developers appreciated the importance of integrating business strategy and business models to achieve business success. Integration means that all business elements are consistent with and in support of each other to streamline business operations and achieve operational excellence and efficiency (Haberberg, & Rieple, 2008). Business model canvas was developed by Alex Osterwalder. It is used by businesses to provide tools for mapping future steps for the organization and determine where the business is headed to in the future. The four box business model by Mark Johnson demonstrates how key processes and components interrelate and link to achieve business goal and success. The key attributes include customer value proposition, key resources, key processes and profit formula. Why do Organizations Need Business Models Business models increase a firm’s effectiveness and subsequently, an increase in profits and successful attainment of the firm’s objective. There are different business models that may be used to increase efficiency in core business processes and functions. For example, revenue business models determine show the company will make revenue, the types of revenue such as service and transaction fees and overall company sales (Zott & Amit, 2009). Maximum utilization of these models increases efficiency in revenue generation and collection, and therefore increases overall business effectiveness. Furthermore, business models are avenues for creativity and innovation, factors that greatly increase a company’s effectiveness. For example, chaining a business model is innovation in itself. The innovation results in synchronization of business activities, elimination of wastage of resources and delays in performing tasks. This increases the overall company effectiveness and efficiency, resulting in competitive advantage, operational excellence and creation of unique value propositions that maps the company in new levels of growth (Teece, 2010). Business models are used by companies to integrate core business operations and strategy. Integration refers to the process of making sure that important systems and processes are in consistency with and in help/support of each other in ensuring that business processes are streamlined for maximum effectiveness. Integration ensures that business processes are in line with core objectives of the organization. Business models show how key elements relate with each other. They demonstrate how a change in one element may affect the others and subsequently affect the overall attainment of company objectives (Magretta, 2002). Furthermore, business models illustrate the close link between business strategy and business models and the role each paly in achieving business success. Business strategies are closely linked with business models. For example, the strategy to increase productivity is linked with a superior production model that obtains inputs affordably, processes them with maximum efficiency to produce high quality output at the lowest costs and minimise wastage of resources. Business models are required to create new business innovations. For example, changing a business model is an innovation in itself. The change can lead to formation of new ways of doing things, new business processes and service delivery channels. Furthermore, new innovations need business models to support their functionality and linkage with key business processes. For example, creating a new technology to increase productivity may need a revision/change of the current production models to support new technology and increase compatibility of technology to core business processes and functions (Teece, 2009). Therefore, it is crucial for any business to understand and monitor its business models to identify areas of improvements, weaknesses and different ways of doing things. Monitoring and evaluating business models increase an organization’s innovation, create new processes, products and services aimed at maximizing profits. A firm that is interested in using technology to achieve its objectives must monitor keenly its business models as a source of technological innovation. Business models avail competitive advantage to the organization. Successful implementation of business models increases a firm’s efficiency and effectiveness. This is because the models streamline the operations of the organization, resulting in increased production of quality products, reduction of waste of time and resources and the subsequent production costs. The models allow a business to increase its innovativeness. This enables the organization to use superior technology and differentiate its products to achieve technological and differentiation advantage over the competitors. Competitive advantage sets the organization apart in terms of offering quality products with value propositions that enhance customer satisfaction and retention (Rumelt 2009). In addition, the organization manages to stay ahead of competitors, seize new opportunities before its rivals and maximally utilise its resources to achieve success, growth and profitability. Business models are designed to increase efficiency in key processes. This further avails the organization operation efficiency that is also an area for the company to achieve a competitive advantage. Business models facilitate long-term planning for the organization. A business model is a map of the activities of the company and integration of these core functions to obtain company objectives. The models are used to make future plans for the organization especially plans concerning growth and expansion. For example, the company uses production models to make plans on how to expand the business through increased production of quality products. They achieve this by planning on how to increase the efficiency and capacity of the existing models to facilitate operational excellence and lower cost production (Teece 2010). The plan may also involve developing a new more superior business model that will have the capacity to handle increased productions in the future. Since business models are the frameworks for coordinating business processes to achieve business objectives, any future plans are made after a careful consideration of how business models will be sued to achieve future objectives. Hagen (2011) argues that business models enhance customer satisfaction and increase customer retention and loyalty. A key ingredient of any business model is the value proposition. This refers to hoe the products of a company address customer needs. While developing the business model, the issues to consider include: why the customer should choose one organization against the others and what an organization will provide that others can’t. Business models enable a company to come up with value propositions that are meaningful to customers. Examples of value propositions include: personalization/customization. Reduction of product search costs, lower price discovery costs and facilitating transactions by managing product delivery. Strong value propositions attract customers to the organization (Hagen, 2011). This is because customers and other stakeholders wish to work with organizations that care about their needs and innovate lasting solutions to address them. Therefore, strong value propositions help a company retain current customers and acquire new ones. Increase in customer base enables an organization to easily acquire a market share and increase its market opportunities. According to Haberberg & Rieple (2008), business models enable organizations to survive the competitive environment especially companies that sell/offer similar products and services. Survival of stiff competition is critical for a firm’s success and growth. Failure to survive results to a company becoming extinct since it is unable to adapt to the changing competitive environment. Business models facilitates survival of competition by giving a company unique value propositions that help it retain current customers, acquire new ones and amass a market share that is difficult for others to compete with (Haberberg & Rieple, 2008). Successful implementation of business models increases business innovation. New innovations provide superior technology that increases efficiency in core business processes and achieve operational excellence that lower costs and wastage of resources. This gives the company a lower cost competitive advantage. Innovation also facilitates product differentiation which results in competitive advantage of product differentiation. Differentiation makes the products unique and customers perceive them as superior and are willing to pay more for the differentiated products. Another function of a business model is increasing the efficiency and effectiveness of the management team. The team is responsible for implementing the business model and ensure that it functions well. Therefore, the management team must coordinate activities that surround the business model i.e. input, processing and output production to ensure the success of the business model. A strong management team may fail to salvage a weak business model but must the he ability to change the weak model and redefine the business as need arises (Froud, 2009). A strong management team ensures a firm’s survival by proper co-ordination, controlling, planning, directing and decision-making. Robust business models keep the management team alert and efficient in ensuring that everything in the organization works together to ensure that business models function well. As a result, the management team acquires leadership skills to handle crisis, address deviation and make wise decisions to steer the business to growth. According to Teece (2009) business models hold many visible benefits for firms or organisations both small and large. However, business models have their negative aspects or limitations. Some of these limitations include a lack of freedom, false certainty and they are both money and time consuming. Vibrant and successful businesses thrive in some part because freedom is offered to employees to provide creative input. Business models tend to curtail this freedom. For instance, managers articulate the firm’s goals and mission in the relevant business model, and employees are hired to pursue these objectives. The business models do not give employees enough freedom to contribute to or influence the firm’s short term and long term strategies and objectives. Additionally, business models often convey a false feeling of certainty. A business or organisation that strictly sticks to its business model risks being unable to align itself with new threats while taking advantage of new arising opportunities. Lastly, business models can be expensive and time consuming. Business models often require professional services from outsiders such as lawyers, marketing experts and accountants. In addition to being expensive, they might take away precious time from other beneficial endeavours. Conclusion Business model was defined as the logic of the firm, the way a firm operates and how it generates value for its stock holders. Every model comprises of choices and consequences. Choices include assets, policies and corporate governance. Consequences result from the choices a firm make. For example, the choice of a firm to increase incentives to drive performance has the consequence of increasing employees’ efforts and thereby increasing its productivity. There are different types of business models including B2B, B2C, and C2C peer to peer and M-commerce. Some example of business models include Value network mapping model, Business model canvas and the four-box business models among others. Organizations use business models to increase efficiency and effectiveness, attain competitive advantage and manage competitive environment. Organizations also use the models to create valuable value propositions, increase innovation, attain a market share and ease penetration into new markets, enhance customer satisfaction and increase efficiency of the management team. A robust and superior models increase a firm’s growth and profits (Froud, 2006). Nevertheless, business models have their weaknesses and negative sides. For example, business models limit employee freedom, they convey a false certainty and they are both money and time consuming. References Afuah, A., & Tucci, C. L., 2000. ‘Internet business models and strategies: Text and cases’.McGraw-Hill Higher Education. Froud, J., Johal, S., Leaver, A., Phillips, R., & Williams, K., 2009. Stressed by choice: A business model analysis of the BBC. British Journal of Management, 20(2), 252-264. Froud, J., Johal, S., Leaver, A., Phillips, R., & Williams, K., 2009., 2006. ‘Financialization and Strategy’ London: Routledge, pp. 94-8; 109-22 (e-book). Haberberg, and Rieple., 2008. ‘On strategies for mature industries’, pp. 561-79. Hagen, J. 2011. ‘Tweet Science, New York Magazine’. Magretta, J., 2002. ‘Why Business Models Matter’, Harvard Business Review. Rumelt, R., 2009. ‘Strategy in a structural break’, McKinsey Quarterly no.1, pp.35-42. Teece, D. J., 2010. ‘Business models, business strategy and innovation’. Long range planning, 43(2), 172-194. Teece, D., 2009. ‘Business Model, Business Strategy, and Innovation; , Long Range Planning, 2009, this issue. Zott, C., and Amit, R., 2009. ‘Designing Your Future Business Model: An Activity System Perspective’, Sage publishers. Read More