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

What is a MODEL? Universals The sales forecast The inventory Cash Merchandising Increase the value to the customer Advertise Product mix

What is a MODEL? Universals Cash –Have enough of it? –How to get more? –Able to generate it? »Merchandising »Increase the value to the customer »Advertise »Product mix

What is a MODEL? Universals Cash (or something equivalent) needed to stay in business 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

What is a MODEL? 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

What is a MODEL? Universals Cash (or something equivalent) needed to stay in business 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

What is a MODEL? 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)

What is a MODEL? 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

What is a MODEL? 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.

What is a 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

What is a MODEL? 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.

What is a MODEL? Revenue The challenge facing the e-businesses and m- business 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 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