BUSINESS M O D E L S A STRATEGIC MANAGEMENT A P P R O A C H ALLAN AFUAH

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved Chapter Introduction and Overview 1

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-3 Preliminary Definition of Business Model The framework for making money. It is the set of activities which a firm performs, how it performs them, and when it performs them so as to offer its customers benefits they want and to earn a profit.

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-4 Determinants of Profitability (1 of 5) Industry Factors Firm-Specific Factors

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-5 Source: Compustat. My thanks to Paul Michaud for making these calculations. Grant explored ROEs for these industries for the years : R. M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (Oxford, U. K.: Blackwell, 2002) p. 68. Industry ROE ROA 1.Pharmaceuticals25.87%10.27% 2.Chemicals and allied products Food and kindred products Printing and publishing Rubber and miscellaneous plastic Fabricated metal products Paper and allied products Electronics and electrical equipment (no computers) Nonferrous metals Machinery, except electrical Petroleum and coal products Textile mill products Aircraft, guided missiles, and parts Stone, clay, and glass products Motor vehicles and equipment Iron and steel Airlines (transportation by air) Determinants of Profitability (2 of 5) Table 1.1 Industry Profitability,

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-6 Firm ROAFirm ROA PharmaceuticalsAirlines Bristol Myers Squibb13.71%Southwest Airlines4.85% Merck13.37AMR1.51 Schering Plough12.89Delta Airlines1.50 WYETH American Home Products12.52UAL0.96 Eli Lilly10.23US Air0.31 Pfizer9.66America West Holdings-3.27 Pharmacia & Upjohn7.98Continental Airlines-4.97 American Cyanamid3.57TWA-5.37 Northwest Airlines-3.40 Determinants of Profitability (3 of 5) Table 1.2 Firm Profitability, Source: Compustat. My thanks to Charlie Chung for making these calculations.

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-7 Determinants of Profitability (4 of 5) Industry Factors – Competitive Forces – Cooperative Forces – Macro Environment – Critical Industry Value Drivers Firm-Specific Factors – Positions of a Firm – Activities of a Firm – Resources of a Firm

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-8 Figure 1.1 Determinants of Profitability (5 of 5)

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-9 Components of a Business Model (1 of 2) Positions Resources Industry Factors Costs

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-10 Figure 1.2 Components of a Business Model (2 of 2)

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-11 Taxonomy of Business Models Revenue vs. Business Models – Revenue Model: how a firm generates income; just one component of making money. – Business Model: how a firm earns a profit; includes both revenues and costs.

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-12 Relationship between Business Models and Strategy Strategy and Operational Effectiveness Strategy and Implementation Corporate- and Business-Level Strategy

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-13 Organization of this Book

Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-14 Questions Introduction and Overview