Week 1

Business Model

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.

Determinants of Profitability

1- Industry Factors

a. Competitive forces – inversely related to profitability and exerted by

i. Suppliers

ii. Customers

iii. Rivals

iv. Potential new entrants

v. Complementors

vi. Substitute products

	Competitive Forces	Profitability
Attractive Industry	Decrease	Increase
Unattractive Industry	Increase	Decrease

b. Cooperative forces – alliances with customers can allow firms to offer the customers better value and cooperation with rivals, where legal, can lower firms costs

c. Macro environment – region’s or country’s culture, governmental policies, judicial and legal systems, and technological change

Critical Industry Value Drivers

Factors that have a large impact on the value i.e. low cost or differentiation that firm offer to their customers.

E.g. capacity utilization in consulting and R&D and clinical trials in pharmaceutical.

2- Firm Specific Factors

a. Position of the firm

i. Customer Value – differentiation and low priced products

ii. Market segment – to which it offers

iii. Sources of revenues – with each market segments

iv. Relative Positioning vis-à-vis its suppliers, customers, rivals, potential new entrants, complementors and substitute products- e.g- fuel injector for Ford car with Intel chips

v. Prices that it charges its customers

Reservation Price

Certain maximum price that a customer if willing to pay for a particular level of benefits the customer perceives in a product.

b. Activities of the firm

i. Which – like the Dells working model

ii. How- Total Quality control or lean – manufacturing method

iii. When – concept of “First Mover” advantage – like the pharmaceutical firm with a new drug but does not always work as in case of Microsoft and Altair and also Intel cannibalizing its own chips.

c. Resources of the Firm

A firm’s resources are its assets and its abilities to use those assets to effectively perform the activities that it’s business model calls for.

1- Tangible

2- Intangible

Competence or Capability – A firm’s ability to turn its assets into customers’ value for different market segments and the right bargaining position.

Fig 1.1 – Determinants of Profitability

Fig 1.2 – Components of a Business Model

Taxonomy of Business Model

A business model is distinguished by how the firm earns a profit, not by how it generates revenue alone.

Revenue model

A set of activities a firm performs that enables it to create value, offer the value to its targeted customers and appropriate the value.

Relationship between Business Model and Strategy

Business models are about making money.

Strategy is about performance

And the two are highly related.

Three aspects of strategy

1- Strategy and Operational Effectiveness

a. Strategy – committing to undertake one set of actions rather than another and in the process, creating a unique and valuable position that allows the firm to perform better than its competitors.

b. Operational Effectiveness - is about performing similar activities better than rivals perform them.

2- Strategy and Implementation- A business model includes the profit oriented aspects of strategy and operational effectiveness.

3- Corporate and Business Level Strategy – three types

a. Corporate – deciding what business the firm should be in and how the businesses should be managed so as to ensure that the corporate whole is more than the sum of its parts

b. Business/ competitive – creating and offering better customer value than competitors so, with the objective of creating a competitive advantage for the firm in a particular business.

c. Functional- pertains to a set of functional activities that a firm performs.