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How to design a winning Business Model? Essay Sample

How to design a winning Business Model? Pages
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Because of the economic slowdown in developed economies and the mature markets more and more companies are encouraged to enter in emerging markets. We can observe an increasing pressure for MNE to enter in emerging economies by targeting middle and low Base of the Pyramid. The leading companies are targeting the BOP in emerging countries (India, Africa, Asia) by adopting innovative business models. Face to this situation, BOP strategies for MNE and Red Ocean for small companies, firms need to modify or reinvent their business model. According to the authors, the problem is that companies build their business model without thinking about competition, “in isolation”. One business model seems successful when we analyse it alone, but in interactions with others it create less value. For Ramon Casadesus-Masanell and Joan E. Ricart, appraising models alone, a faulty assessment of their strengths and weaknesses, bad decision making are the main reasons of business models failure.

* How to create a good Business Model?

For Joan Magretta, a Management writer, a business model is “the story that explains how an enterprise works”. For Peter Drucker, is the answer to four questions: Who is your customer? What does the customer value? How you deliver value at an appropriate cost? According to the research conduct by the authors, good business models respond to few criteria:

1. Is it aligned with company’s goals?
The company need to thin about it strategic fit, strategic stretch and strategic alignment. Capture value with a good alignment with the company objectives.

2. Is it self-reinforcing?
The choices should complement one another. There must be internal consistency. The company can gives up some choices and makes up news ones.

3. Customer value proposition
Profit Formula
Key Resources
Key Processes
Customer value proposition
Profit Formula
Key Resources
Key Processes
Is it robust?
The company should be able to sustain it over time

Harvard Business School’s Clay Christensen suggests that a business model “consist of four elements: customer value proposition, profit formula, key resources, key processes”.

A good business model creates virtuous cycles that result in competitive advantage.

* How business model creates virtuous cycles?

Business model implies choices, which led to consequences (likely or unlikely):

Business Model
CHOICES
(policies, assets, governance)

CONSEQUENCES
(fFexible, rigid)

Business Model
CHOICES
(policies, assets, governance)

CONSEQUENCES
(fFexible, rigid)

Offer a decent level of service at a low cost
CHOICES: Fly out of only secondary airports; serve no meal, non-unionized workforce, standardized fleet of Boeing 737s

CONSEQUENCES: High volume, low-cost reputation, low variable and fixed costs, aggressive management

Offer a decent level of service at a low cost
CHOICES: Fly out of only secondary airports; serve no meal, non-unionized workforce, standardized fleet of Boeing 737s

CONSEQUENCES: High volume, low-cost reputation, low variable and fixed costs, aggressive management

Executives made managerial choices about how the organization should operate (extend of vertical integration, compensation practises, marketing initiatives). These choices influence the “company’s logic of value creation and value capture”. Let us take the example of Ryanair. The company was in bankruptcy in the 1990’s. Ryanair has chosen to transform it business model from a traditional one to a low-cost one :

Ryanair’s business model creates several virtuous cycles. All of the cycles maximize profits by reduced-costs and low prices. Lower prices permit growth sales and increased Ryanair profits. The processes generate virtuous cycles that “continuously strengthen the business model by creating a network effect”. Smart firms use these synergies in their business model to trigger virtuous cycle that “expand value creation and capture”. But sometimes, virtuous cycles slow down because of “the interactions of other business models”. In this situation, the cycle will erode the competitive advantage. For example for Ryanair, if the employees unionized and demand higher wages the virtuous cycle will be a vicious one. The costs will increase; prices will also increase and affect the volume of sales and so on.

* How to compete through Business model?

According to the research of Ramon Casadesus-Masanell and Joan E. Ricart there is three ways to compete through Business Model:

1. Strengthen your virtuous cycle:
Companies can adapt their business model to generate new virtuous cycles to compete more effectively. It’s the case of Airbus and Boeing, which strongly compete each over on the marketplace. The Boeing 747 was a huge success, and the firm enjoyed a monopoly situation. But Airbus, transform it business model by developing large commercial transportation. Airbus launched the A380. Face to this threat, Boeing is trying to strengthen its position id midsize aircraft. Airbus strengthened its virtuous cycles.

2. Destroy the cycle of rivals:
A company can use rigid consequence, such as reputation, to weaken new rivals’ virtuous cycles. For instance, Microsoft to fight against Linux and its free of charge software “has focused on “weakening its competitor’s virtuous cycles”. Microsoft used its relationships to have it software preinstalled on laptops and PCs. In that way, the firm “discourage people from taking advantage of Linux’s free operating system”

3. Build complementaries with rivals’ cycles:
Rivals whose adopted different business models can become partner in the value creation. In this way, companies can turn competitors into complements.

Companies need to develop business models that are able to activate virtuous cycles. Many players are fighting each other in a red ocean to create and capture value.

* Three interrelated concepts: Business Model, Strategy and Tactics *
DEFINITION| COMPARISON|
The business model “refers to the logic of the organization”. It is how the company creates value proposition and captures it for stakeholders on a specific market.| The automobileDifferent kind of cars, which create different value for drivers| The strategy is the “plan to create a unique and valuable position involving distinctive activities”. This plan implies to make choices about the way to compete in the market place.| Designing and building the carWhat technology chooses? Hybrids, standards transmission, automatics| Tactics are the residual choices that a company can makes. It is the business model that determines the tactics available to compete in a specific market.| How you drive you carThe automobile chosen will determine which tactics the driver can us|

According to the authors smart companies are successful because their business models generate virtuous cycles through processes. Over time, these virtuous cycles make them operate more effectively.

What’s new with this research? What can we learn form this article? According to the competitive advantage theories, a company need to identify its competitive advantage in:

1. Its assets (Resource based: strategic fit, stretch, alignment) 2. Its processes (Value chain)
3. Its products (Value proposition)

By developing synergies between its different activities a company can strengthen and sustain its competitive advantage.
This article is really interesting but I do not think that we can learn something new. What is interested is the comparison of the three concepts (business model, strategy, tactics) with a car and its utilization. These three concepts are important and interrelated. Without knowing that companies will not be able to build a successful business model. Companies need to take into consideration the potential consequences of the important decisions.

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