Business Models: Types and Elements

• Business Models: A business model is how a company makes money within its business environment.
• It involves key structural and operational characteristics of a firm, considering its target market, product offerings, competitive advantage, and after-sales services.
• A business model consists of five elements: who it serves, what it provides, how it makes money, and how it differentiates and sustains competitive advantage.

Business Model Examples (Summarized by Thomas Martin, 2021)

• Freemium: Offers the basic product/service version for free to entice customers to purchase advanced features/add-ons (e.g., Dropbox, Spotify, Canva, LinkedIn).
• Subscription-Based: Charges monthly/yearly fees for product/service access, relying on customer loyalty (e.g., Xbox Game Pass, Streaming Services, S&R membership supermarket).
• Peer-to-peer: Allows individuals to directly buy/sell products/services without a third-party intermediary (e.g., Grab, Airbnb, eBay).
• Franchise: A franchisee grants another business a license to use its trademarks/products in exchange for royalty fees (e.g., McDonald's, Jollibee, 7-11).
• Direct Sales: A company employee directly demonstrates and sells products/services to consumers (e.g., Avon, Herbalife, Mary Kay).
• E-Commerce: Companies/individuals buy/sell products/services online; products/services offered are nearly limitless (e.g., Lazada, Shopee, eBay, Metrodeal, Zalora, Shein).
• Affiliate Marketing: A commission-based model advertising other companies' products/services on websites (e.g., YouTube, Clickbank, Affiliaxe, Facebook).
• Razor and Blade: Sells a product at a low price to encourage future purchases of higher-priced complementary items (e.g., Playstation, Xbox, Gilette).
• Consultation: Firms hire experts to advise clients on specific organizational areas (e.g., Law Firms, I.T. Supports, Private Tutors).
• Lock-In: Makes it difficult for customers to switch to a competitors' products/services without negative consequences (e.g., Apple, Microsoft Office Suite).
• Multi-brand: A parent company offers similar products under different brand names to increase market share (e.g., Maybelline, Procter & Gamble, Unilever).
• Pay-as-you-go: Does not require recurring bills or subscriptions, appealing to customers who prefer not to be tied down (e.g., AT&T, Smart, Globe telco).

Value Chain Analysis (VCA)

• Value chain represents internal activities when transforming inputs into outputs.
• Value Chain Analysis (VCA) identifies primary/support activities and capitalizes on them to reduce costs or increase differentiation.

Primary Activities

• Inbound Logistics: Raw materials handling and warehousing.
• Operations: Machining, assembling, and testing.
• Outbound Logistics: Warehousing and distribution of finished products.
• Marketing and Sales: Advertising, promotion, and pricing channel relations.
• Service: Installation, repair, and parts.

Secondary Activities

• Firm Infrastructure: General management, accounting, finance, and strategic planning.
• Human Resource Management: Recruiting, training, and development.
• Technology Development: Research and development and product or process improvement.
• Procurement: Purchasing raw materials, machines, and supplies.

Approaches to Performing Value Chain Analysis (VCA)

• The approach depends on the type of competitive advantage a company desires.
• Cost Advantage: Used to achieve lower product/service costs.
  • A firm must undertake five analysis steps to gain cost advantage
  • Identify the firm's primary and support activities
  • Establish the relative importance of each activity in the total cost of the product
  • Identify cost drivers for each activity
  • Identify links between activities
  • Identify opportunities for reducing costs
• Differentiation Advantage: Driven by a firm's desire to create superior products/services through innovation.
  • Identify the customers' value-creating activities
  • Evaluate the differentiation strategies for improving customer value
  • Identify the best sustainable differentiation

Basic Organizational Structures (Bamford et al., 2018)

• Simple Structure: Lacks functional/product categories, suitable for small, entrepreneur-dominated companies with limited product lines operating in a small market. Employees are often generalists.
• Functional Structure: Suitable for medium-sized firms with several product lines in one industry. Employees tend to specialize in business functions.
• Divisional Structure: Appropriate for large corporations with many product lines in related industries. Employees are functional specialists organized by product/market distinctions.

Strategies for Competitive Advantage

• Cost Leadership: Increases profits by reducing costs while maintaining standard prices or gaining market share by lowering prices while retaining profits.
• Product Differentiation: Creates products significantly different from competitors, offering greater value to the public.
• Cost Focus: Targets a niche market to sell products/services; a niche is a small but profitable segment.
• Blue Ocean Strategy: Creates new demand for a product, developing uncontested market space rather than competing in shrinking markets.
• Information Advantage: Employs the latest technology, strategies, and data to outpace competitors.