The Business Model: An Important Strategic Choice

 
“There is always a better strategy than the one you have; you just haven\'t thought of it yet.”.

Sir Brian Pitman, former CEO of Lloyds TSB, Harvard Business Review, April 2003

A bookseller can operate in a number of ways. It can have one or more ‘brick and mortar shops,’ sell exclusively online, or develop a hybrid. If there is an online shop it could sell ebooks, physical books, other items such as games or a variety of items.

Furthermore it could be a general bookseller covering many topics, or specialise in narrow genres (vertical markets) like medical education. All of the above represent simple examples of the different business models that can be used.

Put simply, business model refers to the logic of the firm, the way it operates, and how (in what form) it creates and delivers value for customers and other stakeholders. In addition it is concerned with how it captures this value, by way of profit, in the face of the type of mounting competition that we are faced with, in today’s fiercely competitive markets.

In our example, a bookseller may also create and deliver value for stakeholders by establishing a chain of on- campus bookshops that stock prescribed books ‘on site’ at highly competitive prices.

These stores may also house a used book section and an in-store DVD area specialising in set works, to capture additional value for the store’s owners, as a consequence of creating and delivering this extra value to students and others.

A Business model is really about applying the best strategy relative (from a number of options) to prevailing circumstances, in order to build and sustain optimal competitive advantage.

Business strategy occurs on a number of levels (e.g. corporate and business unit) but, irrespective, focuses on the best way to attain the chosen objective, relative to the current situation.

Simply put a business strategy needs to answer the following questions: Where are we now? Where do we want to be? What is the best way to get there?

Strategy in a business model is not only about the process of choosing the optimal model from available options, but is also about a contingency plan setting out how the model should be reconfigured or replaced, based on possible future events. This in turn requires knowledge and foresight.

At a fundamental level the composition of a business model may be better understood by taking the following two stages into account: (a) the choices of management on how the organisation should operate and (b) the consequences thereof.

Strategic choices making up the business plan can be divided into business policies, investment of resources (multi classes) to implement these policies, and their governance.

All three involve choices with different sets of consequences. Ultimately the choice of business model occurs as a consequence of the interpretive, analytical, and creative skills that emerge from an analysis of the key factors contained from a business plan audit outlined shortly.

In essence what the best business plan strives to achieve boils down to optimal value creation, delivery and capture within an organisation’s resources and capabilities, relative to competition, in the industry and sector concerned.

This takes into account factors such as competing business models (strategies) and the strength of the organisation relative to the market leader and others from a market share and product differentiation perspective.

Put succinctly, business models are reflections of the particular strategy chosen by organisations under these conditions. Should circumstances change it may become necessary to choose another business model, based on the most appropriate contingency plan.

Tactics are also plans of action but occur at a ‘lower’ level. Tactics, though flexible, can only succeed within the bounds of the firm’s business model. Therefore the chosen strategy (as reflected in the business model) places logical constraints on the tactics we choose. For example, if our bookseller were to specialize in books that were rare, out of print and in demand, an excellent tactic would be to capture as much value as possible through a high price and mark-up that accompanies such rare products.

This business would therefore be based on lower turnovers and higher mark-ups than a discount book dealer relying on low margins and heavy volumes. Clearly, these two business models have different value propositions which significantly influences pricing.

Generally, tactics are easier, faster, and cheaper to change, compared to strategy, and this differential increases with the structural complexity of the entity. Like strategy, tactics also play a crucial role in the way value is created, delivered, and captured.

In addition, the choice of business model can influence the model chosen by other organisations within an industry sector from a competitive perspective. The success of an organisation can be won or lost at the time that a business model is chosen.

It is not uncommon for the same holding group to have different business models in various business units targeting diverse sectors. A good example is Singapore Airlines, an award winning international airline with outstanding service, and Tiger, a cut price Asian regional carrier.

Another example concerns hoteliers whose chains provide different experiences, star ratings, and value propositions. In this regard Accor (Sofitel, Grand Mercure, Mercure, Novotel, Formula 1, and others) is a prime example.

Each chain within the group has its own unique business model, positioning, and loyalty programs. One of the major shifts in business models concerns the extent to which they exist within each industry and sector therein. In past decades there were often only one or two successful models in the same category with dominance being attained through superior innovation, resources, or execution.

Coca Cola and Pepsi existed at a time when their business models completely dominated their sectors, as did Ford and GM. But since then times have changed. New ways to brand and market have sprung to the fore and processes have changed dramatically, thanks to advances in communications and the new digital highway that stretches to infinity and back and the enormous growth of globalisation, to name but a few catalysts.

The communications and retail sectors provide good examples of contrasting business models in Australia. In addition to Telstra and Optus, a large number of mobile specialists like Virgin and Vodafone, have sprung to the fore. In addition, there is a plethora of so called ‘phone card’ companies providing access to overseas markets at vastly reduced rates. Some of these business models provide extra savings, through economies of scale, by specialising in calls to specific regions like Singapore.

Skype followed with a business model that provides free calls from computer to computer and inexpensive calls to landlines and mobiles. These are even cheaper than those made by phone card. Others, similar to Skype, have introduced their models.

The latest initiatives of the Australian Government to introduce super high speed internet to over 90% of the country will change the communications landscape significantly yet again.

On the retail front, with Costco entering the Australian market, a new local retail model involving paid membership and bulk buying at prices perceived to be substantially lower than traditional chains like Coles and Woolworths is now making inroads as additional super sites, not unlike enormous aeroplane hangars, take off around the country.

Aldi, an international retailer of German origin has a low cost image and operates from smaller premises in suburbia but with far smaller ranges than Costco, again representing a different business model in this sector.

In recent years, the number of products, brands, and business models in multiple categories has risen substantially, thus turning the modern competitive landscape into a far fiercer one. In this regard the digital sector plays a major role from a number of perspectives.

Firstly, it has enabled a new world of entrepreneurs to enter the fray and utilise this new and powerful medium on an affordable basis to create a multitude of new business model opportunities that were previously unavailable and which now evolve at a tremendous pace. In addition, consumers and critics now have a host of new platforms and touch points to try and influence corporate, product and brand perceptions across social networks like Facebook, Twitter, YouTube, and Yelp, to name but some.

Furthermore the digital world provides outstanding examples of how major players in areas such as search and social media square up to each other in a space as fluid as gushing oil, with great upside potential for winners and potentially disastrous consequences for losers.

Every business model is unique in certain respects, but key areas Optivance 360 examines and incorporates into a business model audit include: objectives and goals, overview of macro and micro conditions, including industry and competitive activity and different models for comparative purposes. Other aspects covered include areas of opportunity and gap analysis, value offering by organisation, product and brand and perceived differentiation

These issues are pivotal as is your value offering, delivery and the ability to capture this as best possible and the resources that allow you to attain the best outcomes.

These include tangible factors such as financial resources, buildings, and assembly lines, etc, as well as human skills and intangibles such as trademarks and brand equity which have been increasing in importance over time.

In this regard the question that needs to be addressed is : are these resources being utilised in the best way possible taking financial and other considerations into account?

. Business models are not static once off instruments. Instead they should be revised, enhanced, modified, or even replaced, should circumstances warrant this. Innovation of business plans can be as important as product or other innovations. Your organisation’s success depends on having the best foundation.

This is as important as building on the best terrain. One wouldn’t build a home on unsuitable foundations and similarly your organisation’s business model should be the best possible, within available resources.

Depending on circumstances, Optivance 360 will assess your needs and requirements and allocate the most skilled and appropriate team and/or partners to assess and develop your business model alongside you in a simple to understand manner.

A final point is that whilst analytical issues concerning business models are significant, so are creative elements and implementation, and the manner in which these are merged.

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Contact Optivance 360 for a no obligation discussion on how we can assist you with all your branding, marketing and communications endeavours in a consulting, non executive management or mentoring capacity, or for any of our other key business services.

This article is for general information and the reader should seek specific expert advice before taking any action.