An Analysis of Business Models
- Introduction
A business model symbolizes how an organization makes or plans to make money (Weill et. al., 2005). These days, the business model topic is widespread among business people and in various industries, a rise of novel and innovative business models can be seen. In numerous industries, new business models are intimidating or even substituting established companies and traditional methods of carrying out business.
The interest in business models arises from two divergent aspects
- Established companies have to unearth novel and innovative business models to compete against rising race and to keep away insurgents
- Businesspersons want to find novel and innovative business models to set up their space in the market
Business model idea is a chiefly useful element of strategic analysis shaped to today’s competitive business surroundings. It facilitates executives along with businesspersons to grow their capability so as to cope with constant change and continuously adjust to quickly changing business settings by introducing novel ideas into their business model.
- Literature Analysis
The background of the business model notion can be traced back to the year 1962 (Chesbrough & Rosenbloom, 2002) when Chandler accentuated on ‘Strategy and Structure’. According to Chandler, strategy can be defined as the determination of the fundamental enduring goals and objectives of a company, and the acceptance of policies and the allocation of resources required for executing these goals (Chandler, 1962). Additional developments in the perception travel through the opinions of Ansoff (1965) on corporate strategy to the definitions of corporate and business strategy given by Andrews (1980), which can be observed as a predecessor of and quibbled to that of a business model definition.
Magretta (2002) elucidated business models as stories that enlighten how companies work. Magretta further added that business models did not simply display how the company made money but also replied to the vital questions, for example, “who is the customer? “what does the customer value?”. Specifically, this aspect of value observed from the point of the customer made a huge influence on the current thinking.
Furthermore, in the late 1990’s, the notion of business model turned into nearly synonymous with electronic business (e-business) and the rise of the new economy. Essentially, the internet had developed an assortment of new business models where the chief central point of the literature on business models from an e-business perception turned into how to transfer magnificently to profitable e-business models. Thus, major part of the business model literature concentrating on the e-business circumstance concerned how such companies could create value. The merely issue with the initial e-business models was that they tended to disregard the real profit formula or over positive on the exchange of internet traffic to real revenues.
- Comparison and Assessment (Low budget innovation business model and localized low-cost business model)
Today, it is important for companies to become experts in customer behavior, and also in social and individual lifestyle patterns. With a low-budget innovation business model, companies will be competent to attain an elevated new product success rate with lesser budget development costs. On the other hand, companies seeking new market opportunities for their low-cost small and economical products are considering the localized low-cost business model; this business model is appropriate for consistent products and services with least specifications and lesser customer expectations that can be locally formed and worldwide branded.
For low-budget innovation business model, the company’s most significant activities will be customer observation and participation, but for localized low-cost business model, cost effective procurement, marketing and quality management are considered as the chief activities.
In low-budget innovation business model, distribution is done through online channels and offline development labs. However, in localized low-cost business model, energy effective distribution is done via local vendors. In low-budget innovation business model, companies will focus on customer behavior intelligence whereas in localized low-cost business model, main focus of the companies will be the management of its brand portfolio.
In low-budget innovation business mode, the lesser product development cost and higher new product success rate will bring about profitable evolution of global market share. Nonetheless, in localized low-cost business model, the low cost structure, micro financed local activities and low prices along with high volumes will cause profitable market share.
- Justification
Earlier, companies used to perceive the term ‘Innovation’ as a way to bring creative individuals and marketing professionals and make them search for opportunities to create new products. There was no other way but to wait for the best. However, trends have been changed and the concept of mass customization has been introduced. Modern organizations have given a new dimension to the theory of innovation by making the customers as their inspiration instead of waiting for new solutions to enter the market.
At present, companies develop co-created or customized products that are derived from customer observation and participation. Gathering of consumer insight is very different from typical market research. Thorough understanding of hidden needs of the market is possible through customer observation process either via video or live-in immersion. This is the reason to include customer observation as the key activity in this model. Apart from that, the followers of the brand are the early adopters of the new product.
Another reason for choosing this model is the proliferation of social media and online tracking trends that keep on changing very quickly nowadays. This helps the organizations gain insights from personalized designs and improve products to have an edge on competition. With each variant of product, customers tend to share their experience, allowing the companies to improve and innovate more.
Companies are adopting online channels to know their customers’ wants. To adopt such methodology, companies need to become expert at identifying consumer behavior and their consumption patterns. It is important to examine individual and social lifestyle habits of the customer to create best-suited products in the least cost. Therefore, this methodology is named as Low-Budget Innovation Business Model which emphasizes on achieving higher success rate with lower product development costs.
Proposed Conceptual Illustration of Low-Cost Innovation Model
- Application of the Model
With the emerging business trends, modern-aged consumers have started demanding customized products, specifically designed according to their needs and tastes. This is leading to increased product categories for e.g. formerly, shampoo used to have two variants (i.e. normal and anti-dandruff). Now, consumers can have multiple choices for anti-dandruff shampoos such as for oily hair, men, mint flavored anti-dandruff shampoo, and so on.
The latest round of mass customization is likely to intensify the way FMCG businesses are operating. Companies need to profile the buyer in terms of demography, ethnic background, professional choices, buying behavior, etc. On the other hand, niche segmentation will exaggerate the need for highly customized market research, in order to cater the particular needs of targeted audience, before the process of product designing starts.
For instance, the FMCG giant Procter & Gamble (P&G) believes that innovation starts with the consumer. The leading FMCG company claims that gaining consumer insights allow them combine their “needs” with “possibilities”. Some of the finest innovations from P&G portfolio include Tide, Pantene, Pampers, Swiffer, Olay, Gillette, etc. The leading FMCG firm has also started social innovation programs such as Children’s Safe Drinking Water.
- Recommendations
Following recommendations can be considered in order to successfully adopt low-budget innovation model.
- Make the most of social media tools – The organization can design unique social media campaigns in order to gain detailed consumer insights and buying habits. For e.g., asking for their suggestions about a new flavor for energy drink.
- Testimonials written by Consumers – Marketers can build a strategy in which consumers are allowed to write testimonials and their experience about the new product which would help the company to learn and improve.
- Just in Time (JIT) delivery – JIT aims at providing a solution in which vendors can manage the inventory quite efficiently. It allows the retailers to carry inventory that meets the immediate demand of the customer. This helps the company to reduce additional inventory management costs.
- Free Sampling– Experiential marketing is another way to engage the customers and gain their reviews about the new product. This would help the managers to focus on the weak points while allowing them to build more awareness of the brand.
Appendix
Financial Statements of P&G
| XYZ Company | ||||
| Consolidated Balance Sheets | ||||
| Amounts in millions; Years ended June 30 | 2015 | 2014 | ||
| Assets | ||||
| CURRENT ASSETS | ||||
| Cash and cash equivalents | $ 6,845 | $ 8,558 | ||
| Available-for-sale investment securities | 4,767 | 2,128 | ||
| Accounts receivable | 4,861 | 6,386 | ||
| INVENTORIES | ||||
| Materials and supplies | 1,392 | 1,742 | ||
| Work in process | 550 | 684 | ||
| Finished goods | 3,512 | 4,333 | ||
| Total inventories | 5,454 | 6,759 | ||
| Deferred income taxes | 1,356 | 1,092 | ||
| Prepaid expenses and other current assets | 2,853 | 3,845 | ||
| Assets held for sale | 3,510 | 2,849 | ||
| TOTAL CURRENT ASSETS | 29,646 | 31,617 | ||
| PROPERTY, PLANT AND EQUIPMENT, NET | 20,268 | 22,304 | ||
| GOODWILL | 47,316 | 53,704 | ||
| TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET | 26,829 | 30,843 | ||
| OTHER NONCURRENT ASSETS | 5,436 | 5,798 | ||
| TOTAL ASSETS | $ 129,495 | $ 144,266 | ||
| Liabilities and Shareholders’ Equity | ||||
| CURRENT LIABILITIES | ||||
| Accounts payable | $ 8,257 | $ 8,461 | ||
| Accrued and other liabilities | 8,325 | 8,999 | ||
| Liabilities held for sale | 1,187 | 660 | ||
| Debt due within one year | 12,021 | 15,606 | ||
| TOTAL CURRENT LIABILITIES | 29,790 | 33,726 | ||
| LONG-TERM DEBT | 18,329 | 19,811 | ||
| DEFERRED INCOME TAXES | 9,531 | 10,218 | ||
| OTHER NONCURRENT LIABILITIES | 8,795 | 10,535 | ||
| TOTAL LIABILITIES | 66,445 | 74,290 | ||
| SHAREHOLDERS’ EQUITY | ||||
| Convertible Class A preferred stock, stated value $1 per share (600 shares authorized) | 1,077 | 1,111 | ||
| Non-Voting Class B preferred stock, stated value $1 per share (200 shares authorized) | — | — | ||
| Common stock, stated value $1 per share (10,000 shares authorized; shares issued: 2015 – 4,009.2, 2014 – 4,009.2) | 4,009 | 4,009 | ||
| Additional paid-in capital | 63,852 | 63,911 | ||
| Reserve for ESOP debt retirement | (1,320) | (1,340) | ||
| Accumulated other comprehensive income/(loss) | (12,780) | (7,662) | ||
| Treasury stock, at cost (shares held: 2015 – 1,294.7, 2014 – 1,298.4) | (77,226) | (75,805) | ||
| Retained earnings | 84,807 | 84,990 | ||
| Noncontrolling interest | 631 | 762 | ||
| TOTAL SHAREHOLDERS’ EQUITY | 63,050 | 69,976 | ||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ 129,495 | $ 144,266 | ||
| XYZ Company | |
| Consolidated Statements of Comprehensive Income | |
| Amounts in millions; years ended June 30 | 2015 |
| NET EARNINGS | $7,144 |
| OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX | |
| Financial statement translation | (7,220) |
| Unrealized gains/(losses) on hedges (net of $739, $(209) and $92 tax, respectively) | 1,234 |
| Unrealized gains/(losses) on investment securities (net of $0, $(4) and $(5) tax, respectively) | 24 |
| Unrealized gains/(losses) on defined benefit retirement plans (net of $328, $(356) and $637 tax, respectively) | 844 |
| TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX | (5,118) |
| TOTAL COMPREHENSIVE INCOME | 2,026 |
| LESS: TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | 108 |
| TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO PROCTER & GAMBLE | 1,918 |
References
- Andrews, K.R. 1980. The Concept of Corporate Strategy. Homewood: Richard D. Irwin.
- Ansoff, I. 1965. Corporate Strategy. New York: McGraw-Hill.
- Chandler, A.D., Jr. 1962. Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge: The M.I.T. Press.
- Chesbrough, H. & R.S. Rosenbloom. 2002. The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Spin-Off Companies. Industrial and Corporate Change, Vol. 11, No. 3, pp. 529-555.
- Magretta, J. 2002. Why Business Models Matter. Harvard Business Review, Vol. 80, No. 5 May, pp. 86-92.
- Weill, P., Malone, T. W., D’Urso, V. T., Herman, G., and Woerner, S. (2005) Do Some Business Models Perform Better than Others? A Study of the 1000 Largest US Firms, MIT Center for Coordination Science Working Paper No. 226
