Strategy & Business Models

1. Strategy & Business Models Dr. Pasi Malinen Brahea – University of Turku

2. ”Business model” and ”strategy” are among the most sloppily used terms in business; they are often streched to mean everything – and end up meaning nothing • Joan Magretta

3. Aims of the lecture • Background: • Business models are one of the most prominent, yet least understood issues in business research and management. Classical strategic approach relies upon rigid business models, which define the way the actors operate in relation to each other and associated revenue logics. • Technological and organisational innovations together with turbulent business environment set, however, new requirements for business model planning

4. Aims of the lecture • In this lecture, we pay special attention to these new business models. • Consequently, we ask questions such as: • What is the role of a business model? • What kinds of business models are suited for various situations? • How do we formulate and plan our business model? How does our business model affect strategy and management and vice versa. • The lecture pays attention to potential high-growth niche markets and innovative revenue models/logics.

5. Today… • Introduction and explanation of several concepts related to strategy, value networks and business models • What is (competitive) strategy? How do we do strategic planning? • Why do we need business models? How do we plan them? • How are strategy and business models different?

6. Strategiesareaboutcompeting Business modelsareaboutcreating and appropriatingvalue

7. Case – Flooz.com • Establised in 1998, online from February 1999 • Intended to launch an online currency that would serve as an alternative to credit cards – online gift cards you could use in (some) shops • Featured Whoopi Goldberg! • Burned up to $50 million and closed in August 2001 when only few merchants or customers showed interest

8. Case - Kozmo.com • Established in 1998 • Promised free delivery of “videos, games, dvds, music, mags, books, food, basics & more” within one hour • Free delivery for each pack of gum! • Burned up to $280 million and was closed in 2001.

9. Case – Boo.com • Established in 1998, launched the website in autumn of 1999 • The aim was to sell trendy fashion products - target group “cash-rich, time-poor.” • Featured Miss Boo, an animated figure offering fashion advice • Burned up to $188 million and was liquidated in May 2000

10. Lessons • There is a number of reasonswhy a companymayfail • One good idea is notenough – the totalityhas to work!

11. Strategy

12. Different strategies • Defensive • Offensive • Military • Political • Organizational • Business

13. Strategy may be seen as • A pattern: choices made over time (backward view) • A plan: choices about courses of action (forward view) • A position: choices of what is offered in which markets based on differentiation • A perspective: choices about how business is conceptualised

14. Elements of business strategy * Where is the business trying to get to in the long-term (direction) * Which markets should a business compete in and what kind of activities are involved in such markets? (markets; scope) * How can the business perform better than the competition in those markets? (advantage)?

15. Elements of business strategy * What are the values and expectations of those who have power in and around the business? (stakeholders) * What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? (resources)? * What external, environmental factors affect the businesses’ ability to compete? (environment)?

16. A competitive strategy explains how a company will do better than its rivals

17. Positioning-based view

18. Porter’s five forces of competition

19. Porter’s three sources of competitive advantage • Three generic strategic approaches for creating a defensible position and outperforming competitors of a given industry • Cost leadership – less costs, cheaper product • Differentiation – product/service with unique features • Focus – niche, geographic market or product line segment

20. Resource-based view

21. Barney’s resource-based view • Marshalling and uniquely combining a set of complementary, specialised resources and capabilities create value • Utilization of a resource is more important than possessing it • Unique resources are a source of competitive advantage – but also tradable!

22. Problems • It is very hard to formulate a stable strategy in a turbulent environment • Technology, global society and customer needs change with tremendous speed • A complex strategy consists of many views, which may be difficult to follow and even conflicting with each other

23. Case – Yahoo.com • Established in 1994, the leading company with “Portal” business model (using advertising revenue model) • Strategic challenges: intense rivalry, no barriers of entry, extremely price-sensitive users – also barely any unique resources • Uses strategy as simple rules

24. Eisenhardt and Sull: Simple rules • In stable markets, managers can rely on complicated strategies built on detailed predications of the future, but in complicated and fast-moving markets where significant growth and wealth creation can occur, unpredictability reigns. • The most profound strategic implication of the Internet era is that companies must capture unanticipated opportunities in order to succeed. • Rather than picking a position or leveraging a competence, managers should select a few key strategic processes and craft a few simple rules to guide them.

25. Eisenhardt and Sull 2001

26. Valuechains, networks

27. Porter’s value chain

28. Value chain analysis • Main questions: 1) What activities should a firm perform and how? 2) What is the configuration of the firm’s activities that would enable it to add value to the product and to compete in its industry? • But what if the value results from a new combination of information, physical products and services. Anything new and innovative?

29. From value chains to value networks • As products and services become dematerialised, the value chain has less physical dimension, and less functionality as a concept • Banking, insurance, telecom, media etc. • Instead of a hierarchical linear production structure, value is increasingly created in networks and in business ecosystems that share a common platform (for example, Microsoft Windows OS) • Players in the marketplace do not only compete with each other (cf. The Five Forces of Competition), but also collaborate with each other => Co-opetition • Key question: How is value created in a network?

30. Strategiesareaboutcompeting Business modelsareaboutcreating and appropriatingvalue

31. Business models

32. “Business model” as a term became popular during the dot.com hype in the turn of the millenium • Used as a buzzword to “glorify all manner of half-baked plans” (Michael Lewis)

33. What about these cases?

34. What is a business model? • A model is an abstract representation of a reality that defines a set of entities and their relationships • There is no commonly recognized definition of the concept “business model” • “A business model is something that depict the content, structure and governance of transactions designed to create value through the exploitation of business opportunities” (Amit and Zott 2001)

35. Osterwalder’s Business Model Canvas

36. What happened to these?

37. Why these are still around?

38. Case – Google search engine • Yet another “Portal” business model based on the search engine • The value proposition • Advertisers get extremely targeted ads published for surfers with the AdWords • Surfers get the services of a free search engine (and others!) • Content creators may get extra revenue by placing Google ads on their websites with AdSense • The revenue is made by keyword actions to advertisers • Key resources include the search engine, research team

39. Business models and strategy • A business model is a representation of a firm’s underlying core logic and strategic choises for creating and capturing value within a value network • A business model should reflect the firm’s strategic choises • A business model forms the linkage between the strategic planning and the implementation levels of a business

40. Strategy vs. business models – Case Wal-Mart • The first Wal-Mart opened in 1962 in the hamlet of Rogers (pop. ~6000) • Wal-Mart copied the discount-retailing business model, using the supermarket logic in general merchandise (less staff, more customers, lower prices) • Different strategy: ”put good-sized stores into little on-horse towns, which everybody else was ignoring”, chasing away other retailers, offering good national brands at low prices • Lessons: Not a radical business model, but a very functional strategy

41. Strategy vs. business models – Case Dell • Established in 1984, currently one of the largest technological companies in the world • Created a new business model where PCs are sold directly to end customers • Cuts out the middle-men • Optimises inventory • In addition strategic choises: • First only the profitable business customers, then also consumers • With the cost leadership coming from economies of scale, the company may drive out weaker players • Lessons: The business model complements the strategy

42. Conclusions of today’s lecture • The field of strategy analysis is wide and full of different perspectives • Competitive strategy is explains how a company will do better than its rivals • Position-based, resource-based and simple rules based • Value chain analysis is used to analyse activities, which firms use to create competitive advantage • When value is created in networks rather than in chains, the business model concept is useful

43. “Anyone who has never made a mistake has never tried anything new.” “Imagination is more important than knowledge.” “Any intelligent fool can make things bigger and more complex. It takes a touch of genius - and a lot of courage to move in the opposite direction.”