Reinventing Business Model – HBR

Business Model:

A business model refers to the framework or plan that describes how a company creates,
delivers, and captures value in the marketplace. It outlines the way a business operates, generates
revenue, and sustains profitability. A business model serves as a roadmap for a company's
overall strategy and guides decision-making processes. It defines how the company creates and
delivers products or services, how it differentiates itself from competitors, and how it generates
revenue & manages costs.

Elements of a Successful Business Model:

1. Customer value proposition (CVP)

A successful company is one that has found a way to create value for customers—that is, a way
to help customers get an important job done. By “job” we mean a fundamental problem in a
given situation that needs a solution. Once we understand the ‘pain points’ of our customers and
all its dimensions, including the full process for how to get it done, we can design the offering.
The more important the ‘problem’ is to the customer, the lower the level of customer satisfaction
with current options for getting the job done, and the better your solution is than existing
alternatives at getting the job done (and, of course, the lower the price), the greater the CVP.

 Customer Segments: Identifying and targeting specific groups of customers with distinct
needs and characteristics. Example: Nike caters to athletes and sports enthusiasts with its
performance-oriented products.
 Value Creation: Creating unique value for customers through product features,
performance, customization, or service. Example: Spotify, which provides personalized
music recommendations and access to a vast library of songs, offering a tailored music
streaming experience.
 Differentiation: Setting the company apart from competitors by offering unique and
compelling features or benefits. Apple differentiates itself in the technology industry
through a combination of factors such as its design, features, ecosystem integration, and
brand image.
 2. Profit Formula:

The profit formula is the blueprint that defines how the company creates value for itself while
providing value to the customer. It consists of the following:

 Revenue model: Price x volume, For Example: Airbnb generates revenue by charging a
percentage fee on each booking made through its platform.

 Cost structure: Direct costs, indirect costs, economies of scale. Cost structure will be
predominantly driven by the cost of the key resources required by the business model.

 Margin model: Given the expected volume & cost structure, the contribution needed from
each transaction to achieve desired profits. For Example: Starbucks sells premium-priced
coffee and leverages its brand image to maintain higher profit margins.

 Resource Velocity: How fast we need to turn over inventory, fixed assets, and other
assets—and, overall, how well we need to utilize resources—to support our expected
volume and achieve our anticipated profits.

3. Key Resources:

The key resources are assets such as the people, technology, products, facilities, equipment,
channels, and brand required to deliver the value proposition to the targeted customer. The focus
here is on the key elements that create value for the customer and the company, and the way
those elements interact.

For Example: ‘Food Panda’

People: Food panda relies on a team of employees who manage various functions such as
operations, customer support, marketing, and technology. They ensure the smooth functioning of
the platform, coordinate with restaurant partners, handle customer inquiries, and maintain
relationships with stakeholders.

Technology: Food panda's key resource is its technology infrastructure. This includes their
website, mobile app, and backend systems that facilitate order placement, real-time tracking,
payment processing, and seamless communication between customers, restaurants, and delivery
riders.

Products: The "products" refer to the diverse range of food offerings available through their
platform. Food panda partners with a wide network of restaurants and food establishments,
enabling customers to access a variety of cuisines and menu options for delivery.

Facilities: Food panda operates through a network of physical facilities, such as offices, call
centers, and fulfillment centers that support its operations.

Channels: Food panda utilizes various channels to reach and engage with its customers. This
includes their online platform (website and mobile app), social media presence, and targeted
marketing campaigns. These channels enable them to attract and retain customers and drive order
volume.

Brand: Food panda's brand is a significant key resource. It encompasses its name, logo,
reputation, and customer perception. Food panda has invested in building a recognizable and
trusted brand, which contributes to customer loyalty and drives repeat business.

4. Key Processes:

Successful companies have operational & managerial processes that allow them to deliver value
in a way they can successfully repeat and increase in scale. These may include such recurrent
tasks as training, development, manufacturing, budgeting, planning, sales, and service. Key
processes also include a company’s rules, metrics, and norms.

How Great Models are built – NIKE’s Example!

1. Customer Value Proposition: Nike targets athletes and sports enthusiasts by offering
high-performance athletic footwear, apparel, & accessories. Their value proposition lies
in the combination of innovative design, quality products, and the endorsement of
renowned athletes, inspiring customers to "just do it" and achieve their athletic goals.

2. Profit Formula: Nike's revenue model includes selling products through various channels
like company-owned stores, online platforms, and authorized retailers. They price their
products at premium levels, leveraging their brand image and perceived value to generate
 higher profit margins. Nike also invests in marketing and sponsorships to drive brand
awareness and customer loyalty.

3. Key Resources: Nike's key resources include its manufacturing facilities, supply chain
networks, brand reputation, intellectual property (patents and trademarks), research and
development capabilities, and a talented team of designers and athletes. These key
resources enable them to produce and deliver innovative and high-quality athletic
products.

4. Key Processes: Nike's key processes revolve around product design, development, and
marketing. They invest in research and development to create cutting-edge designs and
technologies. Their supply chain management ensures efficient production and
distribution. Marketing campaigns, collaborations with athletes, and sponsorships are key
processes for creating brand awareness and driving sales.

By effectively aligning their customer value proposition, profit formula, key resources, and key
processes, Nike has become one of the world's leading sports and lifestyle brands. Their success
lies in consistently delivering products that resonate with their target customers, utilizing strong
brand recognition, and optimizing their operational processes to maintain a competitive edge in
the market.

When a ‘New Business Model’ is needed?

1. Addressing Needs of Underserved Customers:

This involves identifying & targeting large groups of potential customers who are
excluded from a market due to existing solutions being too expensive or complicated for
them. An example is Tata's Nano, which aimed to democratize car ownership in
emerging markets by offering an affordable & compact vehicle tailored to the needs and
budget of the middle-class population.

2. Capitalizing on New Technology:

This point revolves around leveraging a brand-new technology by creating a business

model around it or introducing a tested technology to a new market. Apple's introduction
 of MP3 players with the iPod and iTunes is a prime example. Apple combined sleek
hardware design with a digital music platform, revolutionizing the way music was
consumed and purchased.

3. Bringing a Job-to-be-Done Focus:

This refers to shifting the focus from products or customer segments to understanding the
"jobs" that customers are trying to accomplish and developing business models that
address those needs. FedEx disrupted the package delivery market by focusing on the job
of delivering packages faster and more reliably than existing services. This emphasis on
customer needs and efficient integration of processes gave FedEx a competitive
advantage.

4. Fending off Low-End Disrupters:

This point highlights the need to respond to low-end disrupters who threaten existing
players by offering lower-cost alternatives. An example is Tata's Nano itself, which
aimed to disrupt the automobile market by providing an ultra-affordable car. Incumbent
automobile manufacturers had to consider their business models to compete effectively
with the low-cost threat.

5. Responding to Shifting Basis of Competition:

As market dynamics change, the basis of competition evolves, and core market segments
commoditize. Companies need to adapt their business models to stay competitive. Hilti, a
manufacturer of high-quality power tools, had to respond to the entry of low-cost
competitors offering "good enough" tools. Hilti adjusted its business model to
differentiate itself through customer service, product innovation, and specialized
applications support.

Types of Business Models

 1. Retailer Model:
In the retailer model, a company purchases products from manufacturers or wholesalers
& sells them directly to customers, either through physical stores or online channels.
Examples: Wal-Mart, Al-Fatah, Metro, Aslam Mart, Jalal sons, Hyperstar, Rainbow.
i. Manufacturer Model:
The manufacturer model involves producing & selling products directly to customers,
bypassing intermediaries such as retailers. Manufacturers have control over the entire
production process and distribution.
Examples: Apple (manufactures and sells iPhones)
Tesla (manufactures and sells electric vehicles)
Coca-Cola (produces and sells beverages)
Samsung (manufactures and sells consumer electronics).
ii. Fee for Service:
In the fee for service model, companies charge customers based on the services they
provide. The revenue is generated by delivering specific services or completing tasks for
clients.
Examples: Law firms charging hourly rates for legal services.
Personal trainers charging per session fees
Doctor’s fee for consultation, checkup or treatment
iii. Subscription Model:
The subscription model involves customers paying a frequent fee at regular intervals to
access a product or service. It often offers ongoing value or access to exclusive features
or content.
Examples: Netflix (subscription-based streaming service)
Spotify (subscription-based music streaming)
Amazon Prime (membership with access to various benefits)
iv. Freemium Model:
The freemium model offers a basic version of a product or service for free, while
charging for advanced or premium features. It allows customers to experience the
offering before deciding to upgrade to a paid version.
 Examples: Drop box (provides limited free cloud storage and charges for additional
space)
LinkedIn & LinkedIn Premium (offers free basic membership with premium features
available for a fee)
Grammarly, Microsoft, Adobe & other editing softwares and applications.
v. Bundling Model:
The bundling model involves offering a combination of products or services as a
package, often at a discounted price compared to purchasing each item separately.
Examples: McDonald's (offering value meals with a burger, fries, and a drink)
KFC (offering family meals)
Cable TV packages (offering multiple channels and services as a bundle)
Vacation packages (including flights, accommodation, and activities).
vi. Marketplace Model:
The marketplace model brings together buyers and sellers on a platform, facilitating
transactions between them. The platform operator typically earns revenue through
commissions or fees.
Examples:Foodpanda is an online food delivery marketplace that connects customers
with various restaurants and food vendors.
Daraz is a popular e-commerce marketplace that operates in multiple countries. It brings
together sellers and buyers, providing a platform for a wide range of products, including
electronics, fashion, beauty, home goods, and more.
Zameen.com is a leading online property marketplace in Pakistan. It connects property
buyers, sellers, and renters, offering a platform to list, search, and explore various
properties, such as houses, apartments, plots, and commercial spaces.
vii. Affiliate Model:
The affiliate model involves earning commissions by referring customers to other
businesses and receiving a percentage of the revenue generated from those referrals.
Examples: Bloggers/Vloggers/Social media influencers doing paid-promotions for
fashion brands, food restaurants, etc
TripAdvisor (earnings through hotel & travel bookings made through affiliate links)
viii. Razor Blade Model:
The razor blade model involves selling a primary product at a low or discounted price
and generating recurring revenue by selling complementary or consumable products or
services.
Examples: Gillette (selling razors at a low price and earning through the sale of razor
blades), Keurig (selling coffee machines and earning through the sale of coffee pods)
ix. Reverse Razor Blade Model:
The reverse razor blade model involves selling a complementary or supporting product or
service at a low or discounted price, with the intent of generating revenue through the
sale of the primary product.
Examples: Video game consoles (offered at a lower price, with revenue generated
through the sale of games and accessories)
x. Franchise Model:
The franchise model involves granting individuals or businesses the right to operate
under an established brand name and business system in exchange for fees or royalties.
Examples: McDonald's (franchisees operate McDonald's restaurants under the brand and
system), Subway (franchisees operate Subway sandwich shops), KFC (franchisees
operate KFC outlets)
xi. Pay-as-you-go Model:
The pay-as-you-go model involves customers paying for products or services based on
their actual usage or consumption, typically in smaller increments or on a per-use basis.
Examples: Utility services like electricity or water (customers pay for the amount used),
Public transportation (customers pay for each ride or trip taken).
xii. Brokerage Model:
The brokerage model involves acting as an intermediary or middleman between buyers
and sellers, facilitating transactions & earning revenue through fees or commissions on
each transaction. The focus is on facilitating the connection between buyers and sellers,
providing services to help complete transactions smoothly.
Examples: Real estate brokers, stockbrokers, insurance brokers, travel agents.