Exploring Strategy, Text and Cases, 12th Edition - (Pg 248-251) 1 PDF

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7.4 Business models

7.4 Business models Business models have become increasingly popular as internet-based and platform companies such as Airbnb, Spotify and Uber have conquered the world with their new models. They are particularly useful when explaining more complex business interrelationships. Consequently, the business model concept is commonly discussed in relation to strategy today. Building on David Teece’s work this chapter carefully distinguishes business models from business strategy.11 cost structures.12 Most fundamentally it concerns the i . the , and can . When entrepreneurs in new start-ups have entered old industries with new business models in recent years, they have frequently changed industry dynamics and competition in radical ways. The new models often involve more complex interrelationships than traditional ones and generate value and profits for more parties than just a buyer and seller. This shows that both entrepreneurs and managers, whose organisations may be threatened by new start-ups, need to understand business models. Illustration 7.4 discusses how Uber’s business model has revolutionised the taxi industry globally. The remainder of this section first discusses three fundamental elements of business models, some typical business model patterns and finishes with an examination of a common business model: the multi-sided platform.

7.4.1 Value creation, configuration and capture

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Business models describe business transactions and interrelationships between various parties and are best explained in terms of three interrelated components (see Figure7.9).13 The first emphasises , a . The second component is the . The final value capture part that and to .14 Figure 7.9 Business model components

Value creation What is offered to what customer segment?

Value capture

Value configuration How is the value proposition structured?

Why does the model generate a margin?

221 Johnson, Gerry. Exploring Strategy, Text and Cases, 12th Edition, Pearson Education Limited, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/bham/detail.action?docID=5987036. Created from bham on 2021-01-03 08:50:17.

Chapte r 7 Business strateg y and models

Illustration 7.4

Uber’s ubiquitous business model

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The on-demand transportation service that has revolutionised the taxi industry. any drivers. Drivers own the cars and are self-employed and apply to Uber to become a driver. Uber’s activities are configured to match customers with a nearby driver and car. In addition to matchmaking, the platform and app include pricing and payment, car tracking and review systems. Uber thus structures the value for both customers and drivers through the development of sophisticated sof tware and algorithms that optimise matchmaking, pricing and reviews for different cities and local markets. Uber captures their profit and value by typically taking a 20–25 per cent cut on all rides except for special promotions to customers and/or drivers and in areas where they face competition from similar services. Besides generating a margin these revenues should cover their expenses to cover Source: NARAPIROM/Shutterstock R&D, technology development, marketing, local infrastructure and own local employees in each city. With an estimated market value of between $70 and 100bn Even though the business model has been a success there Uber has been predicted to become the world’s dominant are several significant challenges. The UberPOP service has transportation company without owning a single vehicle. faced regulatory pushbacks in several European countries After its start in San Francisco 2009 it has quickly expanded and even been forced to shut down in some markets. Uber is to over 78 countries and 600 cities worldwide. Uber only also facing an increasing number of competitors with similar employs 12,000, but has over 7 million drivers and 50 business models; Lyft is a significant competitor in the USA and million users and generates over four billion rides a year. in China they were defeated by Didi Chuxing, which acquired The company is growing at exponential rates and in May their operations. However, the CEO Dara Khosrowshahi has 2019 the company was valued at over $80 billion in an IPO. expanded their food delivery service UberEATS further and Uber’s smartphone app is at the centre of their business entered into new services such as bike- and scooter-sharing model. Customers download the app, create an account and with a vision to be present in all the different ways people move put in their credit card information. By tapping the app they within an urban environment: ‘We want to be the Amazon of request a car and a notification is sent to the nearest driver transportation.’ who can accept or reject the ride and if rejected it is sent Sources: J. Bhuiyan, ‘Uber powered four billion rides in 2017. It wants to another driver in the area. Customers can track the esti- to do more – and cheaper – in 2018’, Recode.com, 5 January 2018; mated time of arrival and the meter via the app. Payment is K. Korosec, ‘Uber CEO: ride hailing will be eclipsed by scooters, bikes made to Uber via the app with a later payment to the driver. and even flying taxis’, Techcrunch.com, 2018; M. Ahmed, ‘Uber: BackThe customer gets an option to rate the driver and the driver seat dr iver ’, Financial Times, 16 September 2015; A. Damodaran, ‘A disruptive cab ride to riches: T he Uber payoff’, Forbes, 6 October also has the option to rate the customer. 2014; Techtrends.tech, 2018. Through the Uber app customers can search, book, pay See also the end-of-chapter case for Chapter 6: Uber and the Ubermensch. and rate the taxi service. They are offered a convenient, reliable and fast taxi service either through luxury rides, priced less than conventional limousine services (Uber Black), or through regular rides priced less than normal taxi fares (Uber Pop or UberX). The value for drivers is an extra source of income and flexible working hours. The review and 1 In terms of Figure7.9, what are Uber’s value creation, value configuration and value capture components? rating system is a key difference compared to regular taxis.

Questions

Customers can avoid drivers with low ratings and drivers can 2 If you were the head of a traditional taxi company: how avoid passengers with low ratings. could you change your business model to compete with The basic resources of Uber include their technological Uber? platform and app, but they do not own any cars or employ

222 Johnson, Gerry. Exploring Strategy, Text and Cases, 12th Edition, Pearson Education Limited, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/bham/detail.action?docID=5987036. Created from bham on 2021-01-03 08:50:17.

7.4 Business models

The business model of the San Francisco-based accommodation broker Airbnb, for example, for r . The . These activities are .Ar . Finally, both hosts and Airbnb

from this business

model. . This : •

. A key part of a business model i : customers, partners and other participants. The main concern here is thus , .

•

. A second component r , for example technology, equipment, facilities, brands, managerial processes, etc. (for a discussion of the value chain see Section4.4.3). These factors (for activity systems see Section4.4.3). participants.15

•

. A business model also . In addition, . For a company, then, this last component .16

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here: • First, once established in an industry, . All , but . Until Airbnb and others started their services few thought about or challenged the ‘hotel business model’ and how value creation, configuration and capture were interrelated in this model. There may have been efforts to change individual business model components, but few changed or differentiated the whole model and the relationships between the components as Airbnb did. i (see Section6.3.2). • Second, l . Walmart, for example, shares the same discount retailer model with several competitors, but has a distinct lowest-cost strategy; cutting costs systematically throughout its value chain. Likewise, Airbnb in the example above has the same business model as Wimdu and many other competitors. However, Airbnb’s extensive selection of accommodation from close to one million listings in 34,000 cities in 200 countries surpasses any competitor and thus differentiates them. Because of this size both customers and hosts

223 Johnson, Gerry. Exploring Strategy, Text and Cases, 12th Edition, Pearson Education Limited, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/bham/detail.action?docID=5987036. Created from bham on 2021-01-03 08:50:17.

Chapte r 7 Business strateg y and models

are likely to prefer Airbnb over competitors as guests are offered more accommodation and hosts more guests. The more customers that use their service the better it is for every customer in their network of guests and hosts and Airbnb thus has an advantage based on network effects (see Section3.2.6 for network effects).

7.4.2 Business model patterns Even though . . Dell, for example, entered the PC and laptop industry many years ago based on a different business model compared to the established one. Instead of going via middlemen of retailers and wholesalers as HP, IBM and others did, they sold directly to customers. It is thus i and tors. It should be noted, however, that l and .17 There are multiple business models around, but include the following: •

•

. This is perhaps the

, but its which l. It builds on Gillette’s classic model of selling razors at a very low price and the compatible replacement blades at a quite high price.18 This model of . For example, and then . In other industries it is the services, maintenance and parts that are priced expensively while the basic product is sold at relatively low margins. This is, for example, the case for ink-jet printers; they are sold at relatively low prices, but manufacturers make their margins on selling expensive ink. It is also common in industrial goods with an emphasis on expensive services; for example, Rolls Royce and GE and others in the jet engine industry and for Otis and Schindler and other players in the elevator industry. . This business model pattern name comes from . It refers to

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. Revenue is generated by the premium buying customers. They are often only a small portion of the total user volume, but their revenues can be enough and can also be used to attract even more users. The photo sharing service Flickr uses this business model pattern. F while . Flickr also uses contextual advertising and cooperation with retail chains and other photo service companies besides subscription fees to generate revenue. Other businesses that use this model are the business-oriented social networking service LinkedIn, the video chat and voice call service Skype and the streaming music service Spotify. however, i to convince premium customers, . It means that the enterprise can gain network effects based on a large installed base of adopters (see Section3.2.6). •

. This model . It is . Transactions include offerings of specific services

224 Johnson, Gerry. Exploring Strategy, Text and Cases, 12th Edition, Pearson Education Limited, 2019. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/bham/detail.action?docID=5987036. Created from bham on 2021-01-03 08:50:17....