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Robust Business Model - A Game Changer in Competitive World

The model reflects the basic means, by which it creates a value proposition, delivers value to consumers and collects revenue from customers to make a profit

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A company's business model is a part of its business's overall strategy: It clearly encapsulates how the company plans to achieve its goals such as making a profit. The model reflects the basic means, by which it creates value proposition, delivers value to consumers and collects revenue from customers to make a profit.

Let's analyze the impeccable business model of Google. It is the world’s most powerful search engine owing sites such as U Tube, Feed Burner, and Picasa. It offers a wide range of free tools from analytical reports to document sharing and storing. The main objective is to attract bloggers, website owners and businesses, small and medium.

The website shown up in the searches are based on a wide range of prodigious factors involving everything such as search engine optimization (SEO) to social network mentions, brand popularity in searches, videos, images. It has links to and from other sites and even factors like how many people visit the site when it shows up in the searches. Through the use of the Android phone technology, it has attracted countless new customers. Google uses the data collected from the Android phone users which power their search engine to further tune their sales and marketing algorithms. Google’s main objective is to drive more people to their search engines. The company gloats of generating 98% of its revenues by selling ad spaces.

Without people to read ads, Google could not attract so many advertisers. The more readers, the more advertisers. The more Google knows about the audience, the better they can target ads. The better they target ads, the more they can charge for ad space.

Google with extremely whimsical marketing side has had a powerful impact on their brand. From time to time, the Google machine updates its search engine home page to feature interactive gadgets designed to get people talking. The company has figured out the key to great marketing with a viral intent is simple.

If organizations are to thrive, senior executive must discern on the working mechanism of business models. According to Peter Drucker‘s perspective, a business model encompasses questions on the customer, customer value and how does an organization drive value at the most appropriate cost. Harvard Professor Clay Christensen states that a good business model consists of four important elements namely a customer value proposition, a profit formula, key resources and important processes. Robust business models are directly correlated to the choices such as compensations structure, the location of the facilities, sales & marketing initiatives, extent of the vertical integration and the procurement contracts. These management choices have far-reaching consequences like pricing, effects on the sales volumes which are directly linked to the company’s scale of the economy and negotiation power. This defines the value creation potential and the company’s ability to capture value on the long run. So a business model consists of a set of management choices and its consequences. An important aspect of good business model focusses on the strategic choices about where to apply the model as for which segments, geography, type of the customers, which products and at what rate of change.

There are few important attributes of the good business model. Does it overlap with the company goals? While designing a good business model certain choices are made in order to deliver consequences enabling to attain goals. It should be self-reinforcing leading to internal consistency. The choices that company executives make while crafting a business model should complement one another.

A good business model helps in an exalted business performance. It should sustain its effectiveness over a period of time by fending off threats like holdup (can customers ,suppliers capture the value you create by flexing their ability to bargain), imitation (can competitors replicate your business model), slack (complacency of an organization) and substitution (reduction in the value perceived due to introduction of the new products).

There are three types of the choice that companies make namely asset choices, policy choices and governance choices. Asset choices focus on the tangible resources of an organization for eg. location of the manufacturing facilities, warehousing and communication satellite systems. The policy choices focus on the using the non-union workers, flying in economy class to save costs. The governance choices focus on how the company arranges the decision-making rights like either owning or leasing decisions. The effectiveness greatly increases when there are innocuous differences in the government policies and presence of the assets. The impact of the choices and the consequences are an interrelated precept. The consequences can either be flexible or rigid. For example, the decision to increase the price will result in the lower volumes.The frugal nature of the choices pushes the employees in certain companies to fly in the economy class, share hotel accommodation and save transportation costs.

The good business model enables companies to sustain and compete in the precarious ever-changing business environment. If companies were to compete with the rivals having the similar business models it is imperative to build extremely rigid consequence based business models. This must be done to capture and create more value as compared to the rivals. When competing with extremely dissimilar business models the results may be widely different and unpredictable in terms of performance.

The business strategy for company defines the path that business will take to achieve its goals whose success is closely linked to the appropriate business model. These goals include the elements of your business model, along with any additional missions or goals.

There is a wide difference between business models operating in the same industry. Robust model is one that operates to the logic and captures the values of the company. In the competitive marketplace, plan of action should be to create the value of the unique propositions. The system of the choice is very simple. The enterprise has to either build up the internal capability or perish. There is always a special place for the contingency plans where business models take the best alternative course of action.

Let us analyze the business model in the automobile Industry which is a hyper-competitive business. Today the automotive industry is facing the biggest vicissitude than ever. The autonomous driving, mobility services, shift from product to product and service, electrification and forced the companies to rethink about their business model. In traditional business OEM (original equipment manufacturers) generated the majority of their revenues and profits by selling vehicles and to some extent services that are directly related to automotive businesses such as maintenance services. Now, most industry experts believe it’s going to change. The increased value would be created in the surrounding ecosystem since the traditional business model on the hardware part has reached its peak. Take the example of the Ericsson connected vehicles marketplace which Ericsson launched in 2017. It allows them to expose data in an extremely controlled way, automate partner onboarding, monetize and manage the entire process through consent between parties.

There are various value drivers with predominant impact. So the company needs to work on the optimum business models for the highest productivity and growth rates. Take the example of the huge surge in SUV model which adapted as per the market demands and the impact was extremely good in terms of gaining the market share in the segment. The car industry needs to be constantly aware of consumer trends and adapt to the demand. The machine driven technology requires constant training imparted to the personnel and may require a certain level of the investments. But the quantification of investments in terms of returns may yield dividend on a long run and transcend the competitor.

With the set of resources, how do you develop the capabilities and inbuilt preeminent resource dominance with the end objective of enhancing the market share and hence the profits is crucial. Developing the strategy requires the tactics to be well-integrated strategy and business model as per the changing competitive landscape. The competitors must constantly interact with customers, suppliers and they must focus to build resilient business models as per the consumer requirements.

It is a universal premise that every organization is built on the robust business model. But the different organization in the same sector don’t have the same business model. The business model is not same as the strategy but in sync with one another. The business model describes as a system and prepossesses how the different pieces of the business fit together with the organization. One of the critical factors of the competition should be the dimension of performance. Every enterprise runs into the competitor dealing with the reality of reciprocation.

A good strategy clearly defines how do you do a particular piece of work better than the competitive rivals. It is obvious that the organization would achieve superior performance when they do a piece of the work better with the well-designed business model.

When companies offer the same product and services better than the customer performing the same type of the activities they will prosper, grow and simultaneously add value for the customers. Head on head competition drives the prices where the returns are inadequate creating an esoteric business environment. There are cases when too many companies go to the market with the identical business model but with no strategies to differentiate themselves from the competition. They need to identify the customer, market to compete in, what services or products to offer resulting in relative differentiated value.

A good strategy must overlap with the business model. Take the example of Wal-Mart, global retail giant. When Sam Walton opened the first store in 1962 the discounting model already prevailed in the industry. Then the existing pioneers were using the supermarket logic to the general merchandise sale. The supermarket had been educating customers about the value of giving up the personal service in exchange of the competitive prices in the conventional departments and hence slashing the costs. Walmart reacted to the competition at nascent stages itself through appropriate measures. The first thing that was done was to strip way the physical amenity such as the carpeting. The second thing was to employ fewer salespeople on the shop floor resulting in the reduction of the costs. The customers were taught to self-serve. The third thing that was done was to configure the stores to handle very large numbers of shoppers efficiently. With these new initiatives, the company was able to bring down the cost drastically as compared to competitors and still make money.

There has been extreme pressure to compete in the emerging markets. In this type of market, those at the middle and the bottom of the pyramid are the key players. There is a great scope for the companies to scale up at the cost of other’s market share through the appropriate competitive business model. The rise of the new technology-based low-cost rivals is already threatening the incumbents, redistributing profits and reshaping the industries. In fact, the ways in which the companies create and capture value through their business models are undergoing extreme radical change making the landscape more competitive and offering a better value proposition to the customers. The success or failure of the business to a great extent depends on how it interacts and counters the business models of the other companies in the industry. Every business model should be built in consideration of the competition.

One of the major toy companies LEGO had to drastically reinvent its business model to turnaround from brink of bankruptcy. They did so by using fewer resources to create more value. The Company reengineered their operations improving the unique business model. They turned to the customers and boosted value creation.

The company first streamlined its operations by reducing the complex manufacturing processes. There was a  reduction in the number of bricks by eliminating those which were difficult and costly to the source. The company focused on standardization in terms of product design which made the entire operations more nimble. This allowed them to adapt and react to the changing market trends. It also decided to get rid of the branded products that were tangible and not profitable.

The business expansion only took place after establishing the robust operational base making sure of profitability. They took feedback from the customers to create more value. The company adapted their kits and design of the 21st century which included smart bricks with the help of sophisticated software and hardware and customized robots. Then they expanded to the new markets by designing new products/sets for underserved segments, e.g. LEGO friends and targeting girls. The rapid expansion in the emerging countries took place and their growth soured. Spectacular business turnaround quadrupled its revenues in less than a decade bringing LEGO bricks back to households around the world. Today, they occupy the top spot in the toy manufacturing business (take that Barbie!)

Hence companies should focus on the optimized business model leading to strategic transformation. The benefits would be long lasting in the form of increased revenues, efficiency gains in short, medium and long-term, cost reductions and enhanced customer relationships. There is a greater possibility for an organizational flexibility and the ability to respond faster to the changing markets and customer needs gaining competitive advantage.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Divakar Prakash

The author is a Strategy Consultant with experience of consulting CEO level executives and key stakeholders in Real Estate , Government, Not for Profit, FMCG and Chemical sectors. Educated at the School of Management ,University of St-Andrews consistently a top ranked institution in Europe at Master's level in business Strategy, Corporate Finance and General Management

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