Business model and doing business in an unstable business environment

Business model and doing business in an unstable business environment

Jacek Włodarczyk, Senior Manager 
11/25/2020
Business model and doing business in an unstable business environment
The pandemic of COVID-19 challenges business. It is, at the same time, an accelerator for various changes and it even enforces these changes. This is also a good moment to verify the organisation's business model.

Nowadays, a lot of entrepreneurs have faced the necessity to analyse their business idea and refer it not only to the new situation, but also to their employees, customers, suppliers and business partners.

What is a business model?

The business model is a plan developed by a company, the aim of which is to generate revenue with the highest possible operating profit. It defines the relationships between market participants and the way they operate - how they produce goods and/or services, generate value for customers and make profits.

According to Michael Porter, the business model is a description of a company's activities which bring it profits. Basically, it is about defining an organisation's role in the chain of values in which it operates. In a broad sense, it is all about a method of operation, geared towards development and optimal use of resources in order to offer customers more value than the competitors. In this way, the company will achieve higher profits and perhaps even gain and maintain a lasting competitive advantage.

Key elements of business models

The company creating its business model should analyse who are its customers, what exactly it wants to offer them and in what way. Finally, the question is why customers should buy a given product or service offered under certain conditions.

Both Laudon and Traver[1] point to eight factors to be taken into account when creating a business model:

  • A value proposition - why should customers buy from you?
  • The revenue model - how will you make money?
  • The opportunity to enter a market - what market will you be operating in and what is its size?
  • Competition - who else operates in this market?
  • Competitive advantage - what are the benefits your company will bring to the market?
  • Market strategy - how are you going to promote your products to attract the attention of your customers?
  • Organisational development - what type of organisational structure is necessary to implement the business plan?
  • Management team - what experience and skills do leaders in the company actually need?

There are many studies of business models in the literature. Some of them are described and made available, e.g. in the form of franchises (McDonalds or Telepizza), many of them are intellectual property or a strictly protected company secret.

Business Model Canvas (BMC)

One of the best described and therefore frequently used business models is the Business Model Canvas, developed by Osterwalder and Pigneur. According to him, in order to build a profitable company, it is advisable to carefully consider the business we run or want to start.

The authors distinguished 9 areas representing the entrepreneurial spirit and business efficiency. They are presented in the form of the following diagram and their arrangement is not accidental - the left side determines performance and the right side determines value, and this corresponds to the functions of the human brain. At the heart of the diagram is the value proposition, which is the purpose of the business. You can use the diagram by filling in its individual sections. Below the diagram you will find a description of the BMC model elements.

Business Model Canvas (BMC)

Customer segments

This is an element which shows to which segments of customers the company wants to reach and why? Customers constitute the foundation of any business model, so the better defined customer segments are, the greater the probability of success. Segmentation allows you to focus on the appropriate customers and conduct activities which will be of value for them.

Value proposition

It determines what products or services can be offered to customers that will be valuable to their needs in any sphere of life at home, work, leisure or care for their health. This value can evolve over time, depending on trends, but it always responds to the current needs of customers.

Channels

What are the channels a company will use to reach its customers in order to optimise costs and increase return on investment? Making decisions in this area affects many other areas of the business model. It is important to choose the right mix of channels to reach the customers.

Customer relationships

This element specifies the way of creating relationships with customers. What will be the form (personal, electronic, Facebook) and how often will the company contact customers? Of course, these parameters are adjusted to the customer segments.

Revenue streams

What revenues does a company generate or plan to generate from the sale of goods and services offered for each market segment? It is important in this element to specify the appropriate margin and source of revenue (sale of assets, subscription, usage fee, rent and lease or granting of a licence).  It is also necessary to analyse for what customers are currently paying, how they make this payment and how they would prefer to pay.

Key resources

What are the key resources of a company giving it the advantage on the market? These can be physical resources (buildings, infrastructure, equipment), intellectual resources (brand, patents, copyrights), human and financial resources (cash or credit line). The importance of individual resources may change over time.

Key activities

This element applies to the company's core business. For example, a manufacturing company will design, manufacture and deliver a product and a consulting company will advise and solve problems of its clients. The activities must also relate to the other elements of the business model, starting from value proposition through distribution channels, customer relationships and revenue streams. 

Key partners

Entrepreneurs rely on a network of suppliers, subcontractors and co-workers, on whom the functioning of the company often depends. Alliances are formed in order to optimise their business model, reduce costs or gain access to resources. 

Cost structure

This element includes all expenses related to the use of a given business model. These costs can be easily calculated if value creation, customer relationships or revenue generation are specified. Of course, depending on the business model and industry, the cost structure plays a major or minor role.

Business model and pandemic

The presented business model can be the basis for verifying the way in which each organisation operates, taking into account its purpose, mission, vision and strategy. Such a review may be particularly important at a time when many companies are struggling with the negative effects of the COVID-19 pandemic. This may be a right time to redefine the value proposition a company wants to offer its customers when revenues are on the decline. For many companies, the current situation has affected their distribution channels and the way they interact with customers, and this has undoubtedly had an impact on their cost structure.

Therefore, it is worth analysing the company's business model, treating the Business Model Canvas as a kind of 'check list', not only during a pandemic, but also on a regular basis, e.g. on an annual or biannual basis. Changes in the business environment are taking place very quickly, and the COVID-19 pandemic has only confirmed this observation.



[1] Laudon K.C., Traver C.G. (2012) E-commerce 2012. Busines. Technology. Society, Pearson Education Limited, United States of America

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