UNDERSTANDING YOUR BUSINESS MODEL AND DEVELOPING YOUR STRATEGY Every firmâ??s business model consist

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July 5, 2020

UNDERSTANDING YOUR BUSINESS MODEL AND DEVELOPING YOUR STRATEGY Every firmâ??s business model consist

UNDERSTANDING YOUR BUSINESS MODEL AND DEVELOPING YOUR
STRATEGY

Every firm’s business model consists of two components: a
revenue model and a cost model. The revenue model breaks down all the sources
of revenue that your business will generate. For instance, if you own a
restaurant, your basic revenue model will separate food and beverage into two
main sources of revenue. You can take that further and break down the revenue
model by meals (breakfast, lunch, and dinner), categories of food (Italian, American,
etc.), or even food item (pizzas, hamburgers, etc.). The more detailed your
categories, the more information you can glean about how certain aspects of
your business are performing.
The cost model identifies how you are spending your
resources to make money. It includes your cost of goods sold (COGS) and your
operating expenses. Basically, the business model is represented by your
company’s income statement. Understanding the business model enables
entrepreneurs to make decisions that lead to greater revenue for lower costs.
Many of the world-changing businesses that have formed over
the last 10 years have struggled to find a viable business model. For example,
it took Twitter, a social networking and micro-blogging service founded in
March 2006, several years to generate revenue. In 2009, Twitter CEO Evan
Williams noted, “We will make money, and I can’t say exactly how because . . .
.we can’t predict how the businesses we’re in will work.†Also, “We think
Twitter will make money. I think it will take some time to figure it out.â€1
After building a huge user base, Twitter monetized advertiser tweets that end
up on search engines. When consumers choose to follow the “tweeting company,â€
Twitter is paid. In 2012, Twitter generated almost $130 million in ad revenue.2
The Revenue Model
All businesses must generate revenue if they are to survive.
Even nonprofit organizations need revenue, whether from donations or a
combination of donations, government grants, and income generated from sales of
a product or service. Without this revenue, nonprofits would be unable to
achieve their missions. Breaking down the revenue sources into categories helps
an entrepreneur understand how the firm can increase each Different revenue
categories often require variations on the firm’s central strategy to achieve
the highest possible outcomes. For instance, Amazon.com’s revenue model
consists of a number of categories according to the products it sells online.
On its Web site, customers can find everything from books and music to toys,
computers, and electronics. In addition, the company breaks out sales by
geographic region (see Figure 4.1). While Amazon markets its site heavily,
spending close to $1.6 billion annually to draw customers to it, Amazon varies
its strategy based on the product categories. For example, Amazon initially
touted itself as “The Earth’s Biggest Bookstore,†which meant it had to carry
(or have access to) more titles than its competitors. In 2012, Amazon’s
business model stands as a centralized variant of the “long-tail†business
model in which it sells less of more. In statistics, a probability distribution
can be described as having a “long tail†when the greater share of its
population is contained under its tail than it would in a normal distribution.
Amazon seeks to sell a little bit of everything, and a lot of just a few
things. This model allows it to remain the online retailer of choice to the
increasingly unique wants and desires of a highly individualized market. The
strengths of Amazon’s business model lay its unprecedented customer reach
(anyone with an Internet connection), and its huge selections of products.
However, this model has tradeoffs. Amazon’s margins are slim, and getting
slimmer. From 2007 to 2010, Amazon’s profit margin was 3.4%, on average. In
2011, it was 1.3%. In comparison, eBay’s profit margins at the end of 2011 were
27.7%, and Google’s were 25.7%.3 In a multi-year effort to improve its margins,
Amazon has morphed into a “marketplace†where other companies are able to pay
Amazon to sell their goods on Amazon’s Web site, and store and ship through
Amazon’s warehouses and fulfillment systems. Amazon has also added new revenue
sources such as Web services to serve software developers and those who require
high-end server performance via on-demand data storage and computing capacity.
This expansion allows other companies to leverage economies of scope in line
with Amazon’s core strengths and theoretically allows Amazon to develop new
revenue streams that more closely resembled the profit margins of eBay and
Google.
The People Are What Matters
Students often think that their company needs to have an
explicit, identifiable, and patentable competitive advantage. However, more
often than not, your competitive advantage will be complemented by the tacit
knowledge held by the people within your company. Southwest Airlines, for
example, has consistently been one of the most profitable airlines, a result
partially due to its direct route strategy (rather than the hub-and-spoke
system of the old-line airlines). Southwest employees also work more
efficiently than their counterparts at traditional airlines. Existing airlines
have tried and failed to imitate their friendly customer interactions and
motivation to get airplanes quickly serviced and back into the air. In other
words, Southwest’s competitive advantage is inherent in the tacit knowledge of
its employees. The most difficult aspects of a firm’s strategy to imitate are
the people and the execution of the strategy. From the very beginning of your
company’s life, you need to create a culture that is conducive to fostering the
human elements of your business.
Probably the most important thing founders do is to create
the organization’s culture. While the original culture will evolve, companies tend
to be replications of what they were in the past, so it is critical that you
get the culture right at the beginning. You need to create an atmosphere that
encourages people to bond to the company. Yes, your people believe in the
mission; yes, they believe in the product; but more importantly, the members of
your team need to believe in each other and want to continue to be part of the
organization. Let’s break building and maintaining a culture into three main
categories: values, selection, and structure.
Values.
Asthefounder,youneedtoidentifywhatvaluesyouwanttodriveyourorganization. Values
are beliefs shared by all members. For example, JetBlue based its organization
building on five core values:16
∙ Safety ∙ Caring ∙ Integrity ∙ Fun ∙ Passion
Values communicate what kind of work environment founders
want to create and what guidelines they use in hiring future employees. For
JetBlue, safety is a central value, and without question, this is a critical
value for the airline industry. The other values communicate that JetBlue
treats its employees the way it expects its employees to treat the customers.
The values put into place at the company’s founding will flow through to
formulating and implementing the strategy. More importantly, values create the
foundation on which your
company will grow.
Selection. It’s important to hire the right person the first
time. Communicating the values you’ve identified to new team members goes a
long way toward making sure there is a fit between the employee and the
company. Every new person added to the company will reinforce the values you’ve
put in place, thereby helping to sustain the company’s culture. JetBlue focuses
on its five core values when interviewing job candidates and structures its
interview questions around these values.17
In 1971, when Herb Kelleher founded what is now America’s
largest domestic air carrier, Southwest Airlines, he was driven to increase the
mobility of the common citizen. He sought to do this by offering low-cost
fares, and trimmed costs and services to do so. He knew that underpinning this
no-frills approach had to be an enjoyable customer experience. A critical early
decision was the hiring of his flight attendant staff that would become the
face of Southwest to its customers. Southwest decided to outfit its flight
attendants is hot pants and go-go boots (again, this was the 1970s). The only
applicants for the job, considering the uniforms, came from the ranks of
cheerleading squads and marching band majorettes. Then a funny thing happened. Southwest
thought it had hired flight attendants with one key attribute, a figure that
was a good fit for the uniform, but quickly realized they had hired people with
a much more important attribute, a natural enthusiasm. The cheerleaders were
all about spreading enthusiasm, about cheering people on, and convincing the
common citizen that they “can win.†The cheerleaders were such a perfect fit,
Southwest Airlines began only to recruit cheerleaders. 18
The lesson for an entrepreneur here is simple: You must clearly
determine what critical qualities you need in an employee, where you are going
to look for it, and how you are going to recognize and measure it.

Structure. The structure of a new
venture changes as it matures. Early on, it is very informal as the founders
and a few early hires do a wide variety of tasks. There are several things to
keep in mind as you build your early organization. First, you need to hire
people who can “wear many hatsâ€â€”who can work on a prototype, contact vendors,
create budgets, and talk to customers as the need arises. It can often be a
mistake to hire a corporate lifer who is used to working in one functional area
and having expensive administrative support. Such employees, while talented,
may not operate well in the informal startup environment.
Second, as team-building expert
Elizabeth Riley19 says, “over-hire.†That is, find team members and early-stage
employees who are overqualified for the tasks they will initially be doing.
While you might save some money by hiring someone else with fewer skills, as a
young and resource-constrained new venture, you won’t have the time and money
to help that person learn on the job.
Finally, you need to create a
flexible organizational structure. While you may have an organizational chart, reporting
and communications need to be free to flow throughout the organization. That
means that any employee during this startup phase can freely talk to any other.
This loose structure facilitates learning about your business model, about
processes that do and don’t work, about customers’ needs, and so forth. It
fosters and promotes flexibility. The universal truth about strategy
formulation and business planning as a whole is that it needs to change and
adjust during implementation based on your customers’ reactions. If you build a
flexible organization, you will be in a better position to adjust your
strategy. As the organization matures, the structure will necessarily become
more formalized. While it is easy to be informal with 5, 10, or even 20 employees,
it is inefficient when you have 150.
In sum, an organization’s culture
starts at its founding and determines your strategy — and ultimately your
success—for the life of the organization. Take time to think about what kind of
culture you want and create a plan to make sure it is implemented

 

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