BUSINESSM O D E L S

A STRATEGIC

MANAGEMENT

A P P R O A C H

ALLAN AFUAH

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Chapter

Introduction and Overview

1

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Preliminary Definition of Business Model

• The framework for making money.

• It is the set of activities which a firm performs, how it performs them, and when it performs them so as to offer its customers benefits they want and to earn a profit.

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Determinants of Profitability (1 of 5)

• Industry Factors

• Firm-Specific Factors

1-5

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Source: Compustat. My thanks to Paul Michaud for making these calculations. Grant explored ROEs for these industries for the years 1985-1997: R. M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (Oxford, U. K.: Blackwell, 2002) p. 68.

Industry ROE ROA1. Pharmaceuticals 25.87% 10.27%2. Chemicals and allied products 21.70 7.883. Food and kindred products 24.78 7.254. Printing and publishing 16.30 6.685. Rubber and miscellaneous plastic 15.07 6.256. Fabricated metal products 19.00 5.587. Paper and allied products 13.77 4.708. Electronics and electrical equipment (no computers) 9.63 4.679. Nonferrous metals 10.39 4.23

10. Machinery, except electrical 15.69 3.8011. Petroleum and coal products 13.25 3.7612. Textile mill products 5.11 3.7113. Aircraft, guided missiles, and parts 14.02 3.5714. Stone, clay, and glass products 9.16 3.4415. Motor vehicles and equipment 11.91 3.1616. Iron and steel 6.40 3.1417. Airlines (transportation by air) 2.68 2.05

Determinants of Profitability (2 of 5)

Table 1.1 Industry Profitability, 1981-2001

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Firm ROA Firm ROA

Pharmaceuticals Airlines

Bristol Myers Squibb 13.71% Southwest Airlines 4.85%

Merck 13.37 AMR 1.51

Schering Plough 12.89 Delta Airlines 1.50

WYETH American Home Products 12.52 UAL 0.96

Eli Lilly 10.23 US Air 0.31

Pfizer 9.66 America West Holdings -3.27

Pharmacia & Upjohn 7.98 Continental Airlines -4.97

American Cyanamid 3.57 TWA -5.37

Northwest Airlines -3.40

Determinants of Profitability (3 of 5)

Table 1.2 Firm Profitability, 1981-2001

Source: Compustat. My thanks to Charlie Chung for making these calculations.

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Determinants of Profitability (4 of 5)

• Industry Factors– Competitive Forces

– Cooperative Forces

– Macro Environment

– Critical Industry Value Drivers

• Firm-Specific Factors– Positions of a Firm

– Activities of a Firm

– Resources of a Firm

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Figure 1.1 Determinants of Profitability (5 of 5)

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Components of a Business Model (1 of 2)

• Positions

• Resources

• Industry Factors

• Costs

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Figure 1.2 Components of a Business Model (2 of 2)

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Taxonomy of Business Models

• Revenue vs. Business Models– Revenue Model: how a firm generates income;

just one component of making money.

– Business Model: how a firm earns a profit; includes both revenues and costs.

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Relationship betweenBusiness Models and Strategy

• Strategy and Operational Effectiveness

• Strategy and Implementation

• Corporate- and Business-Level Strategy

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Organization of this Book

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Questions

Introduction and Overview