Term Paper

New Age Business Models

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Sajid Ansari | IIM SAMBALPUR
Contents
Introduction...................................................................................................................................................3
Digital Era................................................................................................................................................4
Case- Starbucks..........................................................................................................................5
Changes In Business.......................................................................................................................................5
Innovation In Business Model........................................................................................................................6
Cost Obsession........................................................................................................................................7
Case- Southwest Airlines............................................................................................................7
Platform..................................................................................................................................................7
Global Business.......................................................................................................................................8
Seeking Excellence..................................................................................................................................8
Case- Irizar.................................................................................................................................9
Adaptive/Distinctive...............................................................................................................................9
Case- Netflix...............................................................................................................................9
New Business Model....................................................................................................................................10
Pay Per Use/Streaming.........................................................................................................................10
Bundling................................................................................................................................................10
Direct Selling.........................................................................................................................................10
Freemium.............................................................................................................................................11
Case- Spotify............................................................................................................................12
Subscription..........................................................................................................................................13
Case- Magazine Company........................................................................................................14
References...................................................................................................................................................15

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Sajid Ansari | IIM SAMBALPUR
INTRODUCTION:

Business Model can be referred as a basis on which a company or organization decides

to create and deliver value for its Stakeholders. Business models are a convenient way
of representing a business idea with its most important core components and a variety
of peculiarities that distinguish the business idea. Business model construction and
modification is also known as Business Model Innovation, and it is a component of
business strategy. In theory and practice, the term "business model" refers to a wide
range of informal and formal descriptions of core aspects of a business, such as
purpose, business process, target customers, offerings, strategies, infrastructure,
organizational structures, sourcing, trading practices, and operational policies and
processes.

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Source: https://upload.wikimedia.org/wikipedia/commons/b/b6/The_Cambridge_Business_Model_Innovation_Process.png
The definition of what a business model is, was first described in 1994, when Peter
Drucker published an essay for the Harvard Business Review in which he defined the
theory of the corporation as a set of assumptions about what a business will and won't
do. He discusses how businesses fail to adapt to changing market conditions, as well as
their responsibility to identify customers and competitors, their values, and to be
innovative. Given that we've had businesses for hundreds of years, it's amazing that we
only coined the term "business model" a few decades ago!

Joan Magretta, in the midst of the 2002 dot-com incident, expanded on Drucker's
business definition to declare that business models are "at heart, stories." Stories that
explain how businesses operate. A good business model responds to Peter Drucker's
age-old question, "Who is the customer?" 'And what is the customer's worth?'

The transition from a business plan to a business model corresponds to the rise of
personal computers and the use of spreadsheets. Entrepreneurs used to plan their
businesses year after year, quarter after quarter, and write it down in a document that
resembled a book whose copy was final. The transformation occurred concurrently with
the introduction of powerful new technology such as Microsoft Excel, allowing people to
digitally and more accurately model them. The ability to calculate your entire profit and
loss for a business on a single Microsoft Excel page was now available to you. This
meant that businesses could now be modelled before they were launched. Products or
services could be done ahead of time in terms of calculating the business's recurring
revenue, profit, marketing costs, advertising spend, and so on in order to model the
business's framework.

DIGITAL AGE

Customer experience expectations are rising in the digital age. The constant
release of new technologies creates an endless stream of opportunities for
disruption. Because of the constant flow of innovation, today's competitive
differentiator can quickly become yesterday's forgotten feature. Organizations
must get up to speed in this environment – or risk being left behind. Companies
are looking for ways to transform their business models in order to stay ahead of
the competition. In a world where what got you here won't get you there, the
question isn't whether you'll need to develop and implement new business
models, but how. For companies that must deal with a legacy estate while also
attempting to disrupt or move like a start-up.

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 New business models can be enabled by digital transformation. It opens up new
avenues for product development, client acquisition, value creation and delivery,
and profit maximization. All of these can be combined to digitally transform any
company. The digital transformation is much more than just products and
technology. In a connected world where most physical products are already
commodities and people can easily find competitors on the Internet, market
advantage should come from changing the business model and adapting it to
new digital clients demanding customized services rather than new physical
products.

CASE: STARBUCKS

Starbucks provides a business model example for digital transformation in

the restaurant industry. Indeed, this company is at the forefront of digital
customer-facing solutions, increasing profitability through superior
products. They began by developing an app to pay for coffee and food in
their restaurants. It was combined with the loyalty program, and the
company began to create personalized offers and experiences for their
24-hour connected customers. In addition, the company created new
digital services to be enjoyed in their physical stores, resulting in a highly
praised omnichannel approach.

And this is only the beginning: Starbucks is constantly developing new

digital offers and services, even involving their customers in the design
process by a customer co-creation service.

CHANGES IN BUSINESS:

Business models are constantly evolving as they respond to large and small changes
and reposition themselves to avoid emerging risks and seize opportunities. These
cumulative changes can transform everything about the business model over time,
including how the company invests, earns and distributes profits, and deploys capital.
The most visible changes are in how businesses sell to customers and how customers
buy, both in business-to-business and business-to-consumer settings. Part of this
transformation is the result of digitization, as businesses pursue new economic activities
in online virtual markets. The “Uber-ization” of business is also on the rise, with
companies that used to sell products now selling services and vice versa, and the line
between the two becoming increasingly blurred.

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Changes taking place behind the scenes are just as important. Organizations are
changing to accommodate changing families, longer lifespans, and changes in how
people plan their careers. Changes in macro factors such as oil prices, economics, and
geopolitics, as well as changes in micro factors such as changing technology and local
tax changes, are redrawing supply chains.

Another significant shift is that mergers and acquisitions are now integrated into
business-as-usual planning rather than being one-time events. Companies used to grow
organically through operating models that profited in profitable markets and invested
profits in new markets. Mergers and acquisitions would be pursued only when
companies required complementary assets or market scale. Inorganic growth through
M&A is now the norm, particularly in R&D-intensive industries. Deals are now part of the
everyday flow of business activity, and businesses are more difficult to categorize, such
as pure manufacturing operations or intellectual property firms.

The list of unknowns confronting today's businesses is daunting, ranging from uncertain
geopolitical currents to extreme weather events. The stakes are high, and deciding
where to place your bets is becoming increasingly difficult. On a practical level, what
approach should businesses take to avoid surprises and be prepared to adapt to
whatever comes
their way? Businesses must continue to focus on what is going on in their surroundings.

INNOVATIONS IN BUSINESS MODEL:

Technological advancements and its associated developments enable far-reaching

innovation in business models. Opportunities are increasing in this new world. The
future companies may adopt original and novel business models. As it is impossible to
predict future innovations or changes, to some extent, it can be interpreted by looking at
now emerging businesses.

Professor Joan Enric Ricart, former President of Strategic Management Society (SMS),
explains how our hyper-connected, digitally dense world is allowing for business model
innovation Although it is difficult to determine precisely what business innovations will
emerge in the future, he lists potential emerging business models. These are classified
into several categories. First, based on the idea to remove any non-value-added factors
that is not creating any values to customers. The second type of business model is a
"platform," serving more than one market simultaneously. A third category is "global
business," which allows for rapid international expansion. He emphasizes the
significance of the "pursuit of excellence" centered on developing innovation so as to

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promote virtuous circles (a recurring cycle of events, the result of each one being to
increase the beneficial effect of the next), which is the primary objective of any
successful business model. According to Professor Ricart the following trends are rising
in the business models-

COST OBSESSION:

In this model the cost of producing product/service is gradually reduced by

creating a virtuous cycle. The model could be driven by economies of scale
(costs reduce as production volume increases), economies of learning (costs
reduce as production grows), economies of capacity use (costs reduce as utilized
capacity increases). In many industries, "cost obsession" has emerged. It can be
found in retail, with Walmart being a prime example. Sam Walton's cost
obsession philosophy, which he carefully developed at Walmart, has spread to
an increasing number of industries. The idea is to eliminate frills and instead
leverage economies of scale, scope, utilization, experience, and other factors to
benefit consumers. Anything that does not add value to the consumer's life is
removed.

CASE: SOUTHWEST AIRLINES

The only airline in the United States that has never lost money Southwest
decided to fly point-to-point from smaller, less congested airports, and it
implemented a variety of operational measures to ensure that its aircraft
spent more time in the air and carried more passengers on each flight.
Costs fell dramatically, flights could be sold at a lower price, and more
passengers were willing to buy.

PLATFORM:

This refers to business model that functions in more than one market
simultaneously. It creates value by providing an intermediate space for exchange
between more than one inter-dependent groups. This model functions on
‘Network Effect’ which increase its value in proportion to the number of users
which creates a ‘winner takes all’ type of competition. The Platform can further be
classified in two categories- Exchange Platform and Maker Platform.
Exchange Platform creates value by providing a space to facilitate an exchange

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 between inter-dependent groups (i.e., buyer and supplier) while Maker Platform
creates its own value by producing its own commodities (i.e., content, software)
which the consumers consume in exchange for a certain price.

Source: https://www.applicoinc.com/blog/what-is-a-platform-business-model/

GLOBAL BUSINESS:

This business model refers to a functional business model that can be expanded
globally. In this information age, the globalization is growing rapidly with swift
communication and data sharing, with this the scale of competition is also
expanding and more and more companies are expanding their market day by
day to develop their firms. This business model comes with its own sets of
challenges and benefits, major challenge being the aligning company’s offering
with consumer preference of various countries.

SEEKING EXCELLENCE:

These businesses are focused on innovation, surprising their customers with new
features, and meeting needs that did not exist when the product was released.
Apple can be said to be a prime example. Focusing primarily on R&D, Apple has

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 produced many revolutionary products such as iPod, iPhone, iPad etc. and
created its own distinctive consumer base.
CASE: IRIZAR

Irizar began as a family-owned business in the Spanish Basque Country,

then evolved into a cooperative partnership within the Mondragón group
before breaking away in 2005. It manufactures vehicle bodies for high-end
buses for a global clientele. Its highly distinctive management model is
based on autonomously led teams and giving every employee a stake in
the company. This enabled Irizar to achieve an unrivalled level of
innovative
excellence in the niche market of high-end bus bodywork.

ADAPTIVE/DISTINCTIVE

In this time of uncertainty and risk, Globalization, new technologies, and

increased transparency have all conspired to upend the business environment,
leaving many of feeling uneasy. Since 1980, the volatility of business operating
margins has more than doubled, as has the size of the gap between winners
(huge operational-profit-margin) and losers (low operational-profit-margin), which
had been largely static since the 1950s. Hence, the need of adaptability become
crucial. Adaptation is the process by which the firm aligns its business model with
the changes in its surrounding.

CASE: NETFLIX

This is an excellent example of an adaptive business model based on

digital transformation. The company survived the great transformation that
the Internet unleashed on the entertainment industry, which resulted in the
demise of powerful companies like Blockbuster and the threat of many
others. Netflix was the first to advocate for a DVD delivery service that
was efficient in logistics and distribution. The company was doing well, but
they understood that past success is no guarantee of future success, so
they decided to experiment with a new business model.

They created a streaming service through Amazon Web Services based

on the data collected by their recommendation algorithm, giving their
customers the option to customize their experience. They created a high-

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 value new product that replaced TV among digital natives, while also
building a scalable and profitable business and successfully transforming
the company.

NEW BUSINESS MODELS:

PAY PER USE/STREAMING:

Television sector was first to utilize this model. In this model, the consumers pay
for a specific part of product/service (i.e., duration of use) that they consume
without having any ownership of the product. This makes the consumer very
conscious of what they consume and pattern of their consumption whereas
company took full responsibility of issues of life cycle of their product. It is also
used in hotel industry, where rooms are available for hour basis. Some platforms
allow users to book a hotel room by specifying when they want to check in and
when they want to check out. In addition, the platform provides fixed-rate
packages of certain fixed hours. Such platform charges a small fee to connect
users with hotels.

BUNDLING:

In this model various products/services are sold as one combined unit known as
Bundle. The consumer perceives the bundle to be cheaper as compare to the
price of individual products in the bundle. The products in the bundle can be of
same category or a mixture of product and service which have some similarities.
This model focuses on selling more units to every customer to gain profit, and
selling them in a bundle means more unit per customer. These companies have
a clear understanding of the willingness to pay of their customers for their
products. The Bundling makes it hard to compare prices of individual
commodities and also helps in selling the commodity which is not as desirable
individually, while making consumer believe that they are still saving after buying
the bundle. Cable TV is the best example of Bundling, where Direct-to-Home
(DTH) companies charge various amounts for different channel bundle
packages.

DIRECT SELLING:

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 It is also known as B2C model. This model enables manufacturer to sell directly
to consumer without other intermediates. In this era of digitalization, internet has
given power and access to producers to sell their product directly to the
consumers. Due to this, the intermediary costs get eliminated resulting in overall
reduction in price of the commodity, which is beneficial for both the consumers as
well as manufacturers as they can sell more volume of product for same profit
margin. The disadvantage of this model for sellers is that, they have got to do all
the distribution and promotional work, but they can involve a third party for these
as well. For consumers, this model is beneficial as it is more convenient and cost
saving.

FREEMIUM:

Source: https://bmtoolbox.net/patterns/freemium/

Term coined by Jarid Lukin of Alacra by combining words Free & Premium,
Freemium is known as the business model of the Internet. The basic product is
completely free. The company makes money by selling connected premium
products, which are additional functions or services that typically attract a small

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 number of users. Giving away the basic product for free makes it easier to attract
users and build a customer base. This business model pattern is one of the most
popular among Internet start-ups. For Internet-based businesses, the freemium
model works well where acquisition cost is low but lifetime value is high. The
freemium business model allows users to use basic features of a software,
game, or service for free before charging for upgrades to the basic package. It is
a common strategy used by new businesses to entice users to use their software
or
service.

With no cost involved with trying an app or services, Freemium has an advantage
of acquiring new consumers in a very large amount. With high acquisition,
company can a have a huge user data base for analyzing and identifying
potential customers based on user behavior. In many situations, businesses can
still benefit from their free users: even if they are not explicitly purchasing
upgrades or items, the company can collect their user information and data,
show them ads to generate revenue, and boost their own business numbers to
continue to improve the application. On contrary, disadvantages of Freemium are
if not done properly, customer retention can be very low, means free users do not
buy premium, it can be because the company gives so many features to their
free users that they do not feel need to convert into premium.

CASE: SPOTIFY

It is one of the biggest and successful company following Freemium

model. It provides music streaming services online. It has a gigantic user
base of 345 million users, 45% of which have opted for a subscription.
Which is an amazing conversion as the average conversion rate for this
model is about 4%. One of the reasons for such high conversion rate can
be its pricing strategy, even though one can access all the music free of
charge, there are certain features which limits the user experience.

The free mobile version only allows users to skip six tracks per hour,
whereas the Premium version allows users to skip as many as you want.
Free users can not select a specific song but rather can only shuffle songs
form a selected album or playlist. There are frequent advertisements in
between the songs and one can not download songs to listen to while
being offline. These things can be tolerated by many users but for certain
music

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 lovers it is not tolerable, so they opt for premium.

SUBSCRIPTION:

Source: https://bmtoolbox.net/patterns/subscription/

The subscription model, as opposed to selling a single item, aims to sell a

product or service over time. The subscription model was popularized by
newspapers and magazines and is now used by a wide range of products and
services that customers can access by paying a monthly fee. It is relatively more
focused on customer retention than customer acquisition. The subscription model
the lifetime value of the customer should be high as it focuses more on the
aspect that a single customer does multiple payments for a longer period of time
rather than many single payment users.

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 There are generally two types of Subscription models: In the first, the ownership
of the product/service is transferred to a customer for a certain amount of time.
Whilst, user gets right to use the service/product for a certain period of time in the
second type of model.

CASE: MAGAZINE COMPANY

Magazine company’s Subscription model is simplest to recognize. The

company, gives weekly or monthly or annual subscription to purchase or
access their products for periodic payments instead of selling each
magazine individually for a single payment. If the company offers a
periodic payment service than the revenue model of the company
becomes stronger and convenient for forecasting and planning as the
sales projection accuracy increases.

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 REFERENCE:

Article- How does digital transformation and business model innovation interlink? by BMI Lab
https://bmilab.com/blog/2017/7/28/how-does-digital-transformation-and-business-model-
innovation-interlink

Article- Embracing new business models for the digital era by Charlie Li
https://www.capgemini.com/2020/03/embracing-new-business-models-for-the-digital-era/

Article- Business Models for the Companies of the Future from the book Reinventing the Company in
the Digital Age https://www.bbvaopenmind.com/en/articles/business-models-for-the-
companies-of-the-future/

Article- Changing Business Models by Tim Sarson, KPMG

https://home.kpmg/xx/en/home/insights/2019/08/changing-business-models.html

Article- Freemium by Troy Segal

https://www.investopedia.com/terms/f/freemium.asp - :~:text=Under%20a%20freemium
%20model%2C%20a,the%20foundation%20for%20future%20transactions.&text=The
%20freemium%20business%20model%20allows,upgrades%22%20to%20the%20basic
%20package.

Article- Subscription Business Model by Evan Tarver

https://www.investopedia.com/ask/answers/042715/how-do-subscription-business-models-
work.asp

Article- Free Spotify vs Spotify Premium by Sara Carbone

https://www.soundguys.com/free-spotify-vs-spotify-premium-36632/

New business models in digital age- A dosdce.com study sponsored by CEDRO

https://www.dosdoce.com/upload/ficheros/noticias/201504/new_business_models_in_the_dig
ital_age__bookmachine_special_edition.pdf

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