BUSINESS MODEL ANALYSIS

Business Model Analysis

Business Model Analysis

Q.2. It has been argued that an organisation's business model should ensure stakeholder credibility as well as delivering financial performance. Evaluate this business model concept, using examples where possible to show how organisations develop and revise their business models in response to changing circumstances.

Introduction

A business model describes the process by which organizations create economic, social or cultural value. The construction of a business model is part of business strategy. Business model is used to describe the core aspect of a business including strategy, structures and operational processes. When a business is developed, a particular model is developed that represents the mechanism of value creation employed by the business. Businesses are classified by the help of business models and are also used by managers inside the organization to identify further possibilities for development. Only those prospects will be considered that are in conjunction with the model developed.

Business model makes clear the fundamental economic logic that describes how the firm formulates value for all the stakeholders. For large public organization, the ultimate aim is shareholder wealth maximization. Achieving profitability is the intermediate aim that helps in the wealth maximization of the shareholders. Hence it can be said that business model developed must be aligned with the wealth maximization process. Success of an organization is dependent upon the extent to which the shareholders are enriched. Increasingly companies are focusing on the value based management which states that interests of shareholders should be prioritized in the business decisions.

Discussion

The shareholders value maximization should be reflected in the decision that management takes. An anti value maximization step, for instance, includes stock split or mergers or acquisitions that dilutes the rights of the shareholders in the company. It may yield more benefits and profits but these profits now will have to be split among twice or thrice the shareholders. Shareholders value maximization is rather difficult to measure so certain drivers are used to assess the value known as value drivers. Some drivers of shareholders value include operating margin, cost of capital, competitive advantage etc.

But increased profitability does not necessarily mean that it will be reflected in the value of shareholders. Many of the profitability indicators can be manipulated by the management such as deferring expenses or aggressive revenue recognition. To put in simple terms business model is a company's schedule to create more revenue and profit. Many companies amend their business model considering the environmental factors. The basic components of the business model of any company are mentioned in the following table.

Component

Explanation

Narrative

Value proposition

proposal answered to consumer value which satisfied its demands

The benefits that customers receive

Wealth potential

The wealth generated after taking costs out from potential income

Total income means growing market domination and high earnings per share

Revenue mechanism

Revenue creation while creating value for customers

Includes product pricing, cost structure

Product/ service design

Intangible services or tangible products by the company

Real interaction with customers

Organization design

Guideline for a company to fit its resource deployment and core strategy ...