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Business model is the core logic for creating value for many organizations and the change model is the core logic for how a company will change over the period in order to remain profitable in the market. In order to survive in this global competitive environment companies has to have an effective business model. Business model has to be regular revamped to be competitive and to be profitable with the current market continuous pressure. Most company had problem in changing their business model because of global economic crisis, now the crisis is to the end it gives many company to analyse the business model and make some changes and survive in the rapid changing environment. This paper is aimed to understand four types of Business Model Change Strategies defined by Linder and Cantrell (2000) and how these models can be used in term of strategy development and implementation in an Enterprise Resource Planning environment and how ERP products and capabilities can be used to enhance these approaches.
In this report, first the business model is discussed with four types of business model change strategies Realization, Renewal, Extension and Journey models are illustrated. Followed by the model strategies and their role in the strategy development for a company are explained. Next implementing these change models in an ERP environment and SAP as product capabilities is discussed.
What is Business Model?
Business model is a conceptualization of the firm's value proposition for its stakeholders and the unique ways the firms create and deliver value to customers (Seddon, Lewis, Freeman, & Shanks 2004) It is concerned with the revenue, cost and profit economics of the organization strategy. It determines"whether the revenues and costs flowing from the strategy demonstrate business viability."
According to Magretta (2002) Business model explains how Organization works, they identify who the customer is and define the economic logic of delivering value at appropriate cost so profit can be made. It describes how the piece of business together as system to create value to the customer
According to Linder and Cantrell (2000), business model is the organizations core logic for creating value and for making money. It helps and highlights the approach and unique activities that allow organization to supply differentiated product and services to customers, stakeholder and employees to receive profitable business. Many business models components can be configured to make a business model such as revenue model, pricing model, organizational model commerce process model, channel, Internet enable commercial relationship model and value propositional model.
Osterwalder and Pigneur (2005) propose that the business model concept can be understood
by the following.
"A business model is a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm. In particular, the model makes explicit the specific concepts and relationships that elegantly describe and represent what value are delivered to the customers and how is it done and with which financial consequences"
According to Linder and Cantrell (2000), business model constructs consist of strategic question and the answer to these question make the change logic to the business model.
Following are the questions from Linder and Cantrell (2000)
How do we get and keep customers?
Who are our customers and what are their needs?
What do we offer them ex. Products, services, experiences?
How do we reach them?
How do we price our offering?
How do we deliver distinctively?
How do we execute?
What are our distinctive capabilities?
How is our financial structure distinctive?
Answer for the above question has direct impact on the company's Cost, Revenue and assets differentiations.
Four types of business model change strategies defined by Linder and Cantrell (2000).
This business model is used by the organization to maximize the profit and returns for the existing business process and operational logics. By making the minor changes in the business logic to adapt to the market conditions they enhance the business model to raise profit and revenue of the organization. This is one of the models which require least changes on the existing business model. A very good example for the realization model would be a traditional bank providing internet banking service to the customers which provided convenience way of performing transaction and at the same time extending their reach in the market (Linder and Cantrell 2000).
For an organization realization model helps them in retain the companies' brand name which is very important role in positioning in the market. So companies with big brands invest lots of money in advertising themselves. The organization can expand in any direction to extend their service and product by expanding geographically and establishing the business world wide. This model helps in formulating a strategy for retaining current customers by providing better service to improve overall profit and revenue of the organization. By adding new segments to the existing business models organization can experience in opportunity and to add more service channels (Kutenk 2009)
Case Study: Bharat Petroleum Corporation Limited India
Tool Used: SAP NetWeaver Business Intelligence
Bharat Petroleum Corporation Ltd is the country's second largest oil company and listed in fortune 500 companies. They are specialized in refine the crude oil and supplying for both industrial and domestic use. It is well and know brand in India with retail gas stations, liquefied petroleum gas and convenience stores. It has more than 14,000 employees and posted revenue of more than US$27.8 billion in year 2007. Company was strong and success with its IT infrastructure based on SAP ERP software, company had implemented SAP ERP 10years ago. The main challenges and opportunities that company was look for is to enable faster and more efficient decision making, provide accurate and up to date facts and figures to their employees, functionality enhancement across all the areas of the organization and to streamline reporting and analysis of the business.
Considering all this above opportunities BPCL upgraded to the latest release of SAP for oil and gas solution and upgraded to SAP NetWeaver BI. SAP NetWeaver BI integrated data across and beyond the enterprise. It provided employees with the tool to get vital facts and figures and to transform them into valuable business insight. By this transformation the company was able to make more accurate and better decision making, faster and more efficient analysis and reporting, Enhanced access to the business analytics which in turn increased sales in fact company had 30% growth by implementing this tool.(SAP 2009)
Renewal model is commonly used by innovative organization to stay up in the value curve. Sometimes this can be achieved by introducing disruptive products to immensely improve their competitive position. Organization use renewal model for continuously enhance their service and product platform, cost structure, brand value positioning, capabilities and technology base to counter increasing competition. They continuously innovate; improve their product and service, technology and cost in which they are segmented. This is the widely used model by most innovative organization that set the market trends in their own business segment and claiming the numerous uno positions by implementing more innovative products into the market. A very good example would be the model adopted by AIG insurance company which develop its positions in the developing countries and collaborating with the local partners and introducing new service line with respects to the countries economy and market strengths. (Kutenk 2009)
Renewal model inhibits the following aspects in themselves where companies can adopt for developing inventive strategies. The company's can offer new services or new product line to the new market. Renewal Model can innovate themselves to expand a new brand by acquiring low performing brands and transform them to a high brand value. This model can expand them into totally new and untouched market which gives them the best chance to expand their business. Latest technologies can be adapted and the way of doing the business can be rejuvenated by investing in Research and Development which increases their inventions. (Lindel & Cantrell 2000)
Case Study: Asian Paints India
Tool Used: SAP CRM
Asian Paints is one of the India's largest and third largest paint companies in Asia. The company has very good reputation in the corporate world for their professionalism, customer centricity and fast growth track. It has offices in 22 countries and 30 manufacturing facilities and provides services to more than 65 countries. Asian paints partnering with SAP transform its business processes to extend its brand name and to ensure long term growth.
In 2001 company executives realised that organizations long term growth is depended on their ability to get closer to the end customer. They had help line service installed and they received calls from the consumers asking for complete solutions to their painting needs. Because the company sell its products through a dealer's network they had poor visibility in the entire painting process and the end consumer needs. This situation prompted company executives to establish direct link to end customer.
With this situation in mind Asian paints decided to move from a strictly product based manufacturing business model to a services model.(SAP 2001) By building a services brand company launched Asian Paints Home Solutions by offering value added services ranging from feng shui consultation to in person color recommendation. By this business process transformation Asian paints had made a clear gain in achieving long term goal by faster customer acquisition, significant increase in the revenue and optimized visibility to the end customer needs. (SAP 2007)
An extension model is used by the organization to expand their business to a new line of business, to new market or to new geographical location. By significantly adding new capabilities and operational logic, this model doesn't not replace the existing business model. A very good example for this model would be BP Amoco which extended their oil and gas business vertically to include retail stores in their gas stations which significantly enhanced the company revenue. (Kutenk 2000)
Extension model inhibits the following aspects in the business strategy developments. It helps organizations to dump or drop the other brand and to create new their own exclusive brand which is termed as backward integration. New business segment can be added to the existing and it is termed as forward integration. With a strong customer base, the organization can add new services to reach effectively to their customers. It helps organization to turn their internal capability to the external market offerings which drastically expand their business. (Lindel & Cantrell 2000)
Case Study: SWISS POST
Tool Used: SAP REAL ESTATE MANAGEMENT
Head quarters based in Bern, Swiss post a Switzerland based company provides postal, payments, passenger transport service to business and private customers in the country. In addition to it Swiss post real estate is of the largest real-estate property service provider in Switzerland. With more than 55,000 employees it manages 1577 rented properties and 1346 of its own house holdings. It is sighted as second largest employer in the year 2007. The real estate department is responsible 2.6 million Sq meters of leased real estate across the country. Company had major problem in managing 3,000 properties with most of the business process was done manual and with lake of quality. The objective is to overcome this situates is by streamline and consolidating the real estate process from cleaning of property to leasing administration. One more objective was to establish a very flexible self oriented architecture.
So Swiss Post Real Estate decided to participate in SAP ramp-up for latest release of SAP Real Estate Management, this one a cutting edge technology from SAP offering support for development, construction and operation for real estate industries. By implementing this solution Swiss Post achieved significant improvement in their business process, most of them were automated with good performance and better quality. It significantly reduced administrative overheads and redundant process. They integrated the software to GIS to visualize property for better analysis. The transformation form Swiss post to Swiss Post Real Estate was big achievement it would have been difficulty without SAP Real Estate Management application. (SAP 2009)
Organization uses this model to totally change their business model and adopt a new operational logic. For example an organization may change current business model from a local domestic niche player to again very high market value global player. Said this organization can change their business from one industry to another. A very good example for this is Nokia where they first started rubber and paper business and now they are one of the giants in the telecommunication industry. This model may move from service based industry to product based industry or product based industry to service based industry. A another example for this model is WIPRO Technologies India, one of the pioneer software company in India first started as Vegetable oil industries then completely revamped its business model to an Information Technology company. (Kutenk 2009)
According to Lindel & Cantrell, the organization can adopt commoditization meaning to move from product based business model to low cost delivery business model. They can expand globally to reach new markets by building new business segment worldwide. They can avoid commoditizing by changing from product based business model to entire solution or services based business models. Once they have established their position in the market they can offer tradition based products at a very competitive and reasonable price to acquire effective market share. They also change their focus from price based to build a brand value. (Lindel & Cantrell 2000)
Case Study: Colmobil Corporation
Tool Used: SAP Business Suite
With approximate 20% of Israelis vehicle market shares Colmobil remains a family owned business to this day. It was founded in 1936 holding franchise for Mitsubishi, Mercedes and Hyundai. It has around 31 showrooms, 81 workshops operated by dealers and business partners, it employee's more than 800 staff. It not only sells vehicle but does the financing through Daimler bank and also sells vehicle insurance. The business had 2 life cycles that had to be simultaneously managed one was vehicle lifecycle which included importing , selling and servicing, and two Customer lifecycle which included point of contact, warranty claims, ongoing outreach, recall claims and customer satisfaction. In the year 2007 company became clear that its legacy information system was aging and would not be able to compete future to support the lifecycle. The legacy systems were more into product oriented than customer oriented. Here the company was transforming from product based business model to customer based business model. Then it was clear to the company that it needed a ERP system can look into all the area of business. They took 18 months to go-live with their new business model. "SAP software has provided us with support for integrative processes that is built into the system from top to bottom. It has allowed us better transparency into our systems." Gil Katz, CIO, Colmobil Corporation. It was the first company in Israeli to integrate CRM software with Dealer business management and vehicle management software. They integrated the system from bumper to bumper. Using the latest technology like RFID it now has a unique capability and approach customers and deliver latest process to the business. SAP software has provided transparency in to our systems. It is very flexible to be customer focused rather than product focused. Good visibility of the entire system.
"For the future, the capabilities now available to Company mean it can expand its horizons indefinitely. For example, the CRM functionality company gained with its SAP software implementation is only now beginning to be realized." (SAP 2010)
From the above discussion, realization business model does not change the organization business model but it leverages to maximize profit. Renewal business model and extension business models can change the organization business model to some extent. However, the journey business model does change the organization business model completely. To remain agile, organization must attain competencies to control business model change which includes Information Technology system change in response to, or better in expectation of, business and technological changes.