Introduction to Business Modelling – CS Professional Study Material

Chapter 13 Introduction to Business Modelling – CS Professional Valuations and Business Modelling Study Material is designed strictly as per the latest syllabus and exam pattern.

Introduction to Business Modelling – CS Professional Valuations and Business Modelling Study Material

Question 1.
(a) ‘Business Model defines how a Company provide value to customer and transfer payments to profits’. Elucidate the above statement by highlighting the key components of a business model. (June 2019) (5 marks)
(b) Sandeep, an IT graduate, has developed an e-platform to assist farmers to sell their produce directly to the bulk customers in the nearby cities, was unsure of selecting a suitable business model and has approached you to suggest one. As a Business Model consultant, select a suitable business model to Sandeep for his e-platform Application, and explain its features, advantages and drawbacks. (5 marks)
Answer:
(a) A business model embodies nothing less than the organizational and financial ‘architecture’ of a business. It is not a spread sheet or computer model, although a business model might well become embedded in a business plan and in income statements and cash flow projections. But, clearly, the notion refers in the first instance to a conceptual, rather than a financial model of a business.

It makes implicit assumptions about customers, the behaviour of revenues and costs, the changing nature of user needs, and likely competitor responses. It outlines the business logic required to earn a profit (if one is available to be earned) and, once adopted, defines (he way the enterprise ‘goes to market’. But it is not quite the same as a strategy. The following key components must be considered while developing a business model:

(i) High-level vision: The Vision describes the business model in brief.
(ii) Key objectives: The top goals and the plan to measure them.

(iii) Customer targets and challenges: The types of customers along with their exact pain points. Targeting a wide audience won’t allow business to hone in on customers who truly need and want product or service. Instead, when creating business model, narrow audience down to two or three detailed buyer personas. Outline each persona’s demographics, common challenges and the solutions the business model will offer.

(iv) Solution: The primary way that the business model solves customer’s problems. Solution could be a product, service, technology etc.

Introduction to Business Modelling - CS Professional Study Material

(v) Value: The core elements of the solution that make it unique and differentiated is value being offered to the customers. How will your company stand out among the competitors? Do you provide an innovative service, revolutionary product or a new twist on an old favourite? Establishing exactly what your business offers and why it’s better than competitors is the beginning of a strong value proposition. Once you have got a few value propositions defined, link each one to a service or product delivery system to determine how you will remain valuable to customers over time.

(vi) Pricing: How you will package your solution and what it will cost.

(vii) Messaging: A clear and compelling message that explains why your solution is worth buying.

(viii) Go-to-Market: The Channels that use to market and sell to customers. No business can function properly (let alone reach established goals) without key partners that contribute to the business’s ability to serve customers. When creating a business model, select key partners, like suppliers, strategic alliances or advertising partners.

Unless you’re taking a radical approach to launching your company, you’ll need a strategy that builds interest in your business, generates leads and is designed to close sales. How will customers find you? More importantly, what should they do once they become aware of your brand? Developing a demand generation strategy creates a blueprint of the customer’s journey while documenting the key motivators for taking action.

(ix) Investment required : The costs required to make the solution a success.

(x) Growth opportunity : The ways that you will growth the business, including key partnership if you need them. It is important to leave room for future innovations. Review initial plan often and implement changes as needed.

Introduction to Business Modelling - CS Professional Study Material

(b) Suitable Business Model: Become a Marketplaces is the right business model for Sandeep.

Features of the Market Place Model: Marketplace model means providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.

The main feature of the market place model is that the firm will be providing a platform for customers to interact with a selected number of sellers. When an individual is purchasing a product from the firm, he will be actually buying it from a registered seller. The product is not directly sold by the firm. Firm is just a website platform where a consumer meets a seller. Inventory, stock management, logistics etc are not supposed to be actively done by the firm.

Advantages
There are several advantages of using this form of business model. In this model the supply and demand would be brought together. Second, one of the greatest benefits is having Zero to little overhead, and no inventory. You can get a swanky office space if you want, or you can run the company virtually.

When you manufacture a product, you take on a lot more risk and pressure to make sure that inventory is sold. When you are the marketplace, instead of worrying about manufacturing costs, you are simply bringing the sellers to buyers (and Vice versa) and facilitating a transaction, taking a small slice of the pie from each transaction. You give sellers a place to make a profit and reach consumers, while customers are happy to find exactly what they want, usually at a discounted price.

Disadvantages
The Becomes a marketplace is not a bed of roses. There also are some drawbacks:

  • High web traffic is great, but the volume of product and brands on Become a marketplace makes it difficult to stand out from crowd.
  • The benefit of a Become a marketplace don’t come free. There would be some costs to the seller and buyer. Both the parties will see cost benefit analysis.
  • Become a marketplaces have their own rules about what can be listed and how it can be listed, and you must be able to work within those constraints, as opposed to having your own.

These trends suggest the businesses that will be most successful moving forward are the ones that can limit overhead and effectively connect with customers through websites and mobile apps.

Introduction to Business Modelling - CS Professional Study Material

Question 2.
(a) Mohit, a Techie, who is fond of online games, has developed an online version of Trade Game’. The online game has allowed multiple persons from different location to login and play the game. After successfully developing the game, Mohit wondered how to select a business model for it and approached you for suggesting a suitable business model. Suggest a suitable Business Model to Mohit and explain with example how your model will suit his online gaming portal. (Dec 2019) (5 marks)

(b) Brief the purpose and usage of the following excel functions:
(i) EFFECT
(ii) ACCRINTM
(iii) NPER
(iv) XNPV
(v) DB.    (5 marks)

Question 3.
(i) Using Excel function, calculate the future value of an investment of ₹ 1,00,000/ over 5 years. The investment earns interest of 8% during the first two years, 6.5% in third year and 6% during 4th and 5th years, and also answer the following:
(ii) Which excel function is used for this calculation?
(iii) Show how this function is used in excel spread sheet. (June 2019, 5 marks)
Answer:
(i) 1,00,000 + (1,00,000 * 8%) ÷ (1,08,000 * 8%) + (1,16,640 * 6.5%) + (1,24,222 * 6%) + (1,31,675 * 6%) = INR 1,39,575
(ii) Excel function to be used: EV SCHEDULE

Introduction to Business Modelling - CS Professional Study Material

(iii)

Interest = FV SCHEDULE (100000,C4 : C8)
8%
8%
6.50%
6%
6%

It is to be noted that in place of C4:C8 students may assume other cells also.

Introduction to Business Modelling - CS Professional Study Material

Question 4.
A Company’s paid up Capital is ₹ 1,000 lakh (Owner’s Equity). The Ratios for the Company are: (Dec 2019, 5 marks)

  • Current Debt to Total Debt 0.40
  • Total Debt to Owner’s Equity 0.60
  • Fixed Assets to Owner’s Equity 0.60
  • Total Assets Turnover 2 times
  • Inventory Turnover 8 times

Complete the following Balance Sheet given the information above:
Introduction to Business Modelling - CS Professional Study Material 1

Question 5.
Discuss the Key Financial Ratios?
Answer:
Key Financial Ratios
The key financial ratios discussed under this section are:

  1. Price Ratios
  2. Profitability Ratios
  3. Liquidity Ratios
  4. Debt Ratios
  5. Efficiency Ratios

The aforesaid ratios are discussed in the ensuing paragraphs.
1. Price Ratios: Price ratios are used to get an idea of whether a stock’s price is reasonable or not. They are easy to use and generally pretty intuitive, but do not forget this major caveat: Price ratios are “relative” metrics, meaning they are useful only when comparing one company’s ratio to another company’s ratio, a company’s ratio to itself over time, or a company’s ratio to a benchmark.

(a) Price-to-Earnings Ratio (P/E):
What you need: Income Statement, Most Recent Stock Price The formula: P/E Ratio = Price per Share / Earnings Per Share What it means: Think of the price-to-earnings ratio as the price you’ll pay for $1 of earnings. A very, very general rule of thumb is that shares trading at a “low” P/E are a value, though the definition of “low” varies from industry to industry.

Introduction to Business Modelling - CS Professional Study Material

(b) PEG Ratio:
What you need: Income Statement, Most Recent Stock Price The formula: PEG Ratio = (P/E Ratio) / Projected Annual Growth in Earnings per Share

What it means: The PEG ratio uses the basic format of the P/E ratio for a numerator and then divides by the potential growth for EPS, which you’ll have to estimate. The two ratios may seem to be very similar but the PEG ratio is able to take into account future earnings growth. A very generally rule of thumb is that any PEG ratio below 1.0 is considered to be a good value.

(c) Price-to-Sales Ratio:
What you need: Income Statement, Most Recent Stock Price The formula: Price-to-Sales Ratio = Price per Share / Annual Sales Per Share

What it means: Much like P/E or P/B, think of P/S as the price you’ll pay for $1 of sales. If you are comparing two different firms and you see that one frm’s P/S ratio is 2x and the other is 4x, it makes sense to figure out why investors are willing to pay more for the company with a P/S of 4x. The P/S ratio is a great tool because sales figures are considered to be relatively reliable while other income statement items, like earnings, can be easily manipulated by using different accounting rules.

Introduction to Business Modelling - CS Professional Study Material

(d) Price-to-Book Ratio (P/B):
What you need: Balance Sheet, Most Recent Stock Price The formula: P/B Ratio = Price per Share / Book Value per Share What it means: Book value (BV) is already listed on the balance sheet, it’s just under a different name: shareholder equity. Equity is the portion of the company that owners (i.e. shareholders) own free and clear. Dividing book value by the number of shares outstanding gives you book value per share.

Like P/E, the P/B ratio is essentially the number of dollars you’ll have to pay for $1 of equity. And like P/E, there are different criteria for what makes a P/B ratio “high” or “low.”

(e) Dividend Yield:
What you need: Income Statement, Most Recent Stock Price The formula: Dividend Yield = Dividend per Share / Price per Share What it means: Dividends are the main way companies return money to their shareholders. If a firm pays a dividend, it will be listed on the balance sheet, right above the bottom line. Dividend yield is used to compare different dividend-paying stocks. Some people prefer to invest in companies with a steady dividend, even if the dividend yield is low, while others prefer to invest in stocks with a high dividend yield.

(f) Dividend Payout Ratio:
What you need: Income Statement
The formula: Dividend Payout Ratio = Dividend / Net Income

What it means: The percentage of profits distributed as a dividend is called the dividend payout ratio. Some companies maintain a steady payout ratio, while other try to maintain a steady number of dollars paid out each year (which means the payout ratio will fluctuate). Each company sets its own dividend policy according to what it thinks is in the best interest of its shareholders. Income investors should keep an especially close eye on changes in dividend policy.

Introduction to Business Modelling - CS Professional Study Material

2. Profitability Ratios: Profitability ratios tell you how good a company is at converting business operations into profits. Profit is a key driver of stock price, and it is undoubtedly one of the most closely followed metrics in business, finance and investing.
(a) Return on Assets (ROA):
What you need: Income Statement, Balance Sheet The formula: Return on Assets = Net Income / Average Total Assets What it means: A company buys assets (factories, equipment, etc.) in order to conduct its business. ROA tells you how good the company is at using its assets to make money. For example, if Company A reported $10,000 of net income and owns $100,000 in assets, its ROA is 10%. For ever $1 of assets it owns, it can , generate $0.10 in profits each year. With ROA, higher is better.

(b) Return on Equity (ROE):
What you need: Income Statement, Balance Sheet
The formula: Return on Equity = Net Income / Average Stockholder /Equity
What it means: Equity is another word for ownership. ROE tells you how good a company is at rewarding its shareholders for their investment. For example, if Company B reported $10,000 of net income and its shareholders have $200,000 in equity, its ROE is 5%. For every $1 of equity shareholders own, the company generates $0.05 in profits each year. As with ROA, higher is better.

(c) Profit Margin:
What you need: Income Statement
The formula: Profit Margin = Net Income / Sales
What it means: Profit margin calculates how much of a company’s total sales flow through to the bottom line. As you can probably tell, higher profits are better for shareholders, as is a high (and/or increasing) profit margin.

Introduction to Business Modelling - CS Professional Study Material

3. Liquidity Ratios: Liquidity ratios indicate how capable a business is of meeting its short-term obligations. Liquidity is important to a company because when times are tough, a company without enough liquidity to pay its short-term debts could be forced to make unfavourable decisions in order to raise money (sell assets at a low price, borrow at high interest rates, sell part of the company to a vulture investor, etc.).
(a) Current Ratio:
What you need: Balance Sheet
The formula: Current Ratio = Current Assets / Current Liabilities What it means: The current ratio measures a company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the frm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable to unexpected bumps in the economy or business climate.

(b) Quick Ratio:
What you need: Balance Sheet
The formula: Quick Ratio = (Current Assets – Inventory) / Current Liabilities
What it means: The quick ratio (also known as the acid-test ratio) is similar to the quick ratio in that it’s a measure of how well a company can meet its short-term financial liabilities. However, it takes the concept one step further. The quick ratio backs out inventory because it assumes that selling inventory would take several weeks or months. The quick ratio only takes into account those assets that could be used to pay short-term debts today.

4. Debt Ratios: These ratios concentrate on the long-term health of a business, particularly the effect of the capital and finance structure on the business.
(a) Debt to Equity Ratio:
What you need: Balance Sheet
The formula: Debt-to-Equity Ratio = Total Liabilities / Total Shareholder Equity

What it means: Total liabilities and total shareholder equity are both found on the balance sheet. The debt-to equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Generally speaking, as a firm’s debt-to-equity ratio increases, it becomes more risky because if it becomes unable to meet its debt obligations, it will be forced into bankruptcy.

(b) Interest Coverage Ratio:
What you need: Balance Sheet
The formula: Debt-to-Equity Ratio = Total Liabilities / Total Shareholder Equity

What it means: Total liabilities and total shareholder equity are both found on the balance sheet. The debt-to equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Generally speaking, as a firm’s debt-to-equity ratio increases, it becomes more risky because if it becomes unable to meet its debt obligations, it will be forced into bankruptcy.

Introduction to Business Modelling - CS Professional Study Material

(c) Interest Coverage Ratio:
What you need: Income Statement
The formula: Interest Coverage Ratio = EBIT / Interest Expense

What it means: Both EBIT (aka, operating income) and interest expense are found on the income statement.
The interest coverage ratio, also known as times interest earned (TIE), is a measure of how well a company can meet its interest payment obligations. If a company can’t make enough to make interest payments, it will be forced into bankruptcy. Anything lower than 1.0 is usually a sign of trouble.

5. Efficiency Ratios: These ratios give investors insight into how efficiently a business is employing resources invested in fixed assets and working capital. It’s can also be a reflection of how effective a company’s management is.
(a) Asset Turnover Ratio:
What you need: Income Statement, Balance Sheet
The formula: Asset Turnover Ratio = Sales / Average Total Assets

What it means: Like return on assets (ROA), the asset turnover ratio tells you how good the company is at using its assets to make products to sell. For example, if Company A reported $100,000 of sales and owns $50,000 in assets, its asset turnover ratio is 2x. For ever $1 of assets it owns, it can generate $2 in sales each year.

(b) Inventory Turnover Ratio:
What you need: Income Statement, Balance Sheet
The formula: Inventory Turnover Ratio = Costs of Goods Sold / Average Inventory

Introduction to Business Modelling - CS Professional Study Material

Question 6.
Explain the various types of business models.
Answer:
Types of Business Models
There are nine business models for a start-up business. They are as follows-

  1. Become The Middleman (AKA The “Warby Parker” Model)
  2. Become A Marketplace
  3. The Subscription Model
  4. Customized Everything
  5. On-Demand Model
  6. The Modernized Direct Sales Model
  7. Freemium Model
  8. Reverse Auction
  9. Virtual Good Model

1. Become The Middleman (AKA The “Warby Parker” Model):
Warby Parker had the simple idea back in 2010 we all wish we would have thought of first. They decided to enter the eyewear market, noticing that the market was monopolized by Luxottica, who basically control the price of designer eyewear. With the price bar set high, Warby Parker saw huge opportunity in the market, and realized that because most brands sold the rights to huge companies like. Luxottica that drastically increased their manufacturing and design costs,

2. Become A Marketplace:
One of the ever growing business models that continues to prove highly effective is becoming a marketplace. This means you are simply bringing supply and demand together. Air BNB reigns as one of the top success stories to implement this business model well. I’m guessing you thought renting rooms from random people’s homes via the internet was pretty creepy when you first heard the idea. We did too, but the AirBNB founders believed in the new “sharing economy”.

Introduction to Business Modelling - CS Professional Study Material

Why It Works:
There are several advantages to using this type of business model. First, one of the greatest benefits is having zero to little overhead, and no inventory. You can get a swanky office space if you want, or you can run the company virtually. When you manufacture a product, you take on a lot more risk and pressure to make sure that inventory is sold. When you are the marketplace, instead of worrying about manufacturing costs, you are simply bringing the sellers to the buyers (and vice versa) and facilitating a transaction, taking a small slice of the pie from each transaction. You give sellers a place to make a profit and reach consumers, while customers are happy to find exactly f what they want, usually at a discounted price.

Others Who Have Followed:
Amazon is one of the leaders of this business model, creating a marketplace for those who wish to sell items, and those who wish to buy them at a better price. Raise is a C2C gift card market, that a supply of discounted gift cards from sellers who would rather have the cash to spend as they pleaise. Beast is another example of a marketplace that connects high level’consultants for the millennial era with clients looking to outsource unmet needs in their business.

3. The Subscription Model :
Mobile payments continue to rise in popularity, and consumers are trending towards a more simple, hassle-free kind of shopping experience. These trends are leading towards explosive growth in subscription based services that consumers can easily set up, and then not worry about, knowing they will receive their product or service every month. Dollar Shave Club is one of those simple subscription services that made it much easier for men (and now women) to not worry about running out of razors, and save money. Add in some crazy, well messaged commercials with a hilarious spokesperson, and you have a brand who continues to double and even triple revenues annually.

Why It Works:
This business model provides an optimal balance of value to both the startup and the customer. It’s simple and convenient for customers, and take a lot of thinking out of the purchasing process. Customers know they will receive their product every month around the same time, don’t have to worry about reorders, and know they will get a set, flat rate that will stay within a budget.

Others Who Have Followed:
We all know Netflix revolutionized the way we consume TV shows and movies with it’s very affordable monthly subscription service. Spotify did the same thing for the way we consume music, by providing consumers the means to listen to virtually any song they’d like for a small monthly subscription. SkillShare, an edtech startup, initially started where consumers would buy educational content a la carte, but has pivoted to a monthly subscription model to access their content which has proved to work better for them. Of course there is also the subscription box trend that has reigned the past few years, like BirchBox, which provides samples of high end beauty products to consumers for a low monthly subscription.

Introduction to Business Modelling - CS Professional Study Material

4. Customized Everything:
The fashion industry is dominating the customization trend that aligns with a consumer shift towards more personalized goods that reflects their specifc tastes. This is the reason Coke added names to their bottle packaging, automotive manufacturers make cars in any color you want, and massive retailers like Nike allow you to design your own custom sneakers. Custom-tailoring in the clothing sector has been on the rise, and services like Indochino and Black Lapel have taken the market by solving this problem for men’s suits.

Why It Works:
A rising percentage of the population is interested in build-to-order products and is willing to spend 25% more according to a study by Mashable.com for products built specifically to their needs. Production time and lowering costs of customization configurators also bring much more potential to the market, compared to previous years.

5. On-Demand Model :
As the world speeds up, consumers have a adopted a preference for instant gratification. The on-demand economy has a growing appetite for greater convenience, speed, and simplicity. Smartphones have driven transformational shifts in how we consume goods and services, and many consumers have become acclimated to purchasing at the press of a button. On-demand startups like Uber are shaking up their industries, and also provide stead contracted work for consumers who want to become solo-preneurs.

Why It Works :
The on-demand market leaders today know that this successful model is much more cost-effective, scalable, and more efcient that it’s ever been. The model allows a startup to leverage new technology, while utilizing existing infrastructures. Another benefit lies in the use of freelance labor with its obvious advantages in cost cutting. There has also been an influx of VC belief and capital in this revenue model.

Others Who Have Followed:
Spothero is a startup that provides parking on-demand when you are on your way to an event or into the city. Another growing startup in the space is Postmates who provide a local, ondemand delivery of goods. Glamsquad is providing on-demarid services for the beauty industry, and Washio provides the same service for the dry cleaning and laundry sector.

Introduction to Business Modelling - CS Professional Study Material

6. The Modernized Direct Sales Model:
Direct sales companies like Avon and Amway understand there is a big business opportunity in the model. In 2009, direct selling accounted for $117B in sales worldwide, Chloe + Isabel, a fashion jewelry startup, is reinventing the direct sales model by appealing to fashion forward students who have tuition to pay and others who are unable to secure full-time employment.

Why It Works:
This model is perfect for today’s economy where people are more willing than ever to supplement their income, and seek new career paths. With unemployment still high, and more companies offering supplemental income opportunities, this model continues to rise in popularity. Another reason is that social media allows sellers to reach more people than ever, increasing their success as merchandisers, and bringing in higher revenues for the company. Finally, software available now has dramatically improved productivity and flow for direct sales reps.

Others Who Have Followed:
Sequoia-funded newcomer, and another jewelry and accessories startup Stella & Dot has found massive success in using this type of business model. Trumaker, is also finding success with this model in the mobile men’s apparel space and call their direct sellers “Outfitters”.

Introduction to Business Modelling - CS Professional Study Material

7. Freemium Model:
This combination of “free” and “premium” has become a widely used approach amongst startups over the last decade. Broken down, the model offers a basic service to consumers for free, while charging for premium services (advanced features and perks) to paying members. Linkedin is one of the best examples of a successful freemium model, with the free version letting users share professional profiles, while the premium offerings are talent solutions and premium subscriptions with added features.

Why It Works:
One of the greatest advantages to a freemium strategy lies in its ability to be a marketing tool for your service, which helps early stage startups scale by attracting a user base without costly ad campaigns. Freemium models also tend to be more successful that 30-day free trials and other offers like that. Customers are much more comfortable with accessing a service for free, and the no strings attached feeling that comes with before deciding to make a purchase.

Others Who Have Followed:
Dropbox, Hulu, and Match.com are all very popular services that have adopted a successful freemium model. Dating app Tinder has also adopted a freemium model, offering exclusive features to users who pay a low monthly fee. Survey service PollDaddy, video sharing service Vimeo, and photo sharing service Flickr are all members of the freemium model group as well.

Introduction to Business Modelling - CS Professional Study Material

8. Reverse Auction:
This type of model is the reverse of Ebay where the buyers switch roles with the sellers. Buyers who care about price offer bids for a service to the seller,s and if the seller accepts the bid, the buyer must agree to all of the seller’s terms and conditions. Sellers benefit *rom access to a marketplace, while the buyers feel like they are getting a great bargain. One of the most successful implementations of this model is Priceline, where travelers give up convenience for low prices on airline tickets, rentals, and other travel accommodations. Priceline provides a win-win marketplace for it’s B2C marketplace, and because of that has seen significant revenue growth.

Why It Works:
Price sensitive buyers feel great, because they feel good about the deal they won, while the company also wins by facilitating the deal with its sellers who get access to a marketplace and are still making a profit on inventory that might not have sold otherwise.

Others Who Have Followed:
FedBid allows government agencies to use the reverse auction model to award contracts to businesses. Stayful uses the model to help boutique hotels fill unsold inventory which would otherwise go to waste. Squeezify uses this model for freelance work, and MyHammer has found success with the business model helping consumers receive quotes from service experts.

Introduction to Business Modelling - CS Professional Study Material

9. Virtual Good Model:
We all know the game Candy Crush and its addictive qualities that have wasted more hours than most of us are willing to share. Candy Crush understands the power of the virtual good model, and made a ton of its revenues for digital products like extra lives or features like a “color bomb”. Virtual goods are online only products users pay for normally in games or apps such as upgrades, points, gifts, or weapons. The app Hot or Not used this model well by allowing its users to send virtual roses to other users costing between $2 to $10, and the game Clash of Clans has users that spend thousands of dollars each month on their in-app purchases.

Why It Works:
One of the greatest advantages of virtual goods are the high margins, since they cost only what the bandwidth required to serve them does. The objects sold create real value for consumers, for example, in a game, buying a sword adds to the real fun people are having playing a game. Market liquidity continues to increase as more gamers live in virtual worlds. Virtual goods are also more increasingly becoming a way for people to show affection and meaning as we continue moving more into an app obsessed world.

Others Who Have Followed:
Facebook added this revenue model to its social aspect by allowing users to give virtual gifts to one another. Other startups like Acclaim Games, Meez, and Weeworld have also implemented virtual goods from the gaming aspect.

Introduction to Business Modelling - CS Professional Study Material

Question 7.
Discuss the features of a Sustainable Business Model.
Answer:
Features of a Sustainable Business Model
Whatever be the business model, sustainability should be at its core, otherwise a business cannot be successful. In light of this, the ensuing paragraphs discuss about the features of a sustainable business model.

1. Diversity :
The firm needs a diverse set of resources, people and investments to be resilient. While diverse investments are seen to draw on resources and absorb managerial attention, a single line of business, single source of revenue, or people with similar mindsets can expose the firm to greater risks. Firms can no longer simply ‘stick to the knitting’.

2. Modularity :
Matrixed organizations are often seen as facilitating knowledge flows. However, such organizations are not only resource intensive, they expose the whole organization to shocks as they reverberate through the organization. Organizations need to be less interdependent, and focus on modularity, so they can be insulated from shocks.

3. Openness :
Resilient firms must know what’s going on outside their boundaries. These firms can sense issues on the horizon. They are constantly monitoring the external environment, and drawing scenarios of possible futures. They expect not only to react to those potential futures, but also help to shape them. The link between the organization and the external business and natural environment is vital, permeable, and acquiescent.

4. Slack resources :
In an era of just-in-time production, slack resources are often seen as costly and wasteful. However, innovation and adaptation requires both financial and creative investments, and the space to change direction. Firms that can ride storms must allow for a little more time to accommodate new ideas, scenarios, and shifts in thinking.

Introduction to Business Modelling - CS Professional Study Material

5. Matching cycles :
Firms often think about optimizing performance and getting more from less. But, these thinking puts firms on a treadmill, doing the same thing faster every day and, it has them bumping up against resource constraints. Resilient businesses think, not about constant growth, but rather about cyclical processes: cycles of growth and contraction, cycles of production, and cycles of consumer purchase patterns. Understanding the rhythms of business and the environment will allow the frm to synchronize with them meaningfully, and not overreact to what is likely just a cycle. These ideas need to developed and tested. But, they offer a starting place for dialogue for a 21st century business model based on sustainability.

6. Identify your specific audience :
Targeting a wide audience won’t allow your business to hone in on customers Who truly need and want your product or service. Instead, when creating your business model, narrow your audience down to two or three detailed buyer personas. Outline each persona’s demographics, common challenges and the solutions your company will offer. As an example, Home Depot might appeal to everyone or carry a product the average person needs, but the company’s primary target market is homeowners and builders.

7. Establish business processes :
Before your business can go live, you need to have an understanding of the activities required to make your business model work. Determine key business activities by first identifying the core aspect of your. business’s offering. Are you responsible for providing a service, shipping a product or offering consulting? In the case of Ticketbis, an online ticket exchange marketplace, key business processes include marketing and product delivery management.

Introduction to Business Modelling - CS Professional Study Material

8. Develop a strong value proposition :
How will your company stand out among the competition? Do you provide an innovative service, revolutionary product or a new twist on an old favourite? Establishing exactly what your business offers and why it’s better than competitors is the beginning of a strong value proposition. Once you’ve got a few value propositions defined, link each one to a service or product delivery system to determine how you will remain valuable to customers over time.

9. Determine key business partners :
No business can function properly (let alone reach established goals) without key partners that contribute to the business’s ability to serve customers. When creating a business model, select key partners, like suppliers, strategic alliances or advertising partners. Using the previous example of Home Depot, key business partners may be lumber suppliers, parts wholesalers and logistics companies.

10. Leave room for innovation :
When launching a company and developing a business model, your business plan is based on many assumptions. After all, until you begin to welcome paying customers, you don’t truly know if your business model will meet their ongoing needs. For this reason, it’s important to leave room for future innovations. Don’t make a critical mistake by thinking your initial plan is a static document. Instead, review it often and implement changes as needed.

Introduction to Business Modelling - CS Professional Study Material

Question 8.
Write a detailed note on Business modelling.
Answer:
Significance of a Business Modelling
The importance of business modelling can be understood by perusing the eye-catchy benefits of business process modelling.
1. Align Operations with Business Strategy: Implementing a business strategy or a new business model requires changes in the operations and in how people perform their work. This can be affected only by operationalising the business changes to the actual business processes, business rules and decisions that are made on a day to day basis by all the people in the organization.

Business Process Modelling facilitates this by helping:
Link organizational strategy to well-defined business processes – Business process modelling is a critical tool for management and executives to ensure that the business processes are consistent with and enable execution towards achieving the overall strategy of the organization.

Align business execution and operation activity with strategy – Process modeling ensures that the operational tasks and activities performed by the team members actually help the organization to implement its strategy. If the processes and the strategy are not aligned it usually leads to failure in execution because even if the operational tasks are performed correctly, the overall organizational goals are not achieved.

Implement Business Process Reengineering (BPR) by understanding the existing processes and changing them for improved performance – Business process analysis helps in identifying bottlenecks and inefficiencies in the processes and thus improving them.

Enable Process Agility, an ability to change and communicate processes quickly to take advantage of new business opportunities or address business challenges.

Introduction to Business Modelling - CS Professional Study Material

2. Improve Process Communication : One area that distinguishes successful businesses and teams is that they have a very clear idea of what they are supposed to do, how they are supposed to do it and what is the exact role of every team member. Clear communication of the operational processes is critical to facilitate a smooth functioning of a team.

Business Process Modelling enables the documenting and communicating of the organizations business processes:

  • Process modelling offers a common unified language and methodology for communicating processes and information about processes and decision rules.
  • It is ideal for training of new people and rapid knowledge transfer because with a thoroughly documented process any new team member can be very quickly trained on what they have to do in any situation that they may face.
  • Minimizes potential danger of loss of staff resulting in loss of business process knowledge.
  • It helps business managers communicate their ideas quickly and clearly.
  • Jump-starts the organizational process documentation initiative.
  • Turns the team’s experience and “tribal knowledge” into documented processes.

Introduction to Business Modelling - CS Professional Study Material

3. Increase Control and Consistency: Organizations and companies that succeed are ones that ensure their business processes and rules are well designed and that they are consistently applied the same way every single time. This process control and consistency is key for success in organizations ranging from fast-food chains to hospitals to NASA Space Shuttle operations.

Business Process Modelling makes this possible by helping:

  • Formalize existing processes which may not be well documented or which have evolved over time into “informal knowledge”.
  • Execute process in consistent manner because instead of relying on people to remember to do the right thing the documented process can be given to the business users.
  • Make better decisions because guesswork is eliminated as business users can have the documented business rules in front of them.
  • Handle exceptions faster and in a better way.
  • Complete regulatory compliance by ensuring that the documented processes follow the company guidelines and legal regulations.
  • Put business people in charge.

Introduction to Business Modelling - CS Professional Study Material

4. Improve Operational Efficiencies: In today’s business environment, every business and every manager wants to ensure that they are achieving the best possible results with the resources available to them. There is no room for inefficiencies and wastage. The Process simulation and analysis steps of Business Process Modelling are critical tools for managers and analysts to ensure that their processes are optimized and are running like a well-oiled machine:

  • Process Simulation allows analysis and understanding of the process flows and helps managers know if there is room for further optimization and efficiencies.
  • It helps spot needed improvements and reduce process cycle time.
  • It increases productivity of existing resources and staff and so allows the team to do more with less.
  • It facilitates risk free experimentation and encourages exchange of process improvement ideas.
  • Process simulation allows modelling of process designs before actually implementing them thus minimizing disruptions.

5. Gain Competitive Advantage: All the benefits mentioned above lead to a significant competitive advantage for an organization that has invested the time and effort to document, simulate and improve its Dusiness processes. Studies of many wildly successful companies has often shown that their success was not due to better ideas or better business models but because they invested significantly in business process modeling to constantly refine and improve their processes.

Leave a Comment

Your email address will not be published. Required fields are marked *