1. BUSINESS M O D E L S A STRATEGIC MANAGEMENT A P P R O A C H ALLAN AFUAH

2. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved Chapter Introduction and Overview 1

3. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-3 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.

4. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-4 Determinants of Profitability (1 of 5) Industry Factors Firm-Specific Factors

5. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-5 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 ROA 1.Pharmaceuticals25.87%10.27% 2.Chemicals and allied products21.707.88 3.Food and kindred products24.787.25 4.Printing and publishing16.306.68 5.Rubber and miscellaneous plastic15.076.25 6.Fabricated metal products19.005.58 7.Paper and allied products13.774.70 8.Electronics and electrical equipment (no computers)9.634.67 9.Nonferrous metals10.394.23 10.Machinery, except electrical15.693.80 11.Petroleum and coal products13.253.76 12.Textile mill products5.113.71 13.Aircraft, guided missiles, and parts14.023.57 14.Stone, clay, and glass products9.163.44 15.Motor vehicles and equipment11.913.16 16.Iron and steel6.403.14 17.Airlines (transportation by air)2.682.05 Determinants of Profitability (2 of 5) Table 1.1 Industry Profitability, 1981-2001

6. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-6 Firm ROAFirm ROA PharmaceuticalsAirlines Bristol Myers Squibb13.71%Southwest Airlines4.85% Merck13.37AMR1.51 Schering Plough12.89Delta Airlines1.50 WYETH American Home Products12.52UAL0.96 Eli Lilly10.23US Air0.31 Pfizer9.66America West Holdings-3.27 Pharmacia & Upjohn7.98Continental Airlines-4.97 American Cyanamid3.57TWA-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.

7. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-7 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

8. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-8 Figure 1.1 Determinants of Profitability (5 of 5)

9. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-9 Components of a Business Model (1 of 2) Positions Resources Industry Factors Costs

10. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-10 Figure 1.2 Components of a Business Model (2 of 2)

11. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-11 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.

12. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-12 Relationship between Business Models and Strategy Strategy and Operational Effectiveness Strategy and Implementation Corporate- and Business-Level Strategy

13. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-13 Organization of this Book

14. Irwin/McGraw-Hill Copyright © 2004 The McGraw-Hill Companies. All Rights reserved 1-14 Questions Introduction and Overview