A business model is defined as the way by which a company is able to generate revenue and make profit from the operational activities. There are two components of the business model of any company. These two are the price and the costs. A company has the chance of raising the prices of the products or getting the inventories at a reduced cost. Both these actions have the chance of enhancing the gross profit. Business model is also defined as a term of art. Various types of business models are suited for various types of businesses. It also defines the way through which a company is able to sell its products to the customers. It gives a description about how a business is able to create, deliver and capture value.
An established enterprise whether it is implicitly or explicitly, employs a certain business model that that gives a detailed idea about the architecture of creating value for the customers, proper delivery of the products and the capture mechanisms (Teece 2010). The different business models help to classify and describe businesses that assist the creative managers (Baden-Fuller and Morgan 2010). Most of the successful companies are in dilemma now about what to do and how to formulate strategies for future (Drucker 1994).
There are various types of business models, which the companies follow. The basic categories are manufacturer, retail outlet, and franchise and distributor model.
A manufacturer is responsible for the accumulation of raw materials and creation of the product (Hawken, Lovins and Lovins 2013). This business model is also applicable for the companies that usually assemble products from the premade parts. For example, Dell Computers can be considered as a manufacturer as it assembles the computers from different parts made by different companies. A manufacturer always chooses to represent the products directly to its customers or it has the option of outsourcing the sales to other companies. I feel that a manufacturing model is very popular in the world and is capable of earning a lot of revenue.
Distributor is that type of business model that purchase the products directly from the manufacturers in order to resale the products to the retail outlets or directly to the consumers (Varley 2014). For example, a retail distributor would purchase the retail items from the manufacturer of the retail products and sell them wholesale to the retail outlets for the sale to the final consumers. Another example can be the distributorship of an auto dealer who deals with new cars has the chance of purchasing the vehicles from the manufacturers directly and selling them to the final consumers. According to me, companies having distributor model must have strong distribution channel to succeed in the business.
A retail outlet is concerned with purchasing products from either a distributor or a wholesaler (Christopher 2016). Finally, it sells the products to the general customers or the various corporate end users. Retail is also a booming model for many companies who are responsible for the final delivery of the product to the end consumers.
The franchise model is completely different from the other three models. A franchise can be a manufacturer, retail outlet or a distributor (Kalnins 2016). The type of the business model that a company follows, rely on the type of the business it is doing and it has an additional advantage of the franchise company. This business model also incorporates the main types of the business models in the own structure. There is also a provision of directly purchasing a franchise from the franchising company or it can be bought from the master franchise distributor that has the license of selling the franchises in any region.
There can be various ways of structuring the business model that fall under the four business models. A company has the chance of dealing with the customers directly through the internet without the engagement of any intermediaries. A company may also integrate a physical as well as the presence of online. There is another Freemium business model that works through the offering of basic web service or a product for free while charging more for any special features. Online auction is also an option, which is held over the internet. Direct selling to the customers is another option that helps to demonstrate the products in the home of the customers. The cosmetics and the jewellery companies use this business model. Low cost strategy is another business model strategy that the companies adopt to get the competitive advantage. IKEA is a good example of the low cost business strategy model.
IKEA has a frugal business model (Steenkamp 2017). The key partners of IKEA are the wood makers or the harvesters, the manufacturing firms, transport and trucking firms, the logistics companies and the outfitting firms. The company has maintained a price leadership throughout to get the competitive advantage and still maintaining the same standard of the furniture.
Established companies usually do not adopt the low pricing strategies as they try to commoditize the offerings and bring down the margin (Kim and Mauborgne 2014). The retailer IKEA uses the low pricing strategy business model to fulfill the mission of the company, serve the loyal customers and sustain the profitable growth. The company offers a wide range of functional home furnishing products at very low prices that will be affordable to all.
The key pillars of the business model of IKEA include some factors that are discussed. Most of the retailers make use of the designs to make justification of the higher prices. The designers of IKEA work in an opposite manner than most of the retailers. The products of IKEA have functional needs and a targeted price with innovative manufacturing processes for the creation of functional products. IKEA maintains low prices by empowering the customers to help them in making the purchase decisions by themselves. Customers find it easy to choose the right products with all the required specifications. IKEA has frugal supply chain, rich customer experience and inexpensive designs. The business model helps the company to focus on the creation of products that will improve the homes and lives of the customers. It has also built an effective supply chain.
The products of IKEA are designed that can be useful for the masses. The design process is made to combine the quality, function, form, sustainability and low price as well. IKEA has labeled the combinations of these goals as democratic designs. These have helped them to gain the competitive advantage. Pieces are designed in such a way that it can cut down the cost of the suppliers to make it easy for the customers to assemble.
There have been long-term relationships of the company with the suppliers. The business of IKEA helps the company to work closely with the suppliers starting from the sourcing of wood to the actual designs of the product. High volume of ordering of the company helps them to keep the costs of the products much lower than that of the competitors. The team of IKEA works diligently in the creation of upscale design ideas that go to the suppliers directly for collaboration on low cost version.
The business model of the company is such that the logistics of the company is very good. The goods are well packaged and economically packed for shipping. All the packages are very flat that allow for lower shipping costs. The customers also find it easy to pick the items in the store and taking them home in the pallets that save spaces.
The business model of IKEA is based on the manufacturing of aesthetically pleasing goods that are sold at very low prices. The logistics of the company put the focus on the adoption of cost cutting measures. Thus, there is no individual driver for the success of IKEA. The integration strategy of the company makes it difficult for the competitors in terms of design or price and enables IKEA to remain at the top of the target market.
Adopting a cost-leadership strategy has lot of advantages. It gives competitive advantages in dominating a market. A frugal company culture is developed due to the decrease in the costs (Davidson, Dey and Smith 2015). If the company is able to maintain a balance between maintaining the quality and lowering the costs, frugal culture helps in creating a permanent change. Another advantage can be the development of the economies of scale. The development of the economies of scale helps a business to optimize profits by increasing the efficiency of their operations. The leaders of the companies following the cost leadership model may have the chance of drawing up techniques for reducing the costs and increasing efficiency.
The con of lower cost business model may be lowering the quality of the products. The number of customers that can be reached may be drastically reduced. Employee retention thus may have the chance to lower. The need for high volume of sales is a disadvantage of the cost-reduction business model (Matzler et al. 2013). The markets that are highly fragmented and involve a lot of loyalty of brands, may not become a place of opportunity for the companies adopting the cost leadership strategy to attract the customers. Customers may be willing to pay more to enjoy the brand of products they like because of the quality. Companies adopting this strategy tend to cut down costs by reducing advertising, research and development and market research. This also has the chance of reducing the number of customers.
IKEA may follow the business model of franchising. Since the company has gained enough popularity in the market, franchising can be a very good option for them. Franchising has become an impressive model in many parts of the world. It also has the contribution in the national economies being assisted by the divestment programs. Researches have revealed that the failure rate of franchising is less than that of the conventional startups. IKEA is already an established retail company, which does not require any start up programs. It will be easier for them to spread in many areas through franchising where their presence is very low. For this model, the company needs to strengthen their distribution channels or the logistics systems to enter into the places where they lack their presence. Lack of the presence has hindered their growth and less increment of revenue.
IKEA must take into account the ten significant elements of franchising business model that are described in the figure above. IKEA must look into the operational activities, inventory management, training of the new staffs, new legal issues, marketing of the products, distribution channels, sales and development of the franchise and the finance.
Franchising business model has many advantages. Since the company is very popular, it can go for franchising as the risk of failure in business is reduced by franchising. It is a very successful business model than any other models. The products and services of a company already have a strong market share. So, it becomes easy for them, as no further testing with the products is needed. Since the brand is very recognized, it does not need any intense marketing for the new franchise. The franchise gets the support of the franchisor that includes a complete package of training and support of establishing the business. Franchising also helps in the way that no prior training is needed for the staffs that are joining in the new business location. It becomes easier in sharing information and ideas and receives the support of the franchisor. No new relationships with the suppliers are needed.
Franchising also has some disadvantages that the companies must keep in mind. Initial costs may be higher that will include the cost of purchasing the franchise. If the franchisor goes out of the business, then the franchise may fall in trouble of continuing the business (Grace et al. 2016). Good performance of the of the other brands may create a bad reputation for the one who is not doing so well. The profits earned are usually shared among all the franchises. This can demotivate the employees of the franchise doing well. Since IKEA is a well-known franchise, buying a well-known franchise is very much expensive. Those who will buy the franchise need a lot of investment. Not all the franchise of a brand may have the chance of getting the same support. Taking the franchise of a well-known brand also incurs a regular cost.
I have made an analysis about the different business models and come to know about their benefits and disadvantages. This will help me in the future when I join any company as a manager when I will need to formulate strategies or make business plans. I have come to know about the different business models like franchising, retail outlet, low cost, manufacturer and distributor that gave me an insight into how a company formulates these strategies according to their strengths and various other factors. Franchising helps both the seller and the customers as far as I have learnt. There is a high chance of success for the companies in franchising than in the sole proprietorship. I have analyzed and realized that there are several advantages of franchising like requirement of short time to open, the power of selling of products from a known brand, reduction of costs through group purchasing and established business model reusability.
Other factors are lead generation of customers through campaigns and websites; national as well as regional advertising campaigns and receive moral support through the intranet of the company. Some disadvantages of franchising are also there like there is very less independence and company-wide promotions that may not work in certain markets. I have inferred that retail outlet is another important business model. The manufacturing business model is also an important business model which many companies follow. The companies following this model are having huge pressure because of globalization and the increased volatility of the markets. The most important aspect that I have come to know during the analysis of the business models is that a business model forms the core of the competitive forces that helps a company to get success in the competitive market by defining the value propositions, resources, knowing the customers and profits with the related operation. The importance of the products and services has allowed the manufacturing companies to achieve stable relationships with the customers. The distributor model helps to understand the distribution and logistics system of a company. The advantages of the cost leadership model help to understand how the companies are formulating their strategy of maintaining the quality of the products in spite of low cost. The business model of IKEA has helped to know how a company can derive advantages from the low cost strategy.
The importance of business model depends on a number of factors like how much the business model must change based on the changes in the environment and whether the company needs market entry or creation of new market. The organizations may gain more advantages if they develop their distribution channels and the overall logistics systems in case of distributor business model. In the case of the low cost business model like IKEA, the companies must focus on the quality of the products since lowering the cost reduces the quality of products and services in most of the cases and customers have the chance switch to the products of the competitors.
I have made a detailed analysis of the different business models and have to know about which companies are using which business model. The advantages and disadvantages of the different models of business helped me in to gain an insight into how the different business models can provide advantages to the organizations. I have learnt from the analysis of the business model of IKEA that price-leadership model is very useful for any company provided the quality of the products are maintained to retain the customers. If I become a manager of any company in the future, I shall keep in mind all these things and the disadvantages that the different models have. The different models help to understand the business scenarios where to apply the models. The importance of manufacturing and retail outlet has been considered. If I get engaged in any business, then the concept of franchising will help me to analyze the situation and progress accordingly. The analysis shall help in the course of life as well as in the academic course as well. Retail outlet is the initial stage of setting a business.
Franchising shall come after the business is established. This can be in the case of a family business. The strategic elements of a business need to considered very minutely for its success. The strategy of cost leadership of IKEA has shown that in spite of keeping the price of the products very low and maintaining the quality, the company is able to maintain a good distribution channel and logistics system that helps the customers to get the products very quickly. This implies that though a company is following particular model, some aspects of other models are incorporated for the effective operations of an organization or conglomerate. After the detailed analysis, I have come to know that if I start a franchise of an established company, then I need to put a lot of investment and the recurring cost is also very high. When I join any company as a manager, there are lot of things I need to consider. I need to have a good relationship with the suppliers so that starting a new franchise would not be a problem. If I become a marketing manager in the future, I need to look into the distribution channels of whether it is of any retail outlet or any manufacturing company or may it be any franchise. Distribution channel becomes an integral part of any business plan. The significant factors shall help me in the future in various ways, in my personal as well in my professional life.
References
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Christopher, M., 2016. Logistics & supply chain management. Pearson UK.
Davidson, R., Dey, A. and Smith, A., 2015. Executives’“off-the-job” behavior, corporate culture, and financial reporting risk. Journal of Financial Economics, 117(1), pp.5-28.
Drucker, P.F., 1994. The theory of the business. Harvard business review, 72(5), pp.95-104.
Grace, A.R., Frazer, L., Weaven, S.K. and Dant, R.P., 2016. Building franchisee trust in their franchisor: insights from the franchise sector. Qualitative Market Research: An International Journal, 19(1), pp.65-83.
Hawken, P., Lovins, A.B. and Lovins, L.H., 2013. Natural capitalism: The next industrial revolution. Routledge.
Kalnins, A., 2016. Pricing Variation Within Dual-Distribution Chains: The Different Implications of Externalities and Signaling for High-and Low-Quality Brands. Management Science.
Kim, W.C. and Mauborgne, R.A., 2014. Blue ocean strategy, expanded edition: How to create uncontested market space and make the competition irrelevant. Harvard business review Press.
Matzler, K., Bailom, F., Friedrich von den Eichen, S. and Kohler, T., 2013. Business model innovation: coffee triumphs for Nespresso. Journal of Business Strategy, 34(2), pp.30-37.
Steenkamp, J.B., 2017. Customer Propositions for Global Brands. In Global Brand Strategy (pp. 45-73). Palgrave Macmillan UK.
Studyabroadlife, 2015. Own Your business profit franchise overseas education consultancy [online] Available at: https://www.studyabroadlife.org/business-profit-franchise-overseas-education-consultancy/ [Accessed 19 June 2017]
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