are free to homeowners because the advertisers pay (revenue stream).
While they identified a variety of business model patterns, such as the long-tail business (think Amazon.com and its broad portfolio of products), multisided platforms (think pay-walled or physical newspapers that sell subscriptions to readers and ads to advertisers), and freemium models (e.g., free-to-play mobile games that then sell virtual goods), the first pattern that they identify is based on this primary division into value disciplines or unbundled corporation components: basically operations/infrastructure/processes, products/services, and relationships.53
Michael Porter and Competitive Advantage
Another model worth reviewing originated with strategy guru Michael Porter. In his “five forces” model of competition, industry profitability depends on the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, the threat of new entrants, and the intensity of industry rivalry.
Each of these forces has a variety of drivers. For example, buyers have greater bargaining power when they are concentrated or buy large amounts relative to the size of vendors, when their switching costs are low, when they can easily decide to backward integrate, when their profitability is low, forcing them to be cost conscious, when they have information about cost drivers, and when the firm selling to them has heavy fixed costs.
In light of these forces, Porter argued that “the best strategy for a given firm is ultimately a unique construction reflecting its particular circumstances.”54 In other words, there is no one-size-fits-all approach that all companies should take; they each must consider their industry, the five forces, and their unique positioning and capabilities.
However, Porter posited that there are three major generic strategies. Business units can compete either based on “overall cost leadership,” “differentiation,” or “focus.” Retailing offers examples of companies utilizing these different generic strategies. Wal-Mart is a company that offers low cost; Neiman-Marcus is one that is differentiated through service; and Victoria's Secret is one that offers focus.
According to Porter, overall cost leadership means excelling at developing a product or service cost structure lower than competitors based on a variety of approaches. These may include economies of scale; experience curve effects (i.e., learning over time) and through high production volumes (i.e., experience, how to build products or offer services more cost effectively); rigorous management of costs, by, for example, renegotiating supplier contracts; and eliminating unprofitable customers or segments. Cost leadership is a competitive strategy, not a value discipline, in Porter's formulation. In other words, cost leadership might translate into lower prices to customers, but the company might leave prices at market parity and keep the outsize profits or use them to invest in, say, geographic expansion or new product offerings. As a competitive strategy, the point is that the cost leader can survive buffeting from the five forces. For example, strong buyer power that reduces pricing may impact the profitability of the cost leader, but will drive the cost laggard out of business.
Differentiation entails creating unique products or services in a variety of ways. Porter explained that such uniqueness can be based on functionality, design and aesthetics, brand, technology, distribution channels, or advanced technology. With cost leadership, even if pricing is identical, profitability is higher because cost structure is lower. With differentiation, profitability is higher even without cost advantages because customers are willing to pay for these unique capabilities. In some cases, higher prices may be based on perceived benefits such as ego value, such as a Prada bag or Bentley automobile. In other cases, higher prices may be justifiable because advanced product or service capabilities are more financially beneficial to the customer. Differentiation also insulates firms from the five forces. For example, brand loyalty can reduce buyer power by increasing perceived switching costs.
The third generic strategy is focus, either on a narrower product line, a particular customer segment, or a constrained geographic area. Such a strategy is not completely divorced from either overall cost leadership or differentiation. Porter says that a firm using a focus strategy can either better meet the needs of its target market (i.e., be differentiated) or can have lower costs than broad-based competitors within the constrained scope.
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