Core Strategy (COMPONENTS OF AN EFFECTIVE BUSINESS MODEL)

                   The first component of a business model is the core strategy, which describes how a firm competes relative to its competitors.11 The primary elements of a core strategy are the firm’s mission statement, the product/market scope, and the basis for differentiation.
                    Experience suggests that things can go wrong quickly for a company that doesn’t have a focused core strategy. This is what happened to Joost, the subject of this chapter’s “What Went Wrong?” feature. As illustrated in the feature, an unfocused core strategy and miscues in other areas related to use of its business model contributed to Joost’s failure.
Mission Statement
                   A firm’s mission, or mission statement, describes why it exists and what its business model is supposed to accomplish.12 Table 6.3 provides examples of the mission statements of five firms from very different industries. To varying degrees, the statements articulate the overarching priorities of the firms and set criteria to measure performance

                    It is important that a firm’s mission not be defined too narrowly. If it is, the business model that evolves may become too singularly focused and resistant to change. Take Xerox, for example—a firm that styled itself as “The Document Company” with an implicit mission that focused on copiers and copying. This mission created what some call a business concept blind spot, which prevents a firm from seeing an opportunity that might fit its business model. Xerox viewed itself as a company that reproduced documents that already existed, causing the firm to be a late entrant into the market for computer printers, which print original documents stored electronically. This narrow focus allowed Hewlett-Packard to gain control of the printer market.

Product/Market Scope 

                    A company’s product/market scope defines the products and markets on which it will concentrate. The choice of product has an important impact on a firm’s business model. For example, Amazon.com started out as an online bookseller but has evolved to sell a host of diverse products including CDs, DVDs, shoes, apparel, furniture, and even groceries and gourmet food. Similarly, Yahoo! started as a company offering free Internet search services in an attempt to generate enough traffic to sell advertising space on its Web site. This business model worked until the e-commerce bubble burst in early 2000 and advertising revenues declined. Yahoo! is continually revising its business model to include additional subscription services to generate a more consistent income stream.14

                    The markets on which a company focuses are also an important element of its core strategy. For example, Dell Inc. targets business customers and government agencies, while Hewlett-Packard targets individuals, small businesses, and first-time computer buyers. For both firms, their choices have had a significant impact on the shaping of their business models.

                    New ventures should be particularly careful not to expand their product/ market offerings beyond their capabilities. Even Dell had to resist this temptation, during its early rapid growth stage, as illustrated by Michael Dell in his book Direct from Dell:

                    Growing a company much faster than the industry is growing is great, but when your company grows by as much as 127 percent in one year, you can quickly outstrip your ability to manage it effectively. Our problem was not that Dell was in serious decline or that our customers didn’t want to buy our products. Quite the opposite, we learned that it was possible to grow too quickly. The problem was that we had been over enthusiastically pursuing every opportunity that presented itself. We needed to learn that not only did we not have to jump at each and every one, as we once did—but that we couldn’t or shouldn’t, for our overall well-being.

Basis for Differentiation 

A new venture should differentiate itself from its competitors in some way that is important to its customers and is not easy to copy.16 If a new firm’s products or services aren’t different from those of its competitors, why should anyone try them? 17

                    From a broad perspective, firms typically choose one of two generic strategies (cost leadership and differentiation) to establish a defensible position in the marketplace. Firms that have a cost leadership strategy strive to have the lowest costs in the industry, relative to competitors’ costs, and typically attract customers by offering them a low, if not the lowest, price for the products they sell. Warby Parker, the company that sells $95 prescription glasses, clearly uses a cost-leadership strategy as do some large firms such as Walmart and Dollar General. In contrast, firms using a differentiation strategy compete on the basis of providing unique or different products, typically on the basis of quality, service, timeliness, or some other dimension that is important to customers.18 Historically, it has been difficult for a new venture to use a cost leadership strategy because effective use of this strategy demands that a firm develop economies of scale as a path to continuously reducing its costs. The issue is that time and experience are required for a firm to develop economies of scale.

                    Firms within the same industry often use different generic strategies. In the retail clothing industry, for example, Ross follows a cost leadership strategy by offering slightly out-of-date merchandise at a deep discount. In contrast, Abercrombie & Fitch uses a differentiation strategy. It rarely cuts prices and

instead competes on the basis that its products are different and stylish enough that they should command a premium price.

                    The strategy a firm chooses greatly affects its business model.19 A cost leadership strategy requires a business model that is focused on efficiency, cost minimization, and large volume. As a result, a cost leader’s facilities typically aren’t fancy, as the emphasis is on keeping costs low rather than on creating products that differ substantially from competitors’ products in terms of features. Conversely, a differentiation strategy requires a business model focused on developing products and services that are unique in ways that

are important to targeted customers and that command a premium price.

.