Does such a business model have anything to do with strategy?
Prior to Dell’s 1985 debut, businesses buying computers for their employees relied on a system in which they purchased a large number of identical computers at a generous discount. Dell provided a fresh option to corporations, in which employees could personalize their computer orders at the same low price point. Because employees such as engineers, accountants, and sales staff all used computers in different ways, this provided the option to purchase a computer based on spe- cific features and functionality. Dell pioneered this “configure to order” style of manufacturing by using a JIT assembly process, in which standard components are used to create custom products. In the first year alone, Dell made more than $73 million. The JIT process minimized its inventory costs, another critical part of its business model in an industry where components depreciate very rapidly (Fortune 500, n.d.). Although Dell did not radically change the way that computers are produced, the way it sold computers—its business model—was vastly different from industry competitors.
During the 1980s the state of California required rollbacks in auto-insurance premiums and the pro- cess of utilizing auto insurance was complicated and tedious. A company called Progressive Insurance created a new policy in the 1990s to make the process more beneficial to its customers. Instead of taking weeks to process insurance claims, Progressive began settling them immediately, often before competitors were even aware there had been an accident. In quoting rates to customers, it quoted competitors’ rates as well, even if they were lower. Also, it based its rates more on where and when a car was driven rather than on age, a driver’s record, and other established criteria. The result was that it grew six times faster than the industry and achieved a net profit margin of 8% compared to the underwriting losses experienced by its competitors at the time (Abraham & Knight, 2001). Although Progressive was still just offering auto insurance services like any other company, the way it provided insurance—its business model—had changed dramatically.
For years, Blockbuster dominated the video rental industry, possessing over 9,000 stores in 2002 (over 5,000 in the United States) and boasting $6.1 billion in sales (Blockbuster Inc., 2005). No true competition existed. Reed Hastings was a Blockbuster customer who had formerly been successful in selling his own software company for $750 million. After becoming frustrated with the late fees Blockbuster charged, Hastings decided to start his own company: Netf- lix. He envisioned renting movies using proprietary Cinematch software, whereby customers could save money by renting online, avoid late fees, and receive access to reviews and recommendations—all services that Blockbuster did not offer.
Customers could go to the Netflix website, choose from several subscription plans, and have access to its library of movies, which he kept expanding every month by making deals with producers. Netflix’s busi-
ness model also included a mail service, whereby each DVD sent to the customer included a built- in return envelope. Using a large set of distribution centers, movies were delivered quickly, often by the “next business day.” By 2003, the popular company soon had over 3 million subscribers. Today, customers now have the option of streaming movies directly to their computer or TV.
Associated Press/Paul Sakuma
Reed Hastings got tired of video rental late fees and established Netflix. With this new business model, customers would receive their movies in the mail and there would never be a late fee.
CHAPTER 1Section 1.9 Importance of Stakeholders
As with Dell and Progressive Insurance, even though Netflix was ultimately providing the same service—movie rentals—as its competitors, it did so using a brand new business model. Despite Blockbuster’s eventual efforts to copy Netflix, it was unable to do so and ultimately filed for bank- ruptcy in September 2010. In April 2011, it was auctioned to Dish Network for $320 million (Fritz, 2011).
1.9 Importance of Stakeholders Stakeholders are “the individuals and groups who can affect, and are affected by, the strategic out- comes achieved by and who have enforceable claims on a firm’s performance” (Hitt, Ireland, & Hoskisson, 2007, p. 21)—stated somewhat more simply, those to whom a company owes any duty or obligation. Sev- eral groups of people or companies can be defined as stakeholders, including investors in the corporation, creditors, employees, customers, host communities, and even the environment. While the role of each body may differ in its involvement, each is nonethe- less a participant and/or has a stake in the company and its welfare.
Investors Investors in the corporation, called stockholders or shareholders, are the stakeholders that first come to most people’s minds. Investors have taken a risk by investing in the company and expect to be appropriately rewarded. Rewards come in two forms: stock appreciation and dividends. It is conventional wisdom that unless companies provide such returns, investors will withdraw their money and invest elsewhere; that is, they will sell their stock in the company and find a more lucrative investment. Investors in privately held companies are not called stockholders or shareholders, but simply investors. In too many cases, however, top managements endeavor to keep the stock price high, not so much to reward the firm’s investors but rather to line their own pockets, as a large portion of their compensation comes in the form of stock.
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Stakeholders are groups or individuals who can effect and be affected by the organiza- tion’s performance. Shareholders are the largest of these groups.
Discussion Questions 1. What is the business model for a typical university? And for the university you are currently tak-
ing this course from? Does such a business model have anything to do with strategy? 2. If you are currently working for a company—even a branch or division of it—try to articulate its
business model. If you found this exercise difficult to do, why do you think it was difficult?