Strategic Use of Business Models: Case Study

Strategic Use of Business Models: Case Study

This is the last post of this blog series which includes the case study. The case study helps portray the theoretical concepts that have been covered in the previous blog posts: the strategy, the business model canvas, and the implementation.

The current strategy

The case study follows the example of the fictitious organization Travel Co. This organization is a travel agency which has recently been experiencing some troubles with generating enough revenues to sustain itself.

There are three main competitors in the market that divide between them equally the majority of the market share: Travel Co., JourneyTime, and Tourism Inc. All three agencies have been experiencing problems since the financial crisis started. In order to be able to remain competitive in the current market, Travel Co. will need to try to adjust their strategy.

According to the Value Propositions model, the current competitive strategies of the three main competitors in the market are as follows:

• Travel Co.: complementary products and services (Product leadership)
• JourneyTime: excellent customer service and support (Customer intimacy)
• Tourism Inc.: online purchase and payment of tickets (Operational excellence)

The Travel Co. agency relies heavily on the perceived value of their offering to their customers. They offer complementary products and services that help their customers arrange an all-inclusive travel destination (accommodation, transport, informational materials about the chosen destination, etc.).

The canvas

For the past few years, Travel Co. has been employing the same business model which served the same general strategy. Until recently, their chosen path has been highly successful. The first step in helping the agency adjust to the new environment is to look at their current business model.

• Value proposition: all-inclusive travel packages, customization, services (e.g. travel insurance, pick-up service), average prices, seasonal dependent offering
• Channels: direct -> front office, website (mainly promotional)
• Customer segments: Niche market -> customers that desire a customized all-inclusive travel destination
• Customer relationships: personal assistance of staff in the front office
• Revenue streams: sales of travel packages, commissions from tour operators, hotels, resorts, etc.
• Key activities: sales, marketing, finding and designing new travel packages, CRM
• Key resources: skilled employees, good reputation and brand name
• Key partners: airlines, hotels, resorts, tour operators, insurance providers
• Cost structure: Salaries, marketing, rent and utilities

The business model by itself can only provide a limited amount of reconfiguration options for the agency. In order to be able to make a transformation, we need the help of strategic models such as the SWOT analysis and Confrontation Matrix, or of the Blue Ocean Strategy.

The SWOT analysis with the Confrontation Matrix can help generate strategic options that are based on the competitive forces within the industry, which can help Travel Co. outperform its competitors. The Blue Ocean strategy can help the agency move away from the competition towards a niche market. If this is successful, it will mean that Travel Co. will no longer have direct competition from the other travel agencies. This is a riskier approach, but if it succeeds, it will generate higher returns. The choice of using either of these approaches is up to each organization. For this case study, I will exemplify the use of the first approach.

In order to use the SWOT analysis effectively we need to know enough information about both the internal and external environments of the agency. The Business Model Canvas provides sufficient information about the internal environment of the organization, but not enough about the external environment. Here is where the Five Forces analysis and the PEST analysis come into play.

With the help of the Five Forces analysis, we can take a look at the competitive tension within the industry by analyzing the level of several types of threats: new entrants, substitute products, industry rivalry, bargaining power of customers, and of suppliers.

• Threat of new entrants (low): medium capital costs of entry, medium acceptability of new brands, market is stagnating
• Threat of substitute products (high): two main alternatives from the main competitors (better services from JourneyTime, online purchasable tickets from Tourism Inc.), low switching costs
• Industry rivalry (medium): two large competitors, smaller agencies going bankrupt, market is stagnating
• Bargaining power of customers (high): highly segmented market, loyalty programs, low brand affinity
• Bargaining power of suppliers (low): many alternatives, low switching costs between suppliers, airlines remove commission fees, reduced amount of air fares

From this we can see that the main two concerns for Travel Co. are the threat of substitute products offered by their two main competitors, and the bargaining power of their customers which can relatively easily use the services of another agency if their needs are not fully satisfied.

The industry analysis helps put context to the external environment analysis but does not offer the complete information regarding the factors that can influence the agency. The PEST analysis helps complete the picture with information about the threats and opportunities from the agencies macro-environment: political, economic, socio-cultural, and technological. There are also more extensive versions of the PEST analysis which include additional factors to be analysed, such as: Legal, Environmental, Ethical, and Demographic. The choice of using the standard PEST analysis or the extended version depends on the type of organization using it and their interests. For this case study I will portray the use of the standard PEST analysis.

Threats:

• Political: political instability, elections coming soon
• Economic: increase in unemployment, economic slowdown, increase in inflation
• Socio-cultural: all-inclusive vacations are perceived as a luxury
• Technological: noise pollution from airplanes is receiving more awareness

Opportunities:

• Political: minimum wage law
• Economic: better infrastructure, three new booming destinations
• Socio-cultural: increase in number of retired people, air transportation seen as safe, increased demand in three areas of the country
• Technological: information and communication innovations, innovations for air travel (higher speed, lower cost, higher capacity, longer distances)

From the macro-environmental analysis, we can see that one of the most influential threats for the agency is the fact that all-inclusive vacations are now perceived as a luxury due to the strains the financial crisis has put on the economy and population. Thus their customer base has dwindled. There are a number of opportunities the agency can use to counter both the industry and macro-environmental threats, such as trying to find new partners in the three new booming destinations, considering new customer segments (retired people, businesses, etc.), investigating the new options for marketing and promotion, and reconfiguring the offering of the agency to match the innovations in air travel.

With all this information, the SWOT analysis and the Confrontation Matrix can be completed. The SWOT analysis includes all the relevant strengths, weaknesses, opportunities and threats of the agency.

The Confrontation Matrix uses the environmental factors from the SWOT analysis to help build up relevant strategic options for the agency. These alternative strategies are built by making the following combinations of factors: Strengths – Opportunities (attacking strategies), Strengths – Threats (building strengths for attacking strategy), Weaknesses – Opportunities (defensive strategy), and Weaknesses – Threats (building strengths for defensive strategy).

Two examples of strategies that can be built with the help of the confrontation matrix:
ST strategy: Improve the CRM by adding loyalty programs in order to ameliorate the low brand loyalty of customers. Use marketing to make the new program known to the customers. S3+S4+T1
WO strategy: Combat the seasonality of the offering (most sales during the legal holidays) and stabilize the customer base by focusing on a secondary customer segment in the off-season (retired people and businesses) W1+W2+O3

The implementation

Now that we have the two alternative strategies, we can use the canvas and ArchiMate to see how they would impact the agency. The concepts in blue represent the already existing ones in the agency’s business model, and the ones highlighted in green represent the newly added ones.

The first strategy will add to the three new factors to the business model of Travel Co., namely the Loyalty programs which are meant to improve their Customer Relationships, and the specialization of Marketing into General Marketing and Focused marketing for their Key activities. This separation is made in order to introduce the Focused marketing which is meant to improve the awareness of their customers about the new program. This is supposed to have an indirect effect on the revenue streams of the agency by raising and stabilizing their monthly incomes during their main sales seasons.

This is a small example, based on this strategy, of how the changes in the business model of the agency would influence their architecture. The CRM business function will have a new business collaboration concept associated to it and the Marketing function will be now specialized into two new business functions, Focused marketing and General marketing.

The second strategy will introduce four new concepts into the business model of Travel Co. in the Customer segments and Value propositions building blocks. By following this strategy, the agency will try to focus on servicing the needs of Retired people and of Businesses with two new tailored offerings: Off-season offering and Business specialized offering, in addition to their existing customer segment and offering.

This is a small example, based on this strategy, of how the changes in the business model of the agency would influence their architecture. The main change that can be seen is with the business actors and the value of the agency. There will be two new concepts introduced to both of those to represent the two new customer segments and their associated value proposition.

We hope you found this series of blog posts helpful, and feel free to comment below.