MAKERERE UNIVERSITY

COLLEGE OF COMPUTING AND INFORMATION SCIENCES

MASTER OF INFORMATION TECHNOLOGY

COURSE CODE: MIT 7118

COURSE UNIT: OBJECT ORIENTED SYSTEMS ANALYSIS AND
DESIGN

LECTURER: GILBERT MAIGA (PhD)

COURSEWORK: FUNDAMENTALS OF BUSINESS MODELLING

NAME: ADONGOT BRENDA

REG. No:2021/HD05/22987U

STUDENT No: 2100722987

Qn1. What is a business model?
A business model is a blueprint for the successful running of a business that identifies income
streams, the target customer base, products, and finance information. i.e., a company's strategy
for making money by outlining the products and services it intends to sell, its target market, and
any estimated costs.
A business model answers four core questions.

i. Who are your clients?

ii. What value do you provide to your customers?
iii. How will you make these offers a reality?
iv. How do you make money?

A business model is useful for both new and established businesses. Business plans help new and
growing businesses attract capital, talent, and employees by motivating management and
employees. Established businesses must revise their business strategies on a regular basis or risk
missing out on future trends and issues.
Investors use business plans to evaluate companies that they are interested in. Investors want to
know if the plan makes sense and if the numbers add up.
Qn 2. What are the components of a business model?

1. Competitive advantage: A distinguishing feature of your product or service that cannot

be easily replicated by competitors.
2. Target market: A specific segment of the market that might be interested in the product.
3. Value proposition: A characteristic that makes your product attractive to customers.
4. Cost Structure: A list of your company's fixed and variable expenses, as well as how
they influence pricing.
5. Profit margin: The amount by which your revenue surpasses your operating costs.
6. Key metrics: The methods by which your company measures success.
7. Resources: The company's physical, financial, and intellectual property.
8. Revenue model: A framework that identifies viable sources of income to pursue.
9. Revenue streams: Multiple ways your business can generate income.

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 10. Problem and solution: Target customer issues and how your business is targeting your
target customers.

Qn. 3. How do you know if your business model will be successful? Use examples to explain
this.
When a company develops or reinvents a business model, it makes decisions. The impact of
these decisions determines whether a business model succeeds or fails. Three types of decisions
are particularly important for the development of a successful business model:

i. Company policy. These are decisions that have cross-company effects.

ii. Assets (property). These are decisions relating to tangible assets of the company.
iii. Governance. These are decisions that determine how a company’s decision-making
structures are organized in terms of policies and assets.

There are four factors that can be considered to determine whether company decsiosn lead to a
successful business model.

1) The business model is geared to the company’s goals.

Decisions should have consequences that allow the company to meet its objectives. This may
appear obvious, but practice shows that it is not always the case.
For example, in the 1970s, the Xerox PARC research center developed technological innovations
such as laser printing, Ethernet, and graphical user interfaces. Xerox PARC, however, was
unable to translate these innovations into new business models for Xerox due to a lack of focus
on the parent company's goals.

2) The business model is self-reinforcing.

Management decisions in the development of a company model should be complementary. For

example, if a low-cost carrier decides to upgrade its service to that of Austrian Airlines, it will
have an impact on catering and the number of seats available on the plane. This choice would
jeopardize the airline's low-cost strategy and result in lower profitability. If decisions fail to
result in positive reinforcement, the business model should be extended further by making new
decisions

3) The business model is robust.

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A successful company model must be able to maintain its performance over time while avoiding
danger. Pankaj Ghemawat identifies four risk factors that should be avoided at all costs by
making the right decisions:

 Imitation: When a business model is copied or replicated, it decreases the value of the
original (e. g. products made in China).
 Holdup: delays by customers, suppliers or other players in the value chain (negotiating
power).
 Slack: Lack of employee commitment, inefficient use of resources, theft, high sickness
figures, etc.
 Substitution: When other, new products reduce the demand for your own product (e. g.
the old dial-up modem)

Although today’s effectiveness periods are shorter, resilience is still an important factor.

4) The business model generates growth cycles.

A successful business model generates feedback loops that self-improve. This means that
decisions have consequences, which in turn allow for new decisions, and so on. This process
generates growth cycles that reinforce the business model and develop a dynamic resembling
network effect. Ryanair's business model, for example, creates success cycles by deciding on low
prices and costs: When a company develops or reinvents a business model, it makes decisions.
Cycle 1: Low price high volume higher volume greater bargaining power with respect to
suppliers lower fixed costs even lower prices.
Cycle 2: Low price high volume high-capacity utilization low fixed costs/passenger even lower
prices.
Cycle 3: Low price low expectations of service no food supply lower variable costs even lower
prices.
Irizar, a Spanish producer, is another example. The company transformed its business model by
making decisions that resulted in three outcomes: a high level of responsibility, employee
satisfaction, and trust. The company prioritized increasing employee loyalty and empowerment
in its decisions, including eliminating hierarchies, decentralized decision-making, strengthening

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teams, and increasing employee participation in the company. These decisions set in motion a
growth cycle that resulted in a 24 percent annual growth rate.
Second approach to evaluating a business model.
Alexander Osterwalder's holistic approach to evaluating your business model is another option.
The evaluation's focus has shifted from a purely product/service approach to a more holistic
business model approach. Here are seven questions to help you thoroughly assess your business
model. Scale the performance of your business model from 0 (bad) to 10 (excellent).

1) What is the effort for your customers to switch to another company?

The more time, effort, or money it takes a customer to switch to another company's product or
service, the more likely the customer is to remain loyal to that company. Apple's i-Pod launch in
2001, when the company advertised the i-Pod with the slogan "thousand sounds in a pocket," is a
good example of how switching costs were consciously implemented in the design of a business
model. However, the product launch was not solely focused on the "ipod" product innovation. To
make switching to another music platform more difficult, Apple pursued a business model
strategy that encouraged customers to copy all of their music onto itunes and the ipod. This
decision ultimately laid the groundwork for Apple's dominant position in the music industry and
numerous other industries.

2) How scalable is your business model?

Scalability describes how a business model can be expanded without incurring additional costs.
Business models based on software and the internet are inherently easier to scale than those
based on physical values. However, there are significant differences in digital business models.
Facebook is a great example of scalability. With only a few thousand employees, an appealing
product for millions of users was created. Only a few other companies have been able to achieve
such a high user-to-employee ratio.

3) Does your business model produce recurring revenues?

Every sale of a magazine at a kiosk necessitates an effort. A subscription to a magazine, on the

other hand, generates recurring, virtually guaranteed revenue. Recurring revenues have two
major advantages: the "sales costs" are only generated once, and the company has a better idea of
how much money it will earn in the future.

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The software company Redhat is a good example of recurring revenue. The company offers open
source software as a subscription service. Customers in this business model do not pay for new
software because it is constantly updated. This business model is also used by Microsoft and
other software service providers. Similarly, Apple's content and app sales, which generate
ongoing revenue in comparison to hardware sales, are increasing.

4) Do you make sales with your business model before investing?

The more sales you make before investing, the better. Dell, for example, was able to avoid the
problem of depreciation costs by changing its business model and producing computers only
after ordering and paying for them.

5) How much does your business model encourage customers and other players to
create free added value for your company?

You earn money while others do the work for you. With its home-made furniture, IKEA has
taken this approach. Customers assemble their own furniture, which saves IKEA a significant
amount of money. Facebook operates on a similar premise, in that it merely provides a platform
and leaves content creation to the users.

6) How well does your business model protect you from the competition?

A good business model not only produces excellent products, but it also provides long-term
protection against competitors. It is difficult to compete with strong business models. Apple's
competitive advantage is built not only on innovative products, but also on a solid business
model. For Samsung, for example, copying the iPhone is easier than creating an ecosystem like
Apple's App Store, which manages thousands of applications.

7) Is your cost model substantially better that of your competitors?

Cost-cutting is a common practice in cost management. Some business models go above and
beyond by basing their cost structure on a different premise. Skype, for example, provides
communication solutions comparable to those provided by a traditional telecommunications
company - but for free or at a low cost. Skype's business model is based on a cost structure that is
primarily comprised of personnel costs, whereas the telecoms company invests heavily in
infrastructure.

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Precisely for this reason, mobile communications provider Bharti Airtel has also significantly
altered its cost structure. Ericsson and IBM no longer operate the network structures themselves,
but instead purchase them on a variable cost basis. Bharti Airtel's business model adaptation has
resulted in it being one of the cheapest mobile operators in the world.

Qn. 4. State and explain the different types of business models.

1) Product

A product is a tangible item of value. To run a successful product-focused business, strive to

produce the item at the lowest possible cost while maintaining a reasonable level of quality.
Once the item is manufactured, your goal should be to sell as many units as possible at the
highest price that people are willing to pay in order to maximize profit.
We are surrounded by products. Products, from laptops to books to HBS Online courses
(products do not have to be physical), are a classic form of value with high upside if done
correctly.
Advantages
Many products are easily replicable. As a result, firms can achieve economies of scale after
incurring some initial production costs.
Disadvantage.
Physical goods must be stored as inventory, which can raise costs.
They are also more easily damaged or lost than, say, a service.

2) Service

A service is when you provide assistance to someone else for a fee. To make money from your
service, teach others a skill that they can't or don't want to learn for themselves. If at all possible,
provide them with this benefit on a regular basis and at a high level of quality.
Services are in abundance, particularly in the knowledge economy. People with lucrative skills,
such as construction workers, consultants, and teachers, can earn good money for their time.
Advantage
You can charge a fair price for your time and stand out in your field if you have a skill in high
demand or a skill that very few others have.
Disadvantage

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Your business may not be as profitable if you do not charge a fair price for your services or if
there are many people with your skill.

3) Shared assets

A shared asset is a resource that can be used by a large number of people. Such resources enable
the owner to create or buy an item once and then charge customers for its use. To run a profitable
business based on shared assets, you must strike a balance between serving as many customers as
possible while maintaining the overall quality of the experience.
Consider a fitness center, for example. A gym typically purchases treadmills, ellipticals, free
weights, bikes, and other equipment and charges monthly membership fees to customers for
access to these shared assets. The key is to charge customers enough to keep their assets in good
working order and, if necessary, replace them over time. Finding the right customer base is
critical to making a shared asset model work.
Advantage
This model gives people access to a wide range of assets that they would not otherwise have.
Furthermore, many people are willing to pay a high price for access to trendy social spaces.
Disadvantage
Because they do not own the assets, customers have little incentive to treat them well. Make sure
you have enough money in your budget for quick fixes if they become necessary.

4) Subscription

A subscription is a type of program in which a user pays a recurring fee in exchange for access to
certain benefits. These advantages frequently include the recurring provision of goods or
services. Others, unlike shared assets, have no effect on your experience with the product or
service.
Build a subscriber base by providing consistent value over time while attracting new customers
to have a successful subscription-based offering.
In recent years, the number of subscription services has skyrocketed. From magazines to
streaming services to grocery and wine delivery subscriptions, businesses are increasingly
turning to the subscription-based model, with varying degrees of success.
Advantage

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This model provides certainty in the form of predictable revenue streams, which simplifies
financial forecasting. It also has a loyal customer base and customer inertia (for instance,
customers may forget to cancel their subscription).
Disadvantage
Your business operations must be strong in order to run this model. If you are unable to
consistently deliver value over time, you should consider a different business model.

5) Lease/Rental

A lease entails acquiring an asset and renting it out for a set period of time in exchange for a fee.
You can lease almost anything, but it's best to rent assets that will last long enough to be returned
in good condition. This ensures that you can lease the item multiple times and possibly sell it in
the future.
The key to profiting from leases is to ensure that the revenue you receive from leasing the asset
before it loses value exceeds the purchase price. This necessitates strategically pricing the rental
of the item and potentially not leasing to those who may not return it in good condition.
Advantage
To make money with a lease business model, you don't need to have a novel idea. You can buy
assets and rent them to others who would not buy them at full price, earning a premium.
Disadvantage
You must safeguard your assets against unanticipated damage. One method is to use insurance.

6) Insurance

Insurance is the transfer of risk from a customer to an insurance policy seller. The insurance
company (the policy's seller) receives periodic payments ("premiums" in insurance jargon) from
the policyholder in exchange for taking on the risk of a specified event occurring. If the specified
event does not occur, the insurance company keeps the money; however, if it does occur, the
company is required to pay the policyholder.
In some ways, insurance is the sale of safety—it adds value by protecting people from
improbable but catastrophic risks. Policyholders can insure almost anything, including their
lives, health, homes, cars, and boats. To run a successful insurance company, you must
accurately estimate the likelihood of bad events occurring and charge higher premiums than you
pay out in claims to your customers.

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Advantage
If you calculate risk correctly, you'll make money using the insurance business model.
Disadvantage
It can be difficult to calculate the probability of specific events occurring. Insurance only works
because it spreads risk among many policyholders. Insurance companies can fail if a large
number of policyholders are affected by a widespread, negative event that they did not anticipate
(for example, the Global financial crisis in 2007 and 2008).

7) Reselling

The purchase of an asset from one seller and subsequent sale of that asset to an end buyer at a
premium price is referred to as reselling. The process by which most major retailers obtain the
products they then sell to customers is known as reselling. Consider a farmer supplying fruits and
vegetables to a grocery store or a manufacturer selling goods to a hardware store.
Companies profit from resale by purchasing large quantities of items (usually at a bulk discount)
from wholesalers and selling single items to individuals for a higher price. This price increase is
known as a markup.
Advantage
Retail markups are frequently high, allowing you to profit from the items you resell. A bottle of
water, for example, may cost 10 cents to produce, but a customer may be willing to pay $1.50 or
more for the same bottle.
Disadvantage
For the reselling business model to work, you must be able to obtain high-quality products at low
prices. To manage sales cycles, you will also require physical space to store inventory.

8) Agency/Promotion

Agents add value by marketing an asset that they do not own to a buyer who is interested. They
then earn a fee or commission for connecting the buyer and seller. As a result, rather than using
their own assets to create value, they collaborate with others to help promote them to the rest of
the world.
Running a successful agency requires good connections, excellent negotiation skills, and a
willingness to collaborate with a diverse group of people. A sports agent, for example, promotes

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players to teams and negotiates on their behalf to get the best deal. In exchange, they typically
receive a percentage of the contract as compensation.
Advantage
Expertise and connections in your industry, whether publishing, acting, advertising, or something
else, can be extremely beneficial.
Disadvantage
You only get paid if you close the deal, so you must be willing to accept some uncertainty.

References
1. Emprechtinger, F. (2018, April 27). How successful is your business model? Retrieved
from LEADInnovation Management:
https://www.lead-innovation.com/english-blog/business-model
2. Kopp, C. M. (2020, July 03). What is a business model? Retrieved from Investopedia:
https://www.investopedia.com/terms/b/businessmodel.asp
3. Kriss, R. (2020, October 30). What is a business model? Retrieved from NerdWallet:
https://www.nerdwallet.com/article/small-business/what-is-a-business-model
4. Parsons, N. (2021, July 19). What Is a Business Model? Business Models Explained.
Retrieved from Bplans: https://articles.bplans.com/what-is-a-business-model-business-
models-explained/

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