define business model, performance evaluation and system dynamics modeling methodology. In section 3, we establish several novel business models and use system dynamics to represent their system architecture. Section 4 uses scenario-based simulation to investigate the outcomes of different models. Finally, conclusion and recommendation is in given in section 5.
Literature Review
Business model is defined by Magretta [8].
Business model is actually a story of how to operate a company and is a plan to make money.
System dynamics (SD) is a powerful tool in the creation of feedback theories. Many guidelines and case studies have been developed by founders and practitioners of this field for the model building process and a series of tests to build confidence in the models created. An SD approach can be used to demonstrate how managing processes of accumulation and depletion of strategic assets, detecting inertial effects of decisions to help entrepreneurs in understanding opportunities and pitfalls related to e-commerce strategies. SD is a method of solving problems by computer simulation. Like many simulation methods, it offers the promise of less expensive learning to experiment with the effect of new policies on a
Du, Cheung, and Chu
The 9th International Conference on Electronic Business, Macau, November 30 - December 4, 2009 computer model than on a real system with real
people, equipment, and processes. SD can be applied in various fields, such as analyzing mine disasters, dealing failure and robustness in single development projects, and working on e-commerce strategies. SD can also be combined with other management tools: for instance, to combine system dynamics with conjoint analysis for strategic decision making.
This study not only constructs a common business model, but also constructs the other two new potential business models. This study uses Powersim® simulation software to build the system dynamics models and evaluates via scenario-based simulation for the case company of this study.
Model Construction
For the construction of business models, this study sets the followings assumptions: (1) Only a single product exists. (2) The demand of a product subjects to a normal distribution (Normal (μ = 2.5, σ = 0.8) (Number / Day). The forecast uses a naive method that the forecast of the upcoming period is equal to the actual sales of the last period. (3) No backorder. (4) The payment collection risk subjects to a Uniform distribution (Uniform (0,1)) (5) The account receivables will not recover if such failure occurs. (6) The product price is inversely proportional to its remaining life cycle. (7) Product unit cost is inversely proportional to its remaining life cycle. (8) Installment interests uses a simple interest calculation. (9) After the product reaches its maturity stage in life cycle, it continues to be sold.
In this study, the product life cycle and technology development is classified as Sustained Matured Products (Type A), Rapid Matured Products (Type B), Slow Matured Products (Type C) and Entire Life-Cycle Products (Type D). The following section describes the technology life-cycle cost and price assumptions.
Product types
There are four types of products addressed in the study, sustained mature products, rapid matured products, slow matured products and entire life cycle products.
The technology life-cycle curve of Sustained Mature Products (Type A) is constant, such as daily necessities, The demand is stable, The product technology is difficult to get a breakthrough. The unit price and cost is constant as shown in Figure 1.
Figure 1. The relationship between price and cost (Type A)
Rapid matured products (Type B) is the second type of products investigated in the study.
Kuznets (1930) proposed S-curve model for describing future technological change in the technology evolution. Foster (1986) advocated that S curve can be used to establish a technology life cycle and present the results of technology development.
The S curve equation is given below:
t t
e Y Kα +β
= + 1
1 where Yt is the technical performance at time t; K1 is the upper limit of technology performance; α is the parameter of lower limit of technology performance; and β : shape parameter.
The lower limit of technology performance, u1, is defined as follows for simulation use. The parameter α is converted to be the function of the lower limit of technology performance.
⎟⎟⎠
The derivation is as follows:
t t
when t=0, let Yt=u1. Therefore,
⎟⎟⎠
The technology life cycle curve of Rapid matured products (Type B) is shown in Figure 2.
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Figure 2. Technology life cycle curve (Type B) The rapid matured products in the life cycle technology saturate within a short time, such as consumer electronics products. We assumed that the time of technology life cycle is inversely proportional to the product price. The price is high during products introducing to the market, and the scale of demand and production is small. When the product technology is matured, the price and cost is lowed. The S-curve formula is defined as follows:
( )( )
K1 is the upper limit of Technology performance;
K2 is the upper limit of price; u1 is the lower limit of technology performance; and u2 is the lower limit of price.
Du, Cheung, and Chu
The 9th International Conference on Electronic Business, Macau, November 30 - December 4, 2009 The cost and price curve of rapid matured
product is shown in Figure 3.
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Figure 3. Price and cost curve (Type B)
The third type of products is defined as slow matured products (Type C). The products require long time for the phase of its maturity stage owing to such as technological development bottleneck, difficulty in promotion, low customer acceptance or other factors. The technology life cycle curve and the price and cost curve are shown in Figures 4 and 5.
Figure 4. Technology life cycle curve (Type C)
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Figure 5. Price and cost curve (Type C)
The Entire Life Cycle Products (Type D) are the type of luxury was launched with very significant features becoming a pioneer (Figure 6).
The customer is attracted to buy it under initial stage of market hot, but the competition increases dramatically. Then, the amount of the consumers and profits will reduce quickly. The curve of the entire life cycle technology presented by Gamma distribution as follow: Yt =u1+ta−1e−tb where Yt is the technical performance at time t; K1 is the upper limit of technology performance; α is the parameter of lower limit of technology performance; β is the shape parameter.
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Figure 6 Technology Life Cycle Curve (Type D) The price and cost relation is as follows:
( )
2 lower limit of technology performance; u2 is the lower limit of price. The price and cost curve of Entire-Life-Cycle Products is shown in Figure 7.01 02 03 04 05 06 07 08 09
Figure 7. Price and cost curve (Type D) Business models
There are three business models addressed in the study, basic business model, sale-combined-with-installment-service business model, and with-installment-and-agent business model.
The basic business model (denoted as m1) is shown in Figure 8. A company employs sales records as the basis for demand forecasting and develops its production plans. When the demand is less than planned production, inventory is kept in a warehouse. After shipping, customers pay by checks of three-months.
Figure 8. The basic business model of instruments sales
According to the basic business model this study develops a causal feedback loop as shown in Figure 9. The performance indicator of business model of instrument manufacturer is represented by
Du, Cheung, and Chu
The 9th International Conference on Electronic Business, Macau, November 30 - December 4, 2009 sales profit. The sales profit considers revenue and
sales cost. There are two types of costs, inventory cost and the risk of disbursement payment for goods by checks. Base on the causal feedback loop as aforementioned, we construct system dynamics of the basic business model by using Powersim as shown in Figure 10. The system dynamics model also includes two subsystems of the technology performance and sales loss.
Manufacturer Profit Product unit
price
-Figure 9. The causal and feedback loop of basic business model
Product rate Customer Order_m1 Orde Paid
Forecast Order_m1
Figure 10. The basic business model represented in system dynamics
A sale-combined-with-installment-service business model (denoted as m2) is proposed by the study as follows. In the basic business model as aforementioned, customers pay the payment by checks for three months. Since the credit investigation ability of the instrument manufacturer is not good enough, the checks have high risk that cannot be cashed and thus cause loss of sales.
Financial service industry of leasing, installment and factoring is well-developed up-to-date. The installment service industry can provide installment service for customers. From the instrument manufacturers’ perspective, by integrating installment service companies in the existing business model, they can receive the payment for goods quickly to increase turnover rate and transfer the risk to installment service companies. From the customers’ aspects, they can reduce the pressure of gathering mass capital and reserve cash on hand to decrease the managerial risk. From the installment service providers’ viewpoint, they can earn the installment interest from the instrument manufacturer. The business model structure of sale-combined-with-installment-service is shown in
Figure 11. According to the sale-combined-with-installment-service model, we develop a causal feedback loop as shown Figure 12.
Fi gure 11. sale-combined-with-installment-service business model
Figure 12. A causal feedback loop diagram of sale-combined-with-installment-service business model
The with-installment-and-agent business model (denoted as m3) is proposed as follows.
Instrument manufacturers expect to reduce the pressure of inventory and expend the market share, so they can cooperate with financial service companies and agents to develop this business model with installment and agents, as shown in Figure 13.
Figure 13. The with-installment-and-agent business model
The agents ask discounted price to instrument manufacturer for purchasing products. The manufacturer sells the products to agents who respond for sales and channel management. The agents bear finish goods cost and take the margin between of market price and discounted price.
Furthermore, the financial service companies provide the installment service to earn interest. In this model, the manufacturer transfers the
Du, Cheung, and Chu
The 9th International Conference on Electronic Business, Macau, November 30 - December 4, 2009 receivable payment risk and inventory cost to its
partners. According to the with-installment-and-agent business model we develop the causal feedback loop as shown in Figure 14. Table 1 is a comparison of three proposed models.
Figure 14. a causal feedback loop model of with-installment-and-agent business model
Table 1. Comparison of the business models
Model
Inventory Costs Managed By Manufacturer
Managed By Manufacturers
Managed By Agents
Receivables Risk
Managed By Manufacturer
Managed By Financial Service Companies
Managed By Financial Agents Profit and Willing