Switchboard Model

Classification of Business Models

Classification Types of models
criterion
Firm’s strategic In firms displaying strong advantages over competitors and
resources and using key competences, the key issue in their functioning is
competences the protection of ownership rights of strategic resources
together with their effective usage. According to this criterion
the following models can be distinguished:
- profit model from the existing customers base, which is the
main activity model of the sellers in the sector of small-scale
printing machines operating in Poland,
- brand profit model, which is used by the producers of clothes
for young people, e.g. Reserved, House,
- profit multiplier model, which has been used recently by
mobile phone operators.
 Classification of Business Models
Classification Types of models
criterion
Type of A firm which wants to make profit over a longer time horizon
competitive and operating in different sectors should focus on certain
advantage sources of their advantage over competitors. Within this group
the following can be distinguished:
- model based on natural advantage – profit from being a local
leader,
- models based on attractive ratio of price to quality – scale of
transaction profit model, experience curve model, low
operational costs profit model, cyclic profit model,
- models based on the advantage of service system and
suggested solutions – profit model from the solutions for the
customer,
- models based on creating entrance barriers – profit model
from the de facto standard, profit model from the pyramid of
products.
 Classification of Business Models
Classification Types of models
criterion
Innovativeness and These models are used usually in the situations, in which life
the speed of taking cycle of a product spans a relatively short period of time, and
action a firm generates morethan- average profits from the very fact
of ‘being the first’. According to this criterion the following can
be distinguished:
- profit model dependent on time,
- profit model of a specialist product, e.g. in the field of
computer chips, cars, pharmaceuticals,
- profit model from new products (especially popular in
regional clusters
focused on the production of Christmas ornaments, garden
gnomes, chessboards etc.
 Classification of Business Models
Classification Types of models
criterion
Value chain The source of profit and the basis of innovative business
configuration model lie in a particular configuration of processes (functions)
performed by a firm, which analyses the value of individual
elements of value chain and then focuses on a specific
element or expands the value chain in question. Therefore,
the following business models can be distinguished:
- multicomponent profit model, which is used by firms in the
food industry that maintain a number of different distribution
channels, e.g. coffee manufacturers,
- switchboard profit model, which is a fundamental business
model for websites and online shops, as well as financial
consultancy and insurance sector,
- profit model based on specialisation in a specific area,
- after-sale profit model,
- value chain position profit model (e.g. the firm Impet S.A.).
Business Models
Business Models
Business Models
Business Models
 Switchboard Model
• This model consists of a business offering multiple goods and services under one roof, thus
creating a one stop shop for consumers.

• In order for the switchboard model to be effectively implemented, a business must be able to
offer a package of services within an industry, thus allowing all the consumers need to be
taken care of by a single company. To do this the company must create a near monopoly
within the market, meaning that any potential transactions must flow through their company,
like a switchboard, hence the name. They must also hold a critical mass in the supply chain of
the market, thus giving them dominance over the market.

• In order for this profit model to be successful the industry must have enough moving parts
that a streamlined option would be valuable to consumers. The profit for the company is
derived from the fact that it controls enough of the market, if not all of the market, that all
agents are forced to do business with them, thus giving them a key advantage for negotiating
price.

• Example - Wal-Mart. They dominate so much of the market that a producer has no choice but
to go into business with them, and in return Wal-Mart can negotiate the prices as low as they
want. They also offer everything under one roof, everything from groceries togetting an oil
change.
 Switchboard Model
It is characterized by 3 aspects

1. Packaging - Bringing together a

disaggregated
tasks/individuals/etc.

2. Concentration of power : Cater to

all the disaggregated needs by one
core product/service

3. Critical mass / scale

One of the examples mentioned by the author is the business of bringing of set of actors,
musicians, etc to a recording studio and providing a platform to come up with a TV Opera /
Movie by bringing in Good content to the entire set up.

The actors, actresses, directors are always in need of people. Hence switchboard model
works by first bringing together and satisfy their need of great writers and stories. Thus once
the packaging and concentration aspects are taken care of, the set up is scaled so that it
reached a sustainable mass where by it can bargain with both ends of the parties
Switchboard Model – Different Types
The examples which follow these models are

# Integrated Direct – a one-to-one relationship

between the buyer and seller;

# Company.com – where the seller constructs a

Web site for many buyers; also referred to as a
storefront.

# Micromarkets, Marketplaces or Communities

– where many buyers and sellers do commerce
on a common site;

# Auctions – where either a buyer or seller

puts his or her product or service out to bid;

# Content Aggregators – where a neutral site

gathers all the relevant information from a
number of sources for one buyer. (Google,
eBay)
 Example
• Switchboard Profit identifies the components that led to the business success of the
Hollywood agent Michael Ovitz who took the bundling-of-talent concept that he so
successfully perfected in television, and applied it to film-making, but with a difference,
because it was much more difficult to create a concentration of power in an industry
fragmented by many movie studios.

• Ovitz' first step was to assemble talent; the second, to find a source of stories through a
great literary agent; and third, the creation of critical mass. In the author's words, "The
more critical mass you build, the higher your probability of putting together a package
that works. That, in turn, means that a star, a writer, or a director will be better off being
represented by you rather than any other agent, because the odds of being part of a
winning combination are so much higher. …So now the studios have to deal with you, and
the stars want to deal with you." Thus the analogy of the oldfashioned switchboard Ovitz
became that all his various contacts needed to plug into.

• The lesson, of course, isn't that simple. Predictably, much work is needed to arrive at the
numbers constituting the critical mass that is required to generate revenues seven to ten
times greater than in the traditional model for that industry. And Zhao coaches Steve
through the mental ordeal of working out how Ovitz arrived at this successful profit model
Further Diversification
 Case Study
• The Charles Schwab Switchboard
How it all started
• 1971 - Charles Schwab started ‘First Commander’

• Initial business model similar to a conventionalbrokerage

• No brand, No technology, No client base

• 1975 - SECoutlawed fixed commissions

• Schwab seized opportunity – business des ign changed to

‘discount broker’
Timeline
• 1971- Started the brokerage, First Commander
• 1975 – Started the discount brokerage
• 1984 – Had 20% of discount brokerage market
• 1985-89 – The Schwab Institutional Enterprise
linking independent advisors

• 1989 – TeleBroker system introduced

• 1992 – Charles Schwab OneSource launched
• 1995 – e.Schwab launched
 The Discount Brokerage
business
• Conventional brokers - high fee due to Advice, Counselingand
Trading capabilities

• Listening Gap: No option for low-cost trades due to‘Bundled’

package (Advice + Trading functions)
Closing the Gap - Discount brokerage (to unbundle Adviceand
Trades)
Value-added Discountermodel
• Need for differentiation – ‘Why does the customer want to buy
from me?’

• Customer-centric service-design:

• Salaries instead of Commissions

• Reliable information to customers
• Addressed investors need: Inexpensive Access to Market
• Gave customers what they wanted ONLY,no additional costs
• Up-to-date technology: More easily executabletrades
• Emphasis on greater value to customers influenced Customer-
Perception

• Re-invested Profit in:

- Building brand-name and branch network
- Establishing local presence
- Computers & Technology
- Investor-support
- Advertising: Charles Schwab on TV, radio, billboard and print ads

• Addressed Competition by:

- Strong differentiation
- Sharing services with new customers instead of hard-sellingnew
products to existing customers
 Second Business Model:
Serving theFinancial
Planners
Market Environment
• Change in customer behaviour in the late 1980s – from savings to
investment
• Need for unbiased, independent financial advisors
• Mushrooming of independent advisors – individual and partnershipfirms

What did Schwabdo?

Developed New Ways to deliver – Using Financial Planner
Created a new channel to the investors/customers through independent
advisors.
Leveraged the strength of the financial planners to grow his own business.
Gaps in the Existing Service Model
• Listening Gap – Most traditional firms didn’t recognise the change
needs of the customers
• Closing the Gap – The Schwab Institutional Enterprise
linking Charles Schwab & company with independent
financial advisors.

• Service Performance Gap – The financial advisors were not

technologically capable of meeting the necessary customers
needs through efficient back endoperations
• Closing the Gap – Schwab stepped in to become the back- office
operation for many financial plannersand thereby gained more
customers for itself.
• Communication Gap – Changing investor behaviour rendered
traditional methods of communicationsunsuccessful
• Closing the Gap – Communication about Schwab
services through financial advisors/planners.
Benefits SchwabGained
• Customer selection increased – financial planners as well as
investors

• Converting ‘perceived’ competitors into clients

• Created a large pool of virtual sales force at nocost

• Stayed ahead of competitors by taking advantage of their lack

of response

• Increased profits
The Next Leap - OneSource
WHY?
• Enormous expansion in the Mutual fund marketspace
• both in investments and rising of numerous fund companies
• Caused mainly 2 problem to customers:
• Dizzying array of mostly unbranded fundoptions
• High overall transaction fee (load fee + brokeragefee)
• The transaction fee proved to be not just a financial barrier but a
psychological one
• Complexity for customers to relocate assets amongfunds
• Also Schwab focused on business model that had a floor of
recurring revenue
OneSource
WHAT?
• “There were thousands of salespeople out there selling load
funds, with huge commissions,” explains Chuck Schwab. “We
wanted to create a way for people to buy a variety of mutual
funds directly through us —have lots of choice,diversification
— in a way that they could do it conveniently and at low cost.”

• This gave rise to ONESOURCEin July1992

Service Adjuncts
• Offered a no-load, no-transaction fee policy – “Discounted
Mutual Funds”

• All funds in OneSource was accessible through a single phone

call and was tracked in a single account statement

• Had a double advantage for both investors and mutual fund

companies – Acted as a switchboard between the two

• All backend work was carried out by Schwab for thefund

companies thereby saving cost and time
The SwitchboardBusiness
Design
Industry Response
Mainly 3 types of responses:
• Denial :
• No response, Thought that OneSource would be just a passingfad
• Fee Structure:
• Full service brokerage firms introduced new share classes with
their funds with low or no fees
• Imitation :
• Replication of same Business Model
• Eg: Fidelity included 370 funds
Technology and Schwab
• 1989 – Tele Broker
• Voice Broker
• 1993 – Street smart Software
• 1995 – e.Schwab

• Complete account specifically designed for activetraders

• Used an e.schwab account to do trading at any time without the

assistance of any account reps
Future ofSchwab
• OneSource as a gateway to bank customers - a customer
segment unlikely to get

• SchwabLife Insurance Services – “Discount Life Insurance”

• AdvisorSource Program – advices clients with > $100,000 in

their portfolio

• Bought over UK firm – ShareLink Investment Services as

expansion to new markets
Schwab’s Communication in
the 21st Century
• Competition from low-cost providers causing withdrawalsfor
Schwab Investor Services customers

• New target market: Mass affluent

• Fairly knowledgeable about investing, want quality services

yet are cost-conscious

• Communication strategies: Product-oriented, dispersed

campaigns

• Multiple campaigns conflict with eachother

Talk toChuck Campaign
• Aimed to increase awareness levels among the target
customers

• Reposition the company as a value-for-money alternative to

traditional high fee charging financial servicesfirms

• Communicate that the firm’s objectives are imbibed byeach

employee of the company.
http://www.youtube.com/watch?v=_8rNyK1vGKQ
Campaign Attributes
• Easy to pronounce and remember

• References a known personality, whose values can be seen

• Personifies trust, integrity, professionalism, and

approachability, confidence in ability to serve customerneeds,
a personal touch and an overall care for the client as aperson

• Encourages investors to have straightforward conversations

with a company employee about common issues in taking
investment decisions

• An informal feel that projects the feeling of being able to

confide in a close friend
 Communication Strategy
Characteristics
• Target is new and existing customers who can invest $50,000
to $2 million

• Affective component: Changing current investor attitudes

towards financial services firms

• Behavioral component: Call and talk to aSchwab

representative

• Essentially a pull strategy

Conclusions
• Be sensitive to evolving customer needs

• Be proactive

• Ask the right questions

• Be innovative – Seize opportunities

• Be in constant touch with the customer