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Dr. Harris Turino [email protected] harristk.blogspot.com
1. Business Model Concept
2. Business Model and Strategy
3. Nine Building Blocks (NBB)
4. Choice-Consequence Diagram (CCD)
If you have an idea to create a new business, what do you think in the first time?
o You have to start with an insight about social problems, or unmet people need, or something that will be needed.
o You must have something to be offered.
o You think how your offering to be delivered profitably.
If you want to explain that idea, how could you do that?
You need a business model
I want to build small shop that offer low price books, photo copy service, and other stuffs needed by high school students.
I have an access to rent a small place between schools and boarding houses.
I also have some friends who promise to supply several stuffs for my shop.
This is a simple example of Business Model
Business Model (BM) is logical story that describe how a company creates and delivers value, and makes money.
A good business model start with an idea.
Every company has business model, whether clearly articulated or not.
Business model is not same with strategy (discuss later).
Business model at least consists of four elements.
• Profit Formula
• Key Process
• Customer Value Proposition
• Key Resources
Brand Technology
People Channel
Partnership
R&D IT
Manufacturing Marketing
HR Mgt
• Revenue Stream
• Cost Structure
• Target Customer
• Offering
CVP is statement that explains what products are offered, what is the benefit, and who is the target customer.
It answers: “why should customers buy the product”
Group of people that face problems, need relatively same
and specific solutions.
Target Customer
Product and the benefit of products that satisfy
customers’ need.
Value Offering
Brand Offering Target Market Benefit Price
Volvo Automobile Upscale American families
Safety 20% premium
BMW Automobile Young executives Ultimate driving machine
Southwest Flight Travellers Value, enjoy, and fun
Low cost
Palm Pilot Electronic organizer
Busy professional Back up file to PC more easily
15% premium
Domino Pizza Convenience-minded pizza lovers
Delivery speed and good quality
Mountain Dew
Caffeine soft drink
Young and active soft drink consumers who have little time for sleep
More energy, stay alert and keep going
Average
Positioning statement is the classical approach to express customer value proposition, in the form of 1 – 3 sentences.
CVP Positioning Statement
Volvo • Offering: automobile • Benefit: safety • Target: upscale American
families
For upscale American families, Volvo is the automobile that offers the utmost in safety
Southwest • Offering: flight • Benefit: value, enjoy, fun • Target: travelers
Southwest provides travelers with the lowest cost air transportation with an enjoyable and fun atmosphere
CVP or PS should contain at least one point of difference (POD), and might be added with point of parity (POP).
POD aims to differentiate (position) the products among competitors’ offerings.
POP aims to both either: o Define or legitimate products in the industry, or o Negate competitors’ offering
Example: Volvo o POP: Volvo is the automobile (define its industry) o POD: offers the utmost in safety
Key Resources Key Process Value Offering
The strategic resources and capabilities needed to build value offering.
The core activities, rules, and/or norms that transform the key resources into value offering.
e.g. technology, talent, brand, system, distribution channel, strategic alliance, customer loyalty.
e.g. lean manufacturing (Toyota), customer service (Singapore Airline), user friendly software design (Apple).
The blueprint that defines how company create money of profit.
Profit formula can be expressed in the form: o Revenue stream (e.g. price x quantity, display fee, profit
sharing, consultation fee). o Cost structure (e.g. fixed vs. variable cost, indirect vs.
direct cost, economic of scale).
o Margin model, i.e. the contribution needed from each transaction to achieve desired profit.
o Resource velocity, i.e. how fast asset turnover needed to support target volume.
Food & Beverage Store Supermarket
• Target: urban customers • Offer various kind of food and
beverage
• Suitable location • Goods owned by the store
• Purchasing process • Served by store keepers
• Profit from product margin
• Target: urban customers • Offer various kind of food and
beverage
• Suitable location • Goods owned by manufacturers
• Displayed product management • Self-service
• Profit from product margin and/or display fee
Idea: Lowering product price
Business Model
Insight/Idea
Strategy
• Vision • Mission
• Objectives
External Environment
Business Model
Internal Environment
• PEST analysis • Industrial analysis • Market analysis • Competitive analysis
(Five Forces, Strategic group)
O and T S and W
• Resources • Process
• Performance • Innovation
Strategy is the creation of a unique and valuable position, involving a different set of activities, that are different from rivals.
Strategy is making tradeoffs in competing.
Strategy involves continuity of direction.
The goal of strategy is to achieve a superior long-term return on investment.
These are some statement from Michael Porter:
BUSINESS MODEL STRATEGY
• A story (narrative)
• BM is a hypothesis
• How to make money logic
• Require less information
• Good = strong logic
• Rigorous cost and revenue
• More stable
• Abstract world
• A set of action plan
• Strategy is a tool to test the hypothesis in the market
• How to be different, or do better than rivals plans
• Require more detail information
• Good = win the competition
• Detailed in P&L analysis
• More dynamic
• Real world
BUSINESS MODEL STRATEGY
• Automobile
• Train
• Design: minibus, SUV, Jeep, etc • Transmission: M/T or A/T • Engine: premium, diesel, electric, hybrid
• Rail: dual or mono • Power: coal, oil, electricity • Class: economy, business, executive, VIP
To transport people from one to other locations, it can be used automobile, train, and so on.
Existing Players Walmart
• Target: urban customers • Mostly private brands and second
brands
• Suitable location • Comfortable enough
• Displayed product management • Fewer sales people & self-service
• Handle larger number of shoppers and products efficiently
• Target: rural customers • National brands for each product
category
• Suitable location • Comfortable enough
• Displayed product management • Fewer sales people & self-service • Integrated logistic system
• Big enough building to handle large number shoppers and products
Idea: Always low price
Existing Players Walmart
• Located in big cities
• Regular price promo
• Mostly local sourcing
• Located in small towns: o 5,000 – 25,000 population o Four-hour drive from nearest city
• Everyday price promo
• National sourcing
• Continuous improvement to achieve more efficient back-stage process
• Minimum standard salary
Strategy
Business Model
Business Model Strategy
o Value Proposition • Product or service • Target customer • Offering
o Profit Formula
o Key Resources
o Key Process
o Arena • Industry • Market
o Differentiator
o Economic logic
o Vehicle
o Staging
A set of detailed actions plan
Tool to express an idea, and the foundation to formulate strategy.
Initial judgment for business success (before P&L analysis).
As one of evaluation area when business fails
One of innovation area
Value proposition: GE Aircraft engine unit shifts from selling airline jet engine to selling flight hours.
Target customer: Ryanair (European discount airline) targets leisure travelers, instead of business travelers. Walmart targeted rural customers, instead of urban customers.
Value chain: Walmart applies integrated logistic management, instead of managing purchasing, inventory, and information system separately.
Revenue mechanism: Xerox got its start in copier business by leasing its copiers, instead of selling them.
Now we learn how to design a business model
• Nine Building Blocks • Choice-Consequence Diagram
Key Resources
Key Processes
OFFERING Distribution
Channels Customer Segments
Key Partners
Customer Relation
Cost Structure Revenue Stream
Offering Target
Customer
Distribution Channel
Customer Relation
Key Processes
Key Partners
Key Resources
Cost Structure
Revenue Stream
Establish through
Deliver by Reaches
Generate
Generate Generate
Support by Addresses
to provide Needed by
Access Contribute
Perform
Incur
Incur
Incur
INFRASTRUCTURE CUSTOMER
FINANCE
OFFERING
Spectacular Offensive Football
High Visible Advertising Space
FANS
ADVERTISERS
Target Customer Offering
The channels through which company: • communicates with customer segments
• deliver its offering
Awareness Preference Evaluation Purchase After Sales
Communication & Distribution Channels
Spectacular Offensive Football
High Visible Advertising Space
FANS
ADVERTISERS
Target Customer Offering
PO Box
TV Channel
Phone TV
Sales Force
Stadium
Channel
The ways the company entertains its customer segments to build long-term loyalty.
Spectacular Offensive Football
High Visible Advertising Space
FANS
ADVERTISERS
Target Customer Offering
Blog
VIP Tickets
Fans Meeting
Stadium Visit
Customer Relation
what activities should you perform to create value proposition
The strategic parties to access key resources and/or to perform key processes better.
Example: o If we want to build a hospital, we need to create
alliance with universities to source physicians.
o If we want to sell high price machines, we need leasing companies to finance them.
Spectacular Offensive Football
High Visible Advertising Space
Offering
Hi Skill Players
Training Facilities
Hi-Q Coach • Scouting
• Transfer Mgt • Training method
Reputation Brand Management
• Football Federation • Player agents • Alliance Clubs
• World Class Companies
INFRASTRUCTURE ASPECT
Key Resources Key Process
Key Partners
KEY RESOURCES • Players & Coach • Training facilities • Reputation
OFFERING • Offensive football • Advertising
CUSTOMERS • Fans • Advertisers
CUST. RELATION • Facebook, blog • Fans meeting • VIP tickets • Stadium visit
DIST. CHANNEL • Stadium, PO Box • TV Channel, Phone • Sales forces
KEY PARTNERS • Federations • Player agents • Alliance clubs • Companies
KEY PROCESSES • Scout & Transfer • Training methods • Brand mgt.
COST • Player wages • Maintenance • Agency fee
REVENUE • Ticket, TV right • Merchandise • Sponsorship
BM consist of a set of CHOICEs and CONSEQUENCEs
Consequence is result of choice
Two types of Consequence:
o Immediate consequence: respond quickly after choice is done.
E.g.: increase salary operational expense rise
o Rigid consequence: respond needs longer time E.g.: quality training improvement culture
building
Choice is the selection of an act among others
Three types of Choice:
o Policies choice: actions in which organization takes across all its operations
E.g.: locating plant in rural, encourage employee to use low fare flight, join with worker union.
o Assets choice: actions relate to deployment of tangible resources
E.g.: install new information system, build training facility
o Governance choice: actions relate to make or buy decision E.g.: lease or own machinery, outsource or own employee.
CHOICE and CONSEQUENCE are connected in the logical flow.
CHOICE CONSQ
If we choose
then
we get
CHOICE
CONSQ
and
we will also get
we can choose
thus CHOICE
and then
we can choose
this choice also
contribute to
CVP Key
Resource
Key Process
Profit Formula
Differentiation
Low Cost
What do we have to do to create differentiation
How low the cost or price we can achieve (rough cost structure)
Start Here
Hi-Q Rehab
Severe Upscale Stroker
Integrated Intensive Program
Inpatient Rehab
Various Therapies
Hi-Q Support
Hi tech Equipment
Sufficient hi-skill Therapies
Small Branches
Outpatient Continuous Therapies
Fair Premium
Price
High Profit
Additional Revenue
Reputation
Magnet Talent
WOM Promo
Appropriate Volume
Cost Saving
Attract more upscale families
Max recovery expected
Low Fare Low Fixed Cost
High Profit
Young & Leisure
Travelers
All passengers treated equally
Low-quality service
expected
Nothing is free
Additional revenue
Low variable
cost
High Volume
Reputation for fair fare
Low Commissions for travel agency
Bargaining power with
suppliers
High Aircraft
utilization
WOM promo
Standardize fleet of 737
Align with with company goals
Self-reinforcing o There are virtuous cycles in business model. o As cycles spin, key resources are stronger and accumulated. o Some of them will be company’s competitive advantage
(rigid consequences).
Robust o BM can anticipate threats from five competitive forces
(customer and supplier flex their bargaining powers, substitutions can reduce our offering value, new entrants and rivals can replicate our BM easily).
o BM should be evaluated over time.
Low Fare Low Fixed Cost
High Profit
Young & Leisure
Travelers
All passengers treated equally
Low-quality service
expected
Nothing is free
Additional revenue
Low variable
cost
High Volume
Reputation for fair fare
Low Commissions for travel agency
Bargaining power with
suppliers
High Aircraft
utilization
WOM promo
Standardize fleet of 737
BM is different with strategy, though they contain some similar elements.
A strong business model often beat a better technology (Chesbrough, 2007).
Your good strategy execution might not optimize your value creation if your business model is weak.
Business model innovation provide opportunities to build competitive advantage (e.g. Walmart, Dell).