Business Model PDF

Business Model Business Models What’s new? 3 what is a business model? A business model is a simple representation of the complex reality of a business.  The challenge is that the concept must be simple, relevant, and intuitively understandable, while not...

Business Model Business Models What’s new? 3 what is a business model? A business model is a simple representation of the complex reality of a business.  The challenge is that the concept must be simple, relevant, and intuitively understandable, while not oversimplifying the complexities of how enterprises function. 4 ALERT It describes the rationale of how an organization creates, delivers and captures value.  A business model includes nine building blocks that show the logic of how a company intends to make money. The nine blocks cover the four main areas of a business: customers, offer, infrastructure, and financial viability.  Customer Segments The Customer Segments Building Block defines the different groups of people or organizations an enterprise aims to reach and serve  Customers comprise the heart of any business model. Without (profitable) customers, no company can survive for long. In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors, or other attributes.  A business model may define one or several large or small Customer Segments. An organization must make a conscious decision about which segments to serve and which segments to ignore. Once this decision is made, a business model can be carefully designed around a strong understanding of specific customer needs.  Customer Segments Customer groups represent separate segments if: Their needs require and justify a distinct offer They are reached through different Distribution Channels They require different types of relationships They have substantially different profitabilities They are willing to pay for different aspects of the offer  Customer Segments There are different types of Customer Segments. Here are some examples: 1-Mass market Business models focused on mass markets don’t distinguish between different Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships all focus on one large group of customers with broadly similar needs and problems. This type of business model is often found in the consumer electronics sector. 2- Niche market Business models targeting niche markets cater to specific, specialized Customer Segments. The Value Propositions, Distribution Channels, and Customer Relationships are all tailored to the specific requirements of a niche market. Such business models are often found in supplier-buyer relationships. For example, many car part manufacturers depend heavily on purchases from major automobile manufacturers.  Customer Segments 3- Segmented Business models distinguish between market segments with slightly different needs and problems. Example: in retail banking, a bank will create a distinction between consumers whose net worth is $100, 000 and those with a net worth of $500, 000. The differences between these two kinds of consumers are small but significant. Typically, a bank will create separate value propositions, distribution channels and customer relationships for both customer segments. 4- Diversified An organization with a diversified customer business model serves two unrelated Customer Segments with very different needs and problems. For example: Amazon now has individual customers and business customers as well.  Customer Segments 5- Multi-sided platforms (or multi-sided markets) Some organizations serve two or more interdependent Customer Segments. Both segments are required to make the business model work. For example: e-bay which operates with Multi-sided platform by requiring the presence of both buyers and sellers for its continued success. Credit card company, for example, needs a large base of credit card holders and a large base of merchants who accept those credit cards. Similarly, an enterprise offering a free newspaper needs a large reader base to attract advertisers. On the other hand, it also needs advertisers to finance production and distribution. Both segments are required to make the business model work  Value Propositions The Value Propositions Building Block describes the bundle of products and services that create value for a specific Customer Segment  The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfies a customer need. Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment. The Value Proposition is an aggregation, or bundle, of benefits that a company offers customers  A Value Proposition creates value for a Customer Segment through a distinct mix of elements catering to that segment’s needs. Values may be quantitative (e.g., price, speed of service) or qualitative (e.g., design, customer experience).  Newness, performance, customization, design, price, brand/status, accessibility, risk reduction, convenience/usability are examples of elements used to create value.  Value Propositions Newness Some Value Propositions satisfy an entirely new set of needs that customers previously didn’t perceive because there was no similar offering, example: Cell phones. Performance Improving product or service performance has traditionally been a common way to create value. Example: faster PCs, more disk storage space, and better graphics. Customization Tailoring products and services to the specific needs of individual customers or Customer. The concepts of mass customization and customer co-creation have gained importance. This approach allows for customized products and services, while still taking advantage of economies of scale Getting the job done Value can be created simply by helping a customer get certain jobs done. Rolls-Royce understands this very well: its airline customers rely entirely on Rolls Royce to manufacture and service their jet engine. A product whose value proposition is ‘getting the job done’ enhances the customer’s productivity and helps the customer to focus on more relevant details.  Value Propositions Design is an important but difficult element to measure. A product may stand out because of superior design. In the fashion and consumer electronics industries, design can be a particularly important part of the Value Proposition. Brand/status Customers may find value in the simple act of using and displaying a specific brand. Wearing a Rolex watch signifies wealth. Price Offering similar value at a lower price is a common way to satisfy the needs of price-sensitive Customer Segments. But low-price Value Propositions have important implications for the rest of a business model. example, such as Southwest, easyJet, and Ryanair have designed entire business models specifically to enable low-cost air travel.  Value Propositions Cost reduction Helping customers reduce costs is an important way to create value. Risk reduction Customers value reducing the risks they incur when purchasing products or services. For a used car buyer, a one-year service guarantee reduces the risk of post-purchase breakdowns and repairs. Accessibility Making products and services available to customers who previously lacked access to them is another way to create value. Example: NetJets offers individuals and corporations access to private jets, a service previously unaffordable to most customers. Convenience/usability Making things more convenient or easier to use can create substantial value. With iPod and iTunes, Apple offered customers unprecedented convenience searching, buying, downloading, and listening to digital music.  Channels The Channels Building Block describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition  Communication, distribution, and sales Channels comprise a company's interface with customers.  Channels  Finding the right mix of Channels to satisfy how customers want to be reached is crucial in bringing a Value Proposition to market.  An organization can choose between reaching its customers through its own Channels, through partner Channels, or through a mix of both.  Owned Channels can be direct, such as an in-house sales force or a Web site, or they can be indirect, such as retail stores owned or operated by the organization. Owned Channels and particularly direct ones have higher margins but can be costly to put in place and to operate.  Partner Channels are indirect and span a whole range of options, such as wholesale distribution, retail, or partner-owned Web sites. Partner Channels lead to lower margins, but they allow an organization to expand its reach and benefit from partner strengths.  The trick is to find the right balance between the different types of Channels, to integrate them in a way to create a great customer experience, and to maximize revenues  Customer Relationships The Customer Relationships Building Block describes the types of relationships a company establishes with specific Customer Segments Relationships can range from personal to automated. Customer relationships may be driven by the following motivations: Customer acquisition Customer retention Boosting sales (upselling) For example, mobile network operator Customer Relationships were driven by aggressive acquisition strategies involving free mobile phones. When the market became saturated, operators switched to focusing on customer retention and increasing average revenue per customer. The Customer Relationships called for by a company’s business model deeply influence the overall customer experience  Customer Relationships Several categories of Customer Relationships: Personal assistance This relationship is based on human interaction. The customer can communicate with a real customer representative to get help during the sales process or after the purchase is complete. This may happen onsite at the point of sale, through call centers, by e-mail, or through other means. Dedicated personal assistance This relationship involves dedicating a customer representative specifically to an individual client. For example, dedicated bankers serve high net worth individuals Self-service In this type of relationship, a company maintains no direct relationship with customers. It provides all the necessary means for customers to help themselves.  Customer Relationships Automated services This type of relationship mixes a more sophisticated form of customer self-service with automated processes. For example, personal online profiles give customers access to customized services. Automated services can recognize individual customers and their characteristics, and offer information related to orders or transactions. Communities Increasingly, companies are utilizing user communities to become more involved with customers/prospects. Co-creation More companies are going beyond the traditional customer-vendor relationship to co-create value with customers. Some companies engage customers to assist with the design of new and innovative products. Amazon.com invites customers to write reviews and thus create value for other book lovers.  Revenue Streams The Revenue Streams Building Block represents the cash a company generates from each Customer Segment (costs must be subtracted from revenues to create earnings) If customers comprise the heart of a business model, Revenue Streams are its arteries. A company must ask itself, For what value is each Customer Segment truly willing to pay? A business model can involve two different types of Revenue Streams: 1. Transaction revenues resulting from one-time customer payments 2. Recurring revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support.  Revenue Streams There are several ways to generate Revenue Streams: 1- Asset sale The most widely understood Revenue Stream derives from selling ownership rights to a physical product. Amazon.com sells books, music, consumer electronics. 2- Usage fee This Revenue Stream is generated by the use of a particular service. The more a service is used, the more the customer pays. A telecom operator may charge customers for the number of minutes spent on the phone. A hotel charges customers for the number of nights rooms are used. 3- Subscription fees This Revenue Stream is generated by selling continuous access to a service. A gym sells its members monthly or yearly subscriptions in exchange for access to its exercise facilities.  Revenue Streams There are several ways to generate Revenue Streams: 4- Lending/Renting/Leasing This Revenue Stream is created by temporarily granting someone the exclusive right to use a particular asset for a fixed period in return for a fee. For the lender this provides the advantage of recurring revenues. Renters or lessees, on the other hand, enjoy the benefits of incurring expenses for only a limited time rather than bearing the full costs of ownership. 5- Licensing This Revenue Stream is generated by giving customers permission to use protected intellectual property in exchange for licensing fees. Licensing allows rightsholders to generate revenues from their property without having to manufacture a product or commercialize a service. 6- Brokerage fees This Revenue Stream derives from intermediation services performed on behalf of two or more parties. Brokers and real estate agents earn a commission each time they successfully match a buyer and seller. 7- Advertising This Revenue Stream results from fees for advertising a particular product, service, or brand.  Key Resources The Key Resources Building Block describes the most important assets required to make a business model work  These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues.  Different Key Resources are needed depending on the type of business model. For example: A microchip manufacturer requires capital- intensive production facilities, whereas a microchip designer focuses more on human resources.  Key resources can be physical (facilities, plant, buildings, vehicles), financial (cash, line of credit and stocks), intellectual (property, knowledge, patents and copyright), or human.  Key resources can be owned or leased by the company or acquired from key partners.  Key Resources Key Resources can be categorized as follows: 1- Physical This category includes physical assets such as manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales systems, and distribution networks. Retailers like Wal-Mart. 2- Intellectual resources such as brands, proprietary knowledge, patents and copyrights, partnerships, and customer databases are increasingly important components of a strong business model. Intellectual resources are difficult to develop but when successfully created may oΩer substantial value. Consumer goods companies such as Nike and Sony rely heavily on brand as a Key Resource. 3- Human Every enterprise requires human resources, but people are particularly prominent in certain business models. For example, human resources are crucial in knowledge-intensive and creative industries. A pharmaceutical company such as Novartis, for example, relies heavily on human resources 4- Financial Some business models call for financial resources and/or financial guarantees, such as cash, lines of credit, or a stock option pool for hiring key employees.  Key Activities Every business model calls for several Key Activities. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues.  Key Activities can be categorized as follows:  Production: designing, making, and delivering a product in substantial quantities and/or of superior quality. Production activity dominates the business models of manufacturing firms.  Problem solving: coming up with new solutions to individual customer problems. For example: the operations of consultancies, hospitals, and other service organizations are typically dominated by problem solving activities. Their business models call for activities such as knowledge management and continuous training.  Platform/network: Networks, matchmaking platforms (like Uber), software, website and mobile application. Example: ebay (match between buyer and seller); Visa credit card transaction platform for merchants, customers, and banks. Key Activities in this category relate to platform management, service provisioning, and platform promotion.  Key Partners  The Key Partnerships Building Block describes the network of suppliers and partners that make the business model work Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business models.  Companies create alliances to optimize their business models, reduce risk, or acquire resources.  We can distinguish between four different types of partnerships: 1. Strategic alliances between non-competitors 2. Coopetition: strategic partnerships between competitors 3. Joint ventures to develop new businesses 4. Buyer-supplier relationships to assure reliable supplies  Key Partners It can be useful to distinguish between three motivations for creating partnerships: 1- Optimization and economy of scale The most basic form of partnership or buyer-supplier relationship is designed to optimize the allocation of resources and activities. It is illogical for a company to own all resources or perform every activity by itself. (outsourcing or sharing infrastructure) 2- Reduction of risk and uncertainty Partnerships can help reduce risk in a competitive environment characterized by uncertainty. It is not unusual for competitors to form a strategic alliance in one area while competing in another. 3- Acquisition of particular resources and activities Few companies own all the resources or perform all the activities described by their business models. Rather, they extend their own capabilities by relying on other firms to furnish resources or perform certain activities. Such partnerships can be motivated by needs to acquire knowledge, licenses, or access to customers.  Cost strucutre The Cost Structure describes all costs incurred to operate a business model This building block describes the most important costs incurred while operating under a particular business model. Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships. It can be useful to distinguish between two broad classes of business model Cost Structures: cost-driven and value-driven (many business models fall in between these two extremes): 1- Cost-driven business models focus on minimizing costs wherever possible. This approach aims at creating and maintaining the leanest possible Cost Structure, using low price Value Propositions, maximum automation, and extensive outsourcing. No frills airlines, such as Southwest, easyJet, and Ryanair typify cost-driven business models.  Cost strucutre 2- Value-driven Some companies are less concerned with the cost implications of a particular business model design, and instead focus on value creation. Premium Value Propositions and a high degree of personalized service usually characterize value-driven business models. Luxury hotels, with their facilities and exclusive services, fall into this category. Cost Structures can have the following characteristics: Fixed costs that remain the same despite the volume of goods or services produced. Examples include salaries, rents, and physical manufacturing facilities. Some businesses, such as manufacturing companies, are characterized by a high proportion of fixed costs. Variable costs that vary proportionally with the volume of goods or services produced. Some businesses, such as music festivals, are characterized by a high proportion of variable costs. Economies of scale Cost advantages that a business enjoys as its output expands. Larger companies, for instance, benefit from lower bulk purchase rates. This and other factors cause average cost per unit to fall as output rises. Economies of scope Cost advantages that a business enjoys due to a larger scope of operations. In a large enterprise, for example, the same marketing activities or Distribution Channels may support multiple products.  Key Customer Customer Key activities What will your relationsh segments partners business spend ips Who are your the most time What types of interactions will paying What external doing? your customers customers? partnerships Product expect to have should you development? Value with you? Do you have any invest in? Sales? Other? non-paying propositi customers? Mentors? on Channels Lawyers? Key How large is this resources How will group? Distributors What will it cost customers find ? Do you have for: out about you? Suppliers? multiple Manufacturing? customer Intellectual How will you get segments? property? products to Human them? resources? Cost structure Revenue streams How might you make $ from How much time and money will be this? required to do this? What value, other than money, are you hoping to create?