Chapter 1. Understanding Business Model

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Why “IT and Business Advantage”? > US$ 2 trillion spent on IT worldwide in 2007 Continued rapid spending growth Truly global spending distribution

Ever increasing dependence on and impact of IT Search for opportunity Avoidance of operational risk

Module 1 discusses how to leverage IT to create business advantage.

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Key Learning Objectives

• Understand the concept of a business model• Learn how to analyze the three components of a business

model – strategy, capabilities, and value – through a business model audit

• Understand the different ways that business models can evolve and recognize potential drivers of business model evolution

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• What is a business model?• 星巴克為什麼越開越多，每家生意都很好的樣子 ?–和其他連鎖咖啡店，或其他賣現煮咖啡的地方經營方式有何不同 ?• 金車伯朗、丹堤、西雅圖…• 7-11、全家、萊爾富、麥當勞、肯德基…

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Business Model Framework and Definition

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Dot-com late 1990s

• 爭球模式• 永續經營的原則 ?• Early 2000?

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Analysing strategy

• Be different!• Four dimensions

– Market positioning• Determines the choice of customers to serve

– Product positioning• Determines the choice of products and services to offer, the features of

those offerings (price)

– Business network positioning• determines the role an organisation plays

– Boundary positioning• Determines markets, products, and businesses that will NOT be pursued

• Let’s see Apple…

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Strategy audit

• Sustainable advantage barriers exist• Assess business context (boundary positioning)

– Industry, competitive dynamics, demographics, economic, political, regulatory and societal factors

– Industry/IT trends, disruptors, opportunities, risks• Analyse customers

– Current and future customers• Analyse competitors and substitutes

– Who provide alternatives• Assess the business network

– Analysing network of suppliers, distributors, and other partners

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Analysing business networks

• Activities inside the boundaries of our firm vs. outside the boundaries– Corporation

• Kodak “commitment to quality” own laundry• Genuine GM Parts

– Selective sourcing partnership– Community

• How should we interact with our customers, suppliers, distributors, and others?– Transaction– Contract– partnership

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Impact of IT on industry structure and relationships. Why??

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KP KA VP CR CS

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Key Trends

Market Forces

Macro-economic forces

Industry Forces

ForesightCo

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ana

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arket analysis

Macroeconomics

Suppliers and other value chain actors

Stakeholders

Competitors(Incumbents)

New entrants(Insurgents)

Substitute products and services

Global market conditions

Capital markets Commodities and other resources

Societal and cultural trendsRegulatory trends

Economic infrastructure

Technology trends Socioeconomic trends

Market segmentsNeeds and demands

Market issues

Revenue attractiveness

Switching costs

Osterwalder & Pigneur (2010)

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Analysing capabilities

• Assemble the resources and build the capabilities required to achieve defined strategic goals

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Capability audit I

• Analyse processes and infrastructure– Core processes required to produce products;

deliver services; acquire and serve customers; manage relationships with key stakeholders; deliver a continuous stream of new products, services, and innovations

– IT• Evaluate people and partners– Attract, develop, motivate and retain the expertise– Business intelligence

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Capability audit II

• Assess organisation and culture– Decision-making authority, coordinating

mechanisms (formal, informal)• Evaluate leadership and governance– Governance system: strategic controls; operating

controls; effective risk management; development and management of shared values and culture

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Value audit

• Identify internal and external stakeholders– Customers, employees, partners, government,

society– Requirements and contributions

• Identify business model drivers and alignment– SWOT (是甚麼 ?)– Can IT help?

• Develop the financial model and determine financing needs

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SWOT

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OPPORTUNITIES

STRENGTHS

THREATS

WEAKNESSES

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Analysing value created for all stakeholders

• Financial ratios: e.g. DuPont Formula

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Evolving business models

• Not static– Enhance: incremental improvements to an existing

strategy or capability– Expand: launch new product categories, enter new

markets, or expand capabilities– Explore: launch new businesses and build new

capabilities

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Evolving the Amazon.com Business Model (1995-2000)

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Business Plans• Executive summary• The team

– Management profile– Why we are a winning team

• The business model– Vision, mission, and values– How our business model works– Value proposition– Target markets– Marketing plan– Key resources and activities

• Financial analysis– Breakeven analysis– Sales scenarios and projections– Capital spending– Operating costs– Funding requirements

• External environment– The economy– Market analysis and key trends– Competitor analysis– Competitive advantages of our

business model• Implementation roadmap

– Projects– Milestones– Roadmap

• Risk analysis– Limiting factors and obstacles– Critical success factors– Specific risks and countermeasures

• Conclusion• AnnexesOsterwalder & Pigneur (2010)

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Dragons’ den

• http://www.youtube.com/watch?v=OzH3MuxGVls

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The Business Model Canvas: The 9 Building Blocks

• Osterwalder & Pigneur (2010)

Key Partnerships

Key Activities Value Propositions

Customer Relationship

Customer Segments

Key Resources Channels

Cost Structure Revenue Streams

Value created for stakeholdersAnalysing capabilities

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Customer Segments

• Customer groups represent separate segments if:– Their needs require and justify a distinct offer– They are reached trough different Distribution

Channels– They have substantially different profitabilities– They are willing to pay for different aspects of the

offer

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Examples of different types of Customer Segments

• Mass market– E.g. consumer electronics sector

• Niche market– E.g. car part manufacturers

• Segmented– Micro Precision Systems providing outsourced micromechanical design

and manufacturing solutions serving 1) the watch industry, 2) the medical industry, and 3) the industrial automation sector

• Diversified– E.g. Amazon selling “cloud computing” services

• Multi-sided platforms (or multi-sided markets)– E.g. a credit card company needs credit card holders and merchants; an

enterprise offering free newspaper needs readers and advertisers

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Value Propositions

• Describes the bundle of products and services that create value for a specific Customer Segment

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Elements that can contribute to customer value creation (a non-exhaustive list)

• Newness– E.g. Cell phones, ethical investment

funds

• Performance– E.g. PC sector

• Customization• “Getting the job done”

– Rolls-Royce manufacture jet engines and provide services to airline customers

• Design– E.g. fashion, consumer electronics

industries

• Brand/status– E.g. Rolex watch, “underground”

brands

• Price– Southwest, easy jet, Ryanair (no-frills)– Tata Nano in India (NT75,000)– Free offers (newspaper, email, mobile

phone services)

• Cost reduction– E.g. Salesforce.com hosting CRM

application

• Risk reduction– service-level guarantee

• Accessibility– NetJets offers individuals and

corporation access to private jets

• Convenience/usability– Using iPod & iTunes for buying,

downloading and listening to digital music

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No frill flight: Ryanair

• https://www.youtube.com/watch?v=Cdq6KgNSkQM

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Channels

• Describes how a company communicates with and reaches its customer segments to deliver a Value Proposition

• Channels serve several functions– Raising awareness among customers about a company’s

products and services– Helping customers evaluate a company’s Value Proposition– Allowing customers to purchase specific products and

services– Delivering a Value Proposition to customers– Providing post-purchase customer support

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Channel TypesChannel Types Channel Phases

Own Direct Sales force 1. Awareness

2. Evaluation

3. Purchase

4. Delivery

5. After salesWeb sales

Indirect Own stores

Partner Partner storesWholesaler

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Customer Relationships

• Describes the types of relationships a company establishes with specific Customer Segments

• May be driven by:– Customer acquisition– Customer retention– Boosting sales (upselling)

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Several categories of Customer Relationships

• Personal assistance– Based on human interaction

• Dedicated personal assistance– Key account managers

maintaining personal relationships with important customers

• Self-service– Maintain no direct relationship

with customers

• Automated services– Mixed customer self service with

automated processes– Simulate a personal relationship

(e.g. book recommendations)

• Communities– GlaxoSmithKline launched a private

online community when introduced a new prescription-free weight-loss product

– Understand customers and manage customer expectations better

• Co-creation– From customer-vendor

relationship to co-create value with customers

– Amazon.com invite customers to write reviews

– YouTube.com solicit customers to create content

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Revenue Streams

• Represents the cash a company generates from each Customer Segment

• Two types of Revenue Streams– Transaction revenues resulting from one-time customer

payments• Examples?

– Recurring revenues resulting from on going payments to either deliver a Value Proposition to customers or provide post-purchase customer support• Diet industry [http://www.youtube.com/watch?v=x3QDKVxpuCE]• Other examples?

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Ways to generate Revenue Streams

• Asset sale– Amazon.com sells books…

• Usage Fee– Telecom, hotels, package

delivery service

• Subscription fees– Gyms, World of Warcraft

Online, Nokia Comes

• Lending/Renting/Leasing– Zipcar.com provide car

rental services

• Brokerage fees– Intermediation services

performed on behalf of two or more parties

– E.g. credit card provider, brokers, real estate agents

• Advertising

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Pricing Mechanisms to go with Revenue Streams

Fixed Menu Pricing Dynamic Pricing

List price Negotiation (bargaining)

Product feature dependent: price depends on the number or quality of Value Proposition features

Yield management: Price depends on inventory and time of purchase

Customer segment dependent: price depends on the type and characteristic of a Customer Segment

Real-time-market: price is based on supply and demand

Volume dependent: price as a function of quantity purchased

Auctions: price determined by outcome of competitive bidding

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Key Resources

• Describes the most important assets required to make a business model work– Could be physical, financial, intellectual or human– Can be owned or leased by the company or

acquired form key partners

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Types of Key Resources• Physical

– Manufacturing facilities, buildings, vehicles, machines, systems, POS systems, and distribution networks

– Retailers heavily rely on physical resources

• Intellectual– Brands, proprietary knowledge,

patents and copyrights, partnerships, and customer databases

– Consumer goods companies, such as Nike and Sony rely on brand

– Microsoft and SAP rely on intellectual property

– Qualcomm rely on patented microchip designs and earn licensing fees

• Human– Crucial in knowledge-

intensive and creative industries

– E.g. pharmaceutical companies such as Novartis

• Financial– Ericsson borrow funds from

bank and capital market, and then provide vendor financing to equipment customers in order to ensure orders are placed with Ericsson rather than competitors

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Key Activities

• Describes the most important things a company must do to make its business model work

• E.g. supply chain management to PC manufacturer Dell; problem solving to consultancy McKinsey

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Types of Key Activities• Production

– Designing, making and delivering a product– Manufacturing firms

• Problem solving– Knowledge management and continuous training– Coming up with new solutions of consultancies, hospitals, and other

service organizations• Platform/network

– Platform management, service provisioning, and platform promotion– Networks, matchmaking platforms, software, and brands– Web site at eBay.com, Visa credit card transaction platform, interface

between other vendors’ software and Windows operating system platform

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Key Partnerships

• Describes the network of supplier and partners that make the business model work

• Different types of partnerships– Strategic alliances between non-competitors– Coopetition: strategic partnerships between

competitors– Join ventures to develop new businesses– Buyer-supplier relationships to assure reliable

supplies

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Motivations for creating partnerships

• Optimization and economy of scale– Formed to reduce cost, and often involve outsourcing or sharing

infrastructure• Reduction of risk and uncertainty

– Group of consumer electronics, personal computer, and media manufacturers bring Blu-ray technology to market, at the same time, individual members compete in selling similar products

• Acquisition of particular resources and activities– Mobile phone manufacturers may license an operating system for

their handsets rather than developing one in-house– Insurer may choose to rely on independent brokers rather than

develop its own sales force

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Cost Structure

• Describes all costs incurred to operate a business model

• “no frills” airlines have built business models entirely around low Cost Structures

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Two broad classes of business model Cost Structures

Cost-driven• Focus on minimizing cost

wherever possible• Using low price Value

Propositions, maximum automation, and extensive outsourcing

• E.g. no frills airlines

Value-driven• Focus on value creation and

are less concerned with the cost

• Premium Value Propositions and a high degree of personalized services

• E.g. Luxury hotels

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Characteristics of Cost Structures

• Fixed costs– E.g. salaries, rents, and

physical manufacturing facilities

– Manufacturing companies are characterized by a high proportion of fixed costs

• Variable costs– Music festivals are

characterized by high proportion of variable costs

• Economies of scale– Larger companies

benefit form lower bulk purchase rates

• Economies of scope– A Large enterprise the

same marketing activities or Distribution Channels may support multiple products

LONG TAIL BUSINESS MODELSAn example of Business Pattern

Long Tail Business Models

• Offering a large number of niche products, each of which sells relatively infrequently

• Require low inventory costs and strong platforms to make niche content readily available to interested buyers

• Examples– Netflix, eBay, YouTube, Facebook, Lulu.com

Long Tail Business ModelsKey Partnerships

Niche content providers

User generated content

Key Activities

Platform managementService provisioningPlatform promotion

Value Propositions

Large scope of niche content

Content production tools

Customer Relationship

Customer Segments

Many niche segments

Niche content providersKey Resources

Platform

Channels

Internet

Cost Structure

Platform management & development

Revenue Streams

Selling less of more

What Triggers Long Tail

• Democratization of tools of production– Falling technology costs gave individuals access to tools

that were prohibitively expensive• Democratization of distribution– The Internet has made digital content distribution a

commodity• Falling search costs to connect supply with demand– Powerful search and recommendation engines, user

ratings, and communities of interest have made finding interested potential buyers much easier

The Transformation of the Book Publishing Industry: Old Model

Key Partnerships

Key Activities

Content acquisitionPublishingSales

Value Propositions

Broad content (Ideally “hits”)

Customer Relationship

Customer Segments

Broad audience

Key Resources

Publishing knowledgeContent

Channels

Retail network

Cost Structure

Publishing/Marketing

Revenue Streams

Wholesale revenues

The Transformation of the Book Publishing Industry: New Model

Key Partnerships

Key Activities

Platform developmentLogistics

Value Propositions

Self-publishing services

Marketplace for niche content

Customer Relationship

Online profile

Customer Segments

Niche authorsNiche audiences

Key Resources

Print-on-demand infrastructure

Channels

Lulu.com

Cost Structure

Platform management & development

Revenue Streams

Sales commissions (low)Publishing service fees

LEGO Factory: Customer-Designed Kits

Key Partnerships

Customers who build new LEGO designs and post them online become key partners generating content and value

Key ActivitiesLEGP has to provide and manage the platform and logistics that allow packaging and deliver of custom-made LEGO sets

Value PropositionsLEGO Factory substantially expands the scope of the off-the-shelf kit offering by giving LEGO fans the tools to build, showcase, and sell their own custom-designed kits

Customer RelationshipLEGO builds a long tail community around customers who are truly interested in niche content and want to go beyond off-the-shelf retail kits

Customer SegmentsThousands of new customer-designed kits perfectly complement LEGO’s standard sets of blocks. LEGO connects customers who create customized designs with other customers, thus becoming a customer match-making platform and increasing sales

Key ResourcesLEGO has not yet fully adapted its resources and activities, which are optimized primarily for the mass market

ChannelsLEGO Factory’s existence depends heavily on the Web channel

Cost StructureLEGO Factory leverages production and logistics costs already incurred by its traditional retail model

Revenue StreamsLEGO aims to generate small revenues from a large number of customer-designed items. This represents a valuable addition to traditional high-volume retail revenues