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Making Your Business Easy To Lead

What is Business Model?

What is Business Model?

By Jukka Ala-Mutka, DSc.http://fi.linkedin.com/in/jukkaam

http://www.coneadvisor.com

http://twitter.com/jukkaam

http://twitter.com/agilestrategy

© CONE ADVISOR Jukka Ala-Mutka, D.Sc. 2

Introduction to presentation

• Business model is frequently used these days, it is seldom defined explicitly.

• New types of businesses, often created using the Internet, have needed new models and it become popular.

• The business model (or the concept) is either a specific model* (certain company’s model) or it is quite a loose and generic term, a synonym for the idea of earning money.

• In conclusion, a business model is like a business description of business idea holding several forms, steps and elements depending on the author.


*Hamel (2000) as well as Chesbrough and Rosenbloom (2002)

Business & Model*

• Business: • the activity of buying and selling goods and services, or a particular company that does this, or work you do to earn money.

• Model: • a representation of something, either as a physical object which is usually smaller than real object, or as a simple description of the object which might be used in calculations.


*(Cambridge Learner's Dictionary (Cambridge 2003) has the following definitions for the two terms)

Some Milestones and Evolution of Modeling

1. Systems thinking• Business Idea (Normann 1977), Business Definition (Abell 1980),

Business Concept Innovation (Hamel 2000)

2. Visual model (generation 1 models)• Activity System (Porter 1996)

3. Business Model (generic business models)• The most popular business model case Southwest Airlines (Porter

1985 and 1996, Morris et al. 2005, Kim & Mauborgne 2005)• “How you get paid” tai “How to make money” (Chesbrough &

Rosenbloom 2002), Afuah (2004), Rappa etc.• Management System (generation 2 models)

• Strategy Map (Kaplan & Norton 2004)• Strategy Model (Ala-Mutka 2008)


Business Model ≠ Strategy

1. The business model focuses on creating value for the customer

2. In the creation of value for the business, vs. creation of value for the shareholder (strategy).

3. Thirdly, it is assumed that this knowledge is cognitively limited vs. strategy generally requires careful, analytic calculation and choice, which assumes that there is a great deal of reliable information available.


*Chesbrough and Rosenbloom (2002)

Business Model* = Strategy

1. The definition of strategy based on systems thinking, thus it can be described as model

2. Competitive Strategy focus on business level strategies and its focus is on customer value and competition in certain business area.

3. Modern Agile Strategy do not requires analytic calculation and choice, which assumes that there is a great deal of reliable information.


*(or alternatively ”strategy model” (Ala-Mutka 2008)

Three (mostly) agreed ingredients of Business Model

1. Firstly, a business model describes the mechanisms of revenue generation.

2. Secondly, a business model analyzes the customer perspective in the value chain or in the value net.

3. Thirdly, a business model is typically a high-level and quite simplistic model rather than a full business plan.


Source: Ala-Mutka 2005

Business Model - same word and various concepts

• Tool • analytical and visual methods, which allows you to develop and sketch

out new or existing business models.

• Description• what the main activities are, how certain actions should be performed.• how a business positions itself within the value chain of its industry • how it intends to sustain itself to generate revenue. • the essence is "how you get paid" or "how you make money”*

• Management System• A concept to develop the grand strategy and a platform to execute it


*(with a taxonomy of alternative mechanisms (Chesbrough & Rosenbloom 2002).

Why Business Model should be Visual?

© CONE ADVISOR 10

10% rememberstext

65% rememberspicture

Bird

Business model categories

• Part A: Specific Business Model (development)• toolsets to ask right questions and take right steps

• Part B: Generic Business Model (description)• generic models to build strategic groups and library of

alternative business models

• Part C: Modeling for management system • using visually sound models for managing business and

strategic leadership


Part ADefining a Specific Business Model

• Business model is seen as specific solution to certain business environment.

• Business model is an output of modeling method

• Business model• Components • Ontology • Canvas


(1) Components of Business Model

• Component 1 (factors related to the offering): How do we create value?

• Component 2 (market factors): Who do we create value for?

• Component 3 (internal capability factors): What is our source of competence?

• Component 4 (competitive strategy factors): How do we competitively position ourselves?

• Component 5 (economic factors): How we make money?

• Component 6 (personal/investor factors): What are our time, scope, and size ambitions?


Source: Morris et al. (2005) introduced the “six questions that underlie a business model”.

Pros: Good starting point ”business idea”Cons: Where is the visualization?

(2) Business Model Canvas: nine business model building blocks

Osterwalder, Pigneur & al. 2010


Pros: Template to work with businessblocksCons: Where is the (actual) model?

(3) Business Model Ontology diagram by Alex Osterwalder


Source: http://www.choosenick.com/?action=view&url=simple-visual-business-model-design-tool

Pros: Flows btw blocks (generic)Cons: but, still where is the model (specific)?

(4) Mapping a logic of activities


Source: Nick Malik in http://msdn.microsoft.com/en-us/architecture/aa699429.aspx

Pros: All included!Cons: The point is missing. Too much details.

Part BDefining a Generic Business Model

• Various types of generic business models• Modeling is about the confluence of elements

of the model – the model is more than the sum of its parts

• 1st tier strategic decision is between alternative models for example Traditional vs. Discount Airline

• Business model examples• Discount Airline with Value chain• Discount Airline with Activity System


(5) Value chain as Business Model description


Ticket Counter Operations

Gate Operations

Aircraft Operations

On-Board Services

Baggage Handling

Ticket Offices

TraditionalAirlines

Full Service Full service Purchase new aircraftUnion pilots

Full service Free baggage handling

Ticket offices in downtown locations

Low Cost Airlines

Secondary airports and terminalsNo ticket counter (or check-in only)Purchase tickets on board the aircraft of from machinesNo interline ticketsFew fare options

Secondary airports and terminalsFirst come, first served seatingNo ticketing at gates

Used aircraftHigh-density seatingNonunion pilotsSmaller crews and more flying hours per day

Nonunion flight attendants Snack only or no mealsCharge for food and drink service

Provide carry-on spaceCharge for checked baggageNo interline baggage

None

Source: Porter 1985Pros: Clear comparison!Cons: missing causal-relationship of activities?

(6) Southwest Airlines’ Activity System


Source: Porter 1996

High aircraft

utilization

No meals

Very low ticket prices

Short-haul, point-to-point routes

between midsize cities and secondary

airports

Lean, highly productive ground and gate crews

Frequent, reliable

departures

No baggage transfers

Flexible union

contracts

No connections with other

airlines

No seat assignments

High level of employee stock

ownership

High compensation of employees

15-minute gate

turnaround

Limited use of travel agents

Automatic ticketing

machines

Standardized fleet of 737

aircraft

“Southwest the low-fare

airline”

Limitedpassenger

service

Pros: A visualized model from 1996!Cons: Often quite unpractical to use?

(7) Business models on the Web by Rappa

The basic categories of business models:

• Brokerage, • Advertising, • Infomediary, • Merchant,• Manufacturer (Direct),

• Affiliate, • Community, • Subscription and • Utility


Source: http://digitalenterprise.org/models/models.html

Pros: Base to compare modelsCons: Just a starting point?

(7) Brokerage business models

• Marketplace Exchange - transaction process • Buy/Sell Fulfillment - takes customer orders • Demand Collection System - "name-your-price“

priceline.com

• Auction Broker - conducts auctions for sellers • Transaction Broker - payment mechanism• Distributor - catalog operation • Search Agent - search-out the price• Virtual Marketplace - virtual mall


Source: http://digitalenterprise.org/models/models.html

(7) ChemConnect

• ChemConnect is a leader in helping customers optimize their purchasing and sales processes for chemicals, plastics, and related products

• through a unique combination of market information, industry expertise, e-commerce solutions, and an active network of trading partners.

• More than 7,500 Member companies in multiple industries around the world

• ChemConnect's highly efficient tools and services to streamline transactions and lower costs.

• Founded in 1995, ChemConnect based in Houston, Texas.


Source: ChemConnect, Inc.

(8) Logic of action and earning logicvisualization


Source: http://www.boardofinnovation.com/Pros: Visualization of ecosystem (external)!Cons: Missing internal/mgnt point of view

Part CLead through Business Models

• The new generation of business models are linked to implementation.

• Models are visualized by definition • Modeling focus on management and leadership

• Model is shared within organization (strategic leadership issues)

• Linking management issues such as strategic program management (PMO/PM) and KPIs*


*Program Management Office / Project Management and Key Process Indicators

(9) Visualizing and managing strategy with Strategy Model

© CONE ADVISOR Jukka Ala-Mutka, D.Sc. 25Pros: Simple - Easy to Lead!Cons: Lacking some confluence of elements

Source: Ala-Mutka 2008 and visualization by Cone Made, www.coneadvisor.com

Same Southwest case than in slide 18 & strategy modeling.

(9) Visualizing and managing strategy with Strategy Model

• Combines mind map and modeling approaches• Powerful method for team working and brainstorming• Quick to develop a model within an hour• Manage perspectives (~balanced scorecard)

• Linking various elements to model (for example)• Value proposition• Competition• Activities (~Activity System)• Projects• Key Performance Indicators (~balanced scorecard)


(10) BSC & Strategy Maps by Kaplan & Norton

• Kaplan and Norton principle (2nd) -- you cannot measure what you cannot describe

• Contradictory Forces• Differentiated value proposition• Value creation through internal processes• Simultaneous and complementary themes• Determination the value of intangible assets

• Interface between the strategy and the balanced scorecard

• Broken down into a number of strategic themes• Linked to a balanced scorecard (BSC) and an action

plan• Links the mission, values and vision to day-to-day

operations© CONE ADVISOR Jukka Ala-Mutka, D.Sc. 27

Source: Kaplan & Norton 1992 and 2004

Pros: Balancing perspectives!Cons: Too heavy, complex, but idea is good?

10 Tools ofBusiness Modeling

1. List of components

2. Template of components

3. Simple flow chart of components

4. Detailed flow chart of components

5. Value chain

6. Activity System

7. Description of generic business model

8. Visualization of earning logic

9. Strategy Model (Simple, mind map)

10. Strategy Map (Complex, hierarchy)


Sources

• Abell, D. 1980. Defining the business: the starting point of strategic planning. Englewood Cliffs: Prentice Hall.

• Afuah, A. 2004. Business Models: A Strategic Management Approach. New York: McGraw-Hill/Irwin.

• Ala-Mutka, Jukka. 2008. Strategiamalli (in Finnish) / Ala-Mutka, Jukka & Mattila, Jukka & Eräkangas, Kirsi & Etemad, Hamid. Agile Strategy of Rapid Growing and Internationalizing Enterprises from Canada and Finland. The 12th McGill International Entrepreneurship Conference 2009, Vaasa, Finland, 18-20 September, 2009.

• Ala-Mutka, J. 2005. Strategic Management of High Growth Ventures - A Venture-to-Capital Framework for Professional Entrepreneurship, Tampere: Tampere University of Technology. Publication 565

• Business Model Generation, A. Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self published, 2009

• Chesbrough, H. & Rosenbloom, R. 2002. The role of the business model in capturing value from innovation: evidence from Xerox Corporation's technology spin-off companies. Industrial and Corporate Change, Vol. 11, No. 3, pp. 529-555.

• Hamel, G. 2000. Leading the Revolution. Harvard Business School Press.

• Kaplan, R.S. & Norton, D.P. 2004. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Boston, MA: Harvard Business School Press.

• Kaplan, R.S. & Norton, D.P. 1992. The balanced scorecard: measures that drive performance. Harvard Business Review, Jan – Feb, pp. 71-80.

• Kim, W.C. & Mauborgne, R. 2005. Blue Ocean Strategy. Harvard Business School Publishing Corporation.

• Morris, M., Schindehutteb, M. & Allen J. 2005. The entrepreneur’s business model: toward a unified perspective. Journal of Business Research, 58, pp. 726– 735.

• Normann, R. 1977 Management for Growth. Chichester: John Wiley & Sons.

• Porter, M. 1985. Competitive Advantage. New York: The Free Press.

• Porter, M. 1996. What Is Strategy? Harvard Business Review. November-December, pp. 61-78.
