Business Models and Competitive Advantage

Business Models and Competitive Advantage

Section 1: Canvas

The Business Model Canvas

• Def_Business Model
  • A business model describes the rationale of how an organisation creates, delivers and captures value.
• 9 Building Blocks (aka the Blueprint) => hands on tool that fosters understanding, discussion, creativity and analysis
  • Customer Segments (CS)
    • Defines the different groups of people or organizations an enterprise aims to reach and serve
    • Q’s to Ask: For whom are we creating value? Who are our most important customers?
      • Mass Market
        • Don’t distinguish between CS
        • VP, Distribution, Channels and CR focus on 1 group of cx with broadly similar needs and problems
        • Often in cx electronic sector
      • Niche Market
        • Cater to specific specialized CS => VP, DC & CR are tailored
      • Segmented
        • Slightly different needs & problems
        • Implicates other building blocks => VP, DC, CR and Rev. streams.
        • g. Micro Precision Systems (outsource micro mechanical design and manufacturing solutions) -> Serve 3 different CS - watch industry, medical industry and industrial automation sector => offering each slightly different VP
      • Diversified
        • Serves 2 unrelated CS with very different needs and problems
        • g. Amazon - 2006 diversified its retail business by selling “cloud computing” services: online storage space and on-demand server usage => ∴ Catered to totally different CS (Web companies) w. diff. VP -> diversification = powerful IT infrastructure shared by retail sales op. + new cloud computing service unit
      • Multi-sided platforms (or multi-sided markets)
        • Serve 2 or more interdependent CS
        • g credit card companies -> need large base of credit card holders + large base of merchants that accept cards
      • Value Propositions (VP)
        • Describes bundle of products and services that create value (quantitative or qualitative) for a specific CS - Reason for cx choice of company => solves a problem or satisfies a need
        • Each VP (aggregation, or bundle, of benefits - innovative & represents new or disruptive offer OR. existing offer w. Added ft. & attributes ) consists of selected bundle of products and/or services that cater to CS
        • Q’s to Ask - What value do we deliver to the cx? Which one of our cx’s problems are we helping to solve? Which cx needs are we satisfying? What bundles of products and services are we offering to each CS?
        • Creation in value:
          • Newness
            • Entirely new set of needs cx previously didn’t perceive (nothing was available)
            • Often technology related => e.g cell phones = telecommunications OR. ethical investment funds
          • Performance
            • Improving product or service performance
          • Customization
            • Tailoring products & services to specific needs to create value
            • Concept of mass customization & cx co-creation = gained importance (allows for cust. Products + services, while taking advantage of economies of scale)
          • “Getting the job done”
            • Rolls-Royce: airline cx rely entirely on the manufacturing and servicing of their jet engines => arrangement = cx can focus on running airline (airline pay a fee for every hour an engine runs)
          • Design
            • Important but difficult to measure
            • Fashion & cx electronics industries
          • Price
            • Similar value at low price = common cx satisfaction (price-sensitive CS)
            • Implications on the rest of a business model
            • Free offers starting to permeate various industries
          • Cost Reduction
            • g. Salesforce.com - sells hosted Customer Relationship Management (CRM) application = relieves buyers from expenses and trouble of having to buy, install and manage CRM software themselves
          • Risk Reduction
            • g Used car buyers - one yr service guarantee reduces risk of post-purchase breakdowns and repairs.
          • Accessibility
            • Making products and services available to customers who previously lacked access to them = value => result from business model innovation, new technologies or combination
            • g. NetJets = popularized concept of fractional private jet ownership for individual and corporation access (previously unaffordable to most cx) OR. Mutual funds - innovative financial product = possible for people w. modest wealth to build diversified investment portfolios
          • Convenience/Usability
            • g. iTunes convenience of searching, buying, downloading and listening to digital music = dominates market
          • Channels (CH)
            • Describes how company communicates w. and reaches CS to deliver VP
            • Interface (touch points) w. cx
            • Q’s to Ask: Though which CH do out CS want to be reaches? How are we reaching them now? How are our CH integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with cx routines?
            • Five distinct phases.
            • Owned CH (Direct: in-house sales forces or website, vs. Indirect: retail stores owned or operated by organization), Partner CH (Indirect: e.g. wholesale distribution, retail or partner-owned websites) or both
            • Partner CH -> lower margins BUT allow for expansion or reach and benefit from partner strengths

VS.

Owned CH -> higher margins BUT costly to put in place + operate

Need 2 be balanced for great cx exp. + maximize rev.

• Customer Relationships (CR)
  • Types of relationships a company establishes with specific CS
  • Personal to Automated. Delivered by cx acquisition, retention and upselling motivations
  • g. Early days = mobile network operator CR were driven by aggressive acquisition strategies involving free mobile phones -> Saturated Market = operators switched to focusing on cx retention + inc. average rev. per cx
  • Q’s to Ask: What types of relationships does each CS expect us to establish and maintain with them? Which ones have we established? How costly are they? How are they integrated with the rest of our business model?
    • Personal Assistant
      • Human interaction - during + after sale => on-site, call centers, e-mail, etc.
    • Dedicated personal Assistance
      • Dedicated rep to client - deepest and most intimate relationship (normally develops over long period of time)
      • g. Private banking services or key account managers (maintain personal relationships)
    • Self-Service
      • No direct relationship w. Cx
    • Automated Services
      • More sophisticated form of cx self-service w. Automated processes
      • Recognize individual cx & characteristics => offer info. Related to orders/transactions
      • g. Netflix recommendations of tv/movies
    • Communities
      • Facilitating connection between community -> e.g online communities allowing users to exchange knowledge and solve each others problems.
      • Help companies better understand cx
      • g. Pharmaceutical giant GlaxoSmithKline => launched private online community upon introduction of alli (new prescription-free weight-loss product) -> Increased understanding of challenges faced by overweight adults = learn to better manage cx expectations
    • Co-creation
      • g. Amazon.com -> reviews on books = value for other book lovers
      • Engage cx to assist w. Design of new & innovative products
      • g. Youtube -> solicit cx to create content for public consumption
    • Revenue Streams (R$)
      • Cash a company generates from each CS (costs must be subtracted from revenues to create earnings)
      • Arteries of business
      • Each stream may have different pricing mechanisms -> prices, bargaining, auctioning, market dependent, volume dependent or yield management
      • Can involve 2 types of Streams
        • Transaction Rev. (one-time payments)
        • Recurring Rev. -> Deliver VP or post-purchase support
      • Q’s to Ask: What value is each CS truly willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each R$ contribute to overall revenues?
      • To generate R$:
        • Asset sale
        • Usage fee - service fee (e.g hotel - # of nights stayed)
        • Subscription fee (e.g. gym membership or WOW)
        • Lending/Renting/Leasing - temporarily granting someone exclusive right to use an asset for a fixed period in return for a fee => Lender = recurring revenue; Renter/Lessees = Benefits of expenses for limited time rather than bearing full cost of ownership
        • Licensing - Giving cx permission to use protected intellectual property for licensing fees => Right holders can generate revenue w/o manufacturing a product or commercializing a service -> e.g Media industry or Technology sector (patent holders)
        • Brokerage fees - Intermediated services performed on behalf of two or more parties E.g. credit card providers taking % of value of each sale executed between card merchants and cx OR. Brokers and real estate agents earning commission for each successful match
      • Advertising
        • R$ results from fees for advertising particular products, services or brands.
        • Two types of pricing mechanisms: fixed and dynamic
      • Key Resources (KR)
        • Allow enterprise to create and offer VP, reach markets, maintain relationships with CS and earn revenue
        • Physical, financial, intellectual or human
        • Resources => owned or leased
        • Q’s to Ask: What KR do our VPs’ require? Our Distribution CH? CR? R$?
        • Can be categorized as follows:
          • Physical -> Assets (e.g manufacturing facilities, buildings,vehicles, machine, systems, point-of-sales systems and distribution networks)
          • Intellectual resources (brands, proprietary knowledge, patents and copyright, partnerships and cx databases) are difficult to develop, but offer substantial value (e.g Nike and Sony rely heavily on brand as a KR, while Microsoft and SAP depend on software & related intellectual property developed over many years)
          • Human -> Crucial in knowledge-intensive & creative industries
          • Financial resources and/or financial guarantees -> cash, lines of credit or stock option pool for hiring key employees (E.g. Ericsson, telecom manufacturer,opt to borrow funds from banks and capital markets, use portion of proceeds to provide vendor financing to equip cx => ensuring orders are places w. Ericsson rather than competitors)
        • Key Activities (KA)
          • Requires to create and offer VP, reach markets, maintain CR and earn rev. (e.g Microsoft = software development)
          • Q’s to Ask: What KA do our VP require? Distribution CH? CR? R$?
            • Production - designing, making and delivering
            • Problem Solving - Operations of consultancies, hospitals and other service organizations
            • Platform/Network - Networks, matchmaking platforms, software and even brands -> E.g eBay - continually develop & maintain platform
          • Key Partnerships (KP)
            • Network of supplies and partners that make the business model work
            • Alliances optimize business models, reduce risk or acquire resources
            • Four different types
              • Strategic alliance between non-competitors
              • Coopetition: strategic partnerships between competitors
              • Joint ventures to develop new businesses
              • Buyer-supplier relationships to assure supplies
            • Q’s to Ask: Who are our KP? Who are our key suppliers? Which KR are we acquiring from partners? Which KA do partners perform?
            • Three motivations for creating partnerships:
              • Optimization and economy of scale - Reduce costs & often involve outsourcing or sharing infrastructure
              • Reduction of risk and uncertainty
              • Acquisition of particular resources and activities - Few companies own all the resources or perform all the activities described by their business models -> extend own capabilities by relying on other firms to furnish particular resources or perform certain activities (motivated by need of knowledge, licenses or access to cx) - E.g. Telstra
            • Cost Structure (C$)
              • Creating and delivering value, maintaining CR and generating revenue = costs
              • Q’s to Ask: What are the most important costs inherent in our business model? Which KR are most expensive? Which KA are most expensive?
              • Cost-driven (leanest CS) vs. value-driven (focus on value creation)
              • Characteristics:
                • Fixed cost - salaries, rent, physical manufacturing facilities
                • Variable costs - e.g music festivals
                • Economies of scale - Large companies benefit from low bulk purchase rates.
                • Economies of scope - cost advantages that a business enjoys due to a larger scope of operations

Reinventing Your Business Model by Mark W. Johnson, Clayton M. Christensen and Henning Kagermann

“Our secret to maintaining a thriving business is recognizing when it needs a fundamental change”

• 2003 - Apple revolutionized portable entertainment (creating new market + transforming company) = iPod w. iTunes > Rio (1998) or Cabo (2000) BECAUSE Apple took a good technology and wrapped it in a great business model (ease + convenience -> combined hardwear, software and service)
  • Gillette’s famous blades-and-razor model in reverse:
    • Apple essentially gave away the “blades” (low-margin iTunes music) to loc in purchase of the “razor” (high-margin iPod) = convenience
  • 2005 Economist Intelligence Unit survey reported over 50% of executives believe business model innovation (WILL become more important) > product/service innovation => 2008 IBM survey of corporate CEO’s echoed these results (NEED for adaptation of business model) - ⅔ required extensive changes.
  • Breakthrough, game-changing products rarely emerge from established businesses
    • Radically new product usually needs new business model
    • Transcending problem is possible IF you:
      • Understand your existing model at a granular level, so that you are in a position to reinvent it
      • Come up with a great way to help people get an important job done
    • Roadmap consists of three simple steps:
      • Realize success starts with thinking about the opportunity to satisfy a real cx who needs a job done
      • Construct a blueprint laying out how company will fulfill that need at a profit => 4 elements:
        • Customer Value Proposition (CVP)
        • Profit Formula - blueprint that defines how company creates value for itself while providing value to the customer
          • Revenue Model: price x volume
          • Cost Structure: direct costs, indirect cost, economies of scale
          • Margin Model: Contribution needed from each transaction to achieve desired profits
          • Resource Velocity: how fast we need to turn over inventory, fixed assets, and other assets – and, overall, how well we need to utilize resources – to support our expected volume and achieve our anticipated profits. (PROFIT = 1 PIECE OF THE PUZZLE)
          • HINT: Start by setting price required to deliver CVP, then work backwards to determine variable costs and gross margins
        • Key Resources - people, technology, products, facilities, equipment, channels, and brand required for VP
        • Key Processes - operational and managerial processes that can successfully be repeated and increased in scale (e.g training, development, manufacturing, budgeting, planning, sales and service & rules, metrics and norms.)
        • CVP & profit formula define value for the customer and the company, respectively; KR and key processes describe how that value will be delivered to both the customer and the company.
      • Compare model to existing models - see how much change is needed to capture opportunity
        • Think about most common barriers keeping people from getting particular jobs done:
          • Insufficient wealth
          • Access
          • Skill => QuickBooks - fulfill small-business owners’ need to avoid running out of cash = greatly simplified accounting software = broke the skills barrier of untrained small-business owners
          • Time
        • Five strategic circumstances that often require business model change:
          • Address need of innovation for large groups of potential customers who are shut out of a market entirely (existing solutions are to expensive or complicated) - inc. democratize products in emerging markets (or reach the bottom of the pyramid).
          • Capitalize on a brand-new technology by wrapping a new business model around it (Apple and MP3 players) OR. leverage a tested technology by bringing it to a whole new market (offering military technologies in the commercial space or vice versa - samsung Knox).
          • Bring a job-to-be-done focus where one does not yet exist (Refine existing products or profitability, increase commoditization over time; e.g FedEx concentrated on fulfilling an entirely unmet customer need to receive packages faster & more reliably - they integrated key processes and resources in more efficient way = competitive advantage that took UPS many years to copy)
          • Need to fend off low-end disruptors - E.g. Success of Nano (cheap cars in Mumbai by Ratan Tata) = threaten other automobile makers
          • Need to respond to a shifting basis of competition (Inevitably, what defines an acceptable solution in a market will change over time, leading core market segments to commoditize)

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