Dr. Harris Turino harristk@indo.net.id 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

Facebook

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).