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.

 Key Resources

Brand Technology People Channel Partnership

Target Customer Offering

Customer Value Proposition

Key Process

R&D IT Manufacturing Marketing HR Mgt

Revenue Stream Cost Structure

Profit Formula

 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
Value Offering
Target Customer

Product and the benefit of products that satisfy customers need.

Group of people that face problems, need relatively same and specific solutions.

Brand Volvo BMW Southwest Palm Pilot Domino Mountain Dew

Offering

Target Market

Benefit Safety Ultimate driving machine Value, enjoy, and fun Back up file to PC more easily Delivery speed and good quality

Price 20% premium

Automobile Upscale American families Automobile Young executives Flight Electronic organizer Pizza Caffeine soft drink Travellers Busy professional Convenience-minded pizza lovers

Low cost 15% premium

Young and active soft More energy, drink consumers who stay alert and have little time for sleep keep going

Average

 Positioning statement is the classical approach to express customer value proposition, in the form of 1 3 sentences.
CVP Volvo Offering: automobile Benefit: safety Target: upscale American families Positioning Statement For upscale American families, Volvo is the automobile that offers the utmost in safety
Southwest provides travelers with the lowest cost air transportation with an enjoyable and fun atmosphere

Southwest Offering: flight Benefit: value, enjoy, fun Target: travelers

 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. e.g. technology, talent, brand, system, distribution channel, strategic alliance, customer loyalty.

The core activities, rules, and/or norms that transform the key resources into value offering. 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.

Business Model
Idea: Lowering product price

Food & Beverage Store

Target: urban customers Offer various kind of food and beverage Suitable location Goods owned by the store Purchasing process Served by store keepers

Supermarket
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

Profit from product margin

External Environment

Insight/Idea

Internal Environment

Business Model

PEST analysis Industrial analysis Market analysis Competitive analysis (Five Forces, Strategic group)

Vision Mission Objectives

Resources Process Performance Innovation

O and T

Strategy

S and W

These are some statement from Michael Porter:

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.

BUSINESS MODEL
A story (narrative) BM is a hypothesis

STRATEGY
A set of action plan Strategy is a tool to test the hypothesis in the market

How to make money logic

Require less information Good = strong logic

How to be different, or do better than rivals plans

Require more detail information Good = win the competition

Rigorous cost and revenue

More stable Abstract world

Detailed in P&L analysis

More dynamic Real world

To transport people from one to other locations, it can be used automobile, train, and so on.

BUSINESS MODEL
Automobile

STRATEGY
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

Train

Idea: Always low price

Existing Players
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

Walmart
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

Existing Players
Located in big cities

Walmart
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

Regular price promo

Mostly local sourcing

Strategy
Business Model

Business Model
o Value Proposition Product or service Target customer Offering o Profit Formula o Key Resources

Strategy
o Arena Industry Market o Differentiator

o Economic logic
o Vehicle o Staging
A set of detailed actions plan

o Key Process

 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 Partners

Customer Relation

Key Resources

Key Processes

OFFERING

Distribution Channels

Customer Segments

Cost Structure

Revenue Stream

INFRASTRUCTURE
Key Partners
Access

OFFERING

CUSTOMER
Customer Relation

Contribute Perform

Support by Establish through

Addresses

Key Resources
Needed by

Offering

Target Customer
Reaches

to provide

Deliver by

Key Processes
Incur

Distribution Channel
Generate

Incur

Cost Structure

Incur

Generate

Revenue Stream

Generate

FINANCE

Offering

Target Customer

Spectacular Offensive Football High Visible Advertising Space

FANS

ADVERTISERS

The channels through which company:

communicates with customer segments deliver its offering

Communication & Distribution Channels

Awareness Preference Evaluation Purchase After Sales

Offering

Channel
PO Box

Target Customer

Spectacular Offensive Football

Stadium TV Channel

FANS

Phone TV
High Visible Advertising Space

Sales Force

ADVERTISERS

The ways the company entertains its customer segments to build long-term loyalty.
Offering Customer Relation
Facebook

Target Customer

Spectacular Offensive Football

Fans Meeting Blog

FANS

High Visible Advertising Space

VIP Tickets Stadium Visit

ADVERTISERS

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.

Key Partners
Football Federation Player agents Alliance Clubs World Class Companies

INFRASTRUCTURE ASPECT

Key Resources
Hi Skill Players Hi-Q Coach Training Facilities Reputation

Key Process
Scouting Transfer Mgt Training method

Offering
Spectacular Offensive Football

Brand Management

High Visible Advertising Space

KEY PARTNERS Federations Player agents Alliance clubs Companies KEY RESOURCES Players & Coach Training facilities Reputation KEY PROCESSES Scout & Transfer Training methods Brand mgt.

CUST. RELATION Facebook, blog Fans meeting VIP tickets Stadium visit

OFFERING Offensive football Advertising

DIST. CHANNEL Stadium, PO Box TV Channel, Phone Sales forces

CUSTOMERS Fans Advertisers

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.

we can choose and then we can choose
CHOICE

thus
If we choose
CHOICE

CHOICE

we get then
CONSQ

and
CONSQ

this choice also contribute to

we will also get

What do we have to do to create differentiation

Differentiation
Start Here

Key Resource

CVP
Low Cost
Profit Formula
How low the cost or price we can achieve (rough cost structure)

Key Process

Reputation Appropriate Volume

WOM Promo Small Branches Max recovery expected Outpatient Continuous Therapies Various Therapies Inpatient Rehab

Cost Saving

High Profit

Severe Upscale Stroker

Additional Revenue Integrated Intensive Program Fair Premium Price

Hi-Q Rehab
Hi-Q Support Magnet Talent

Hi tech Equipment Sufficient hi-skill Therapies Attract more upscale families

Low Commissions for travel agency Reputation for fair fare Low-quality service expected Young & Leisure Travelers Nothing is free All passengers treated equally

Low variable cost Additional revenue

Low Fare
WOM promo

Low Fixed Cost Bargaining power with suppliers

High Profit

Standardize fleet of 737

High Volume

High Aircraft utilization

 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 companys 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 Commissions for travel agency Reputation for fair fare Low-quality service expected Young & Leisure Travelers Nothing is free All passengers treated equally

Low variable cost Additional revenue

Low Fare
WOM promo

Low Fixed Cost Bargaining power with suppliers

High Profit

Standardize fleet of 737

High Volume

High Aircraft utilization

 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).