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What Is Business Model  Cone Advisor
 

What Is Business Model Cone Advisor

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

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.
Firstly, a business model describes the mechanisms of revenue generation.
Secondly, a business model analyzes the customer perspective in the value chain or in the value net.
Thirdly, a business model is typically a high-level and quite simplistic model rather than a full business plan.

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  • The business model differs from the focus of strategy in three ways at least*. The business model focuses on creating value for the customer , and builds the model for delivery of value. In the creation of value for the business , vs. creation of value for the shareholder. Thirdly, it is based on the assumptions made about the state of knowledge held by the firm, its customers and third parties. It is assumed that this knowledge is cognitively limited , and biased by the earlier success of the firm. In contrast, they argue that strategy generally requires careful, analytic calculation and choice, which assumes that there is a great deal of reliable information available.
  • Hence, the business model converts innovation into economic value for the business as the case of low-cost airlines. The business model describes how a company earns money by specifying where it is positioned in the value chain, what the main activities are, how certain actions should be performed, etc. Preliminary definition of business model: A business model is a framework for making money. It is the set of activities which a firm performs, how it performs them, and when it performs them so as to offer its customers benefits they want and to earn a profit (Afuah 2004). It draws together a multitude of business subjects including entrepreneurship, strategy, economics, finance, operations, and marketing. Furthermore, a business model describes how a business positions itself within the value chain of its industry and how it intends to sustain itself to generate revenue. In the most basic sense, a business model is the method of doing business by which a company can generate revenue. The essence of the business model is "how you get paid" or "how you make money", with a taxonomy of alternative mechanisms (Chesbrough & Rosenbloom 2002). Afuah and Tucci (2001) defined the business model as "how [the firm] plans to make money long-term using the Internet". Cambridge Learner's Dictionary (Cambridge 2003) has the following definitions for the two terms: 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.
  • In mature businesses such as the low-cost airline business it is usually a new business model that challenges large airline companies. The elements of the low-cost airline business model or business approach (for example, Southwest Airlines see e.g. Porter 1985, 1996 and Morris et al. 2005): Short flights and fast turnaround times allowing higher utilization of planes. Aircraft are able to fly between two cities many times per day because of effective field operations and simple structures. Services are minimal and target customers just want to point-to-point transit: no transfers at hubs, in-flight services, just online bookings Building-up barriers to entry by creating frequent flights and high capacity so that other low-cost airlines will not to enter the same route. Simple structures and high utilization of resources e.g. a single passenger class, a single type of aircraft, a simple fare scheme, use of secondary airports, short flights and fast turnaround, point-to-point transit, Internet booking and employees working in multiple roles.
  • Similarly, strategy maps are built around the structure of these four perspectives. Accordingly, the key drivers of the business are also described in strategy maps, which are certain models that link business issues to others in a logical way. Those issues are then linked to the balanced scorecard (Kaplan & Norton 2004). Strategy maps are the interface between the strategy and the balanced scorecard. A strategy map can be broken down into a number of strategic themes, each of which can be linked to a balanced scorecard and an action plan. Conceptually, a strategy map links the mission, values and vision of the organization in a meaningful way to day-to-day operations. Thus, strategy maps can also be regarded as one type of business model and the balanced scorecard as a management system of that business model (Ala-Mutka & Talvela 2004). Learning and growth perspective (BSC) Though the intangible assets of an organization are the most powerful means by which to effect permanent change in the organization, the idea of strategy maps is to plan in a top down way -- start with the needs of the higher perspectives and work downwards to figure out what is needed at the level of the human, organization and information capital. Human capital Kaplan and Norton outline the following multi step strategy for improving human capital: Identify the strategic job families Develop the competency profile Assess the human capital readiness Formulate a plan for improving the human capital Information capital There are three areas of information capital application: Transaction processing applications : This involves the day to day, repetitive tasks. Analytic applications : This involves statistical analysis used to understand and improve Transformation applications : This involves change in the nature of business Organization capital Organization has the following four elements: Culture : This describes the perception across the company of its goals, mission, and policies. Leadership and accountability Alignment : Linking rewards to performance Teamwork : A system of global knowledge management

What Is Business Model  Cone Advisor What Is Business Model Cone Advisor Presentation Transcript

  •  
  • What is Business Model? By Jukka Ala-Mutka, DSc. http://fi.linkedin.com/in/jukkaam www.coneadvisor.com www.conemade.com © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • 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) © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • 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) © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • Some Milestones and Evolution of Modeling
    • Systems thinking
      • Business Idea (Normann 1977) ‏ , Business Definition (Abell 1980) ‏ , Business Concept Innovation (Hamel 2000) ‏
    • Visual model (generation 1 models)
      • Activity System (Porter 1996) ‏
    • 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)
    © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • Business Model ≠ Strategy
    • The business model focuses on creating value for the customer
    • In the creation of value for the business , vs. creation of value for the shareholder (strategy).
    • 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) © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • Business Model* = Strategy
    • The definition of strategy based on systems thinking , thus it can be described as model
    • Competitive Strategy focus on business level strategies and its focus is on customer value and competition in certain business area.
    • 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) © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • Three (mostly) agreed ingredients of Business Model
    • Firstly, a business model describes the mechanisms of revenue generation .
    • Secondly, a business model analyzes the customer perspective in the value chain or in the value net.
    • Thirdly, a business model is typically a high-level and quite simplistic model rather than a full business plan.
    Source: Ala-Mutka 2005 © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • 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). © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • 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
    © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • Part A Defining 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
    © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • (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”. © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Pros: Good starting point Cons: Where is the model?
  • (2) Business Model Canvas: nine business model building blocks, Osterwalder, Pigneur & al. 2010 © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Pros: Template to work Cons: Where is the model?
  • (3) Business Model Ontology diagram by Alex Osterwalder Source: http://www.choosenick.com/?action=view&url=simple-visual-business-model-design-tool © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Pros: Yes, Visualization! Cons: Where is the model?
  • (4) Mapping a logic of activities Source: Nick Malik in http://msdn.microsoft.com/en-us/architecture/aa699429.aspx © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Pros: All are included! Cons: THE point is missing?
  • Part B Defining 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 example
      • Discount Airline with Value chain
      • Discount Airline with Activity System
    © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • (5) Value chain as Business Model description Source: Porter 1985 © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Ticket Counter Operations Gate Operations Aircraft Operations On-Board Services Baggage Handling Ticket Offices Traditional Airlines Full Service Full service Purchase new aircraft Union pilots Full service Free baggage handling Ticket offices in downtown locations Low Cost Airlines Secondary airports and terminals No ticket counter (or check-in only) Purchase tickets on board the aircraft of from machines No interline tickets Few fare options Secondary airports and terminals First come, first served seating No ticketing at gates Used aircraft High-density seating Nonunion pilots Smaller crews and more flying hours per day Nonunion flight attendants Snack only or no meals Charge for food and drink service Provide carry-on space Charge for checked baggage No interline baggage None Pros: Clear comparison! Cons: Confluence of activities?
  • (6) Southwest Airlines’ Activity System Source: Porter 1996 High aircraft utilization 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 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” Limited passenger service © CONE ADVISOR Jukka Ala-Mutka, D.Sc. No meals No baggage transfers Flexible union contracts Pros: A visualized model!!! Cons: 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 © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Pros: Base to compare models Cons: 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 © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • (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. © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • (8) Logic of action and earning logic visualization Source: http://www.boardofinnovation.com/ © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Pros: Yes, visualization! Cons: Just one step ahead?
  • Part C Lead 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 © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • (9) Visualizing and managing strategy with Strategy Model Source: Ala-Mutka 2008 and visualization by Cone Made, www.coneadvisor.com © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Pros: Simple - Easy to Lead! Cons: Confluence? 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 a day
      • Manage perspectives (~balanced scorecard)
    • Linking various elements to model (for example)
      • Value proposition
      • Competition
      • Activities (~Activity System)
      • Projects
      • Key Performance Indicators (~balanced scorecard)
    © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • (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
    Source: Kaplan & Norton 1992 and 2004 © CONE ADVISOR Jukka Ala-Mutka, D.Sc. Pros: Balancing perspectives! Cons: Too heavy, complexity?
  • 10 Tools of Business Modeling
    • List of components
    • Template of components
    • Simple flow chart of components
    • Detailed flow chart of components
    • Value chain
    • Activity System
    • Description of generic business model
    • Visualization of earning logic
    • Strategy Model (Simple)
    • Strategy Map (Complex)
    © CONE ADVISOR Jukka Ala-Mutka, D.Sc.
  • 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.
    © CONE ADVISOR Jukka Ala-Mutka, D.Sc.