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Introducing a Business Model Development and Evaluation Framework (BMDEF)

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  • 1. The Business Model Design andEvaluation Framework (BMDEF)A tool for founder, business developer, strategic manager, etc. tocreate, explore and analyse real or fictious business conceptsRalf HeimStrategy and Technology Management Consultantralf.heim@heimr.de Published in June 2012
  • 2. Introduction into the BMDEF What the BMDEF is about “Competition is no longer between products or services, it’s between competing business concepts”1 Gary Hamel (2000): Leading the Revolution  To understand competitive advantage in complex modern economics you need more than just focusing on single products/services or resources  A Business Model presents an integrated view on the strategically important components of a business as well as their independencies  The objective is to support management in understanding and communicating as well as analysing and (re)designing business logic  The understanding of the term model ranges from enumeration of components to complex mathematical logics  Still, there is no connection between the simple creative world of a business modeling and the quantitative-financial world of controlling  The BMDEF integrates simplicity of business modeling and the deepness and detail-orientation of controlling in one instrumentFor further information and link to the paper, follow instructions atthe end of the presentation Business Model Development and Evaluation 2
  • 3. Introduction into the BMDEFModern understanding of the components of a business model Market Value Creation Finance Strategy Publication Customer Offer & Compe Trans- Value Resour Cul- Part- Capi- Revenue Oppor- Risks needs Price -tition action Activities -ces ture ners tal / Profit tunities Bieger/Reinhold (2011) 1 1 1 1 1 1 Bouwman et al. (2008a) 1 1 1 1 1 1 1 1 Gordijn (2004) 1 1 1 1 1 1 1 1 Johnson (2010) 1 1 1 1 1 Kett et al. (2009) 1 1 1 1 1 1 Lambert (2006) 1 1 1 1 1 1 1 1 Mieschke (2005) 1 1 1 1 1 Osterwalder/ Pigneur (2009) 1 1 1 1 1 1 1 Palo/Tähtinen (2011) 1 1 1 1 1 1 Sepännen et al (2007) Stähler (2002) 1 1 1 Teece (2010) 1 1 1 1 Tikkanen (2005) 1 1 1 1 1 1 1 1 Umbeck (2009) 1 1 1 1 1 1 1 1 1 1 1 Voelpel et al. (2004) 1 1 1 1 Weill/Vitale (2001) 1 1 1 1 1 1 Wirtz (2011) 1 1 1 1 1 1 1 1 1 1 1 1 Mentioned in total 19 19 5 11 20 15 3 14 6 14 4 3 Business Model Development and Evaluation 3
  • 4. Introduction into the BMDEFStructural template and methodology The Business Model Development and Evaluation Framework (BMDEF) Business Model Development and Evaluation 4
  • 5. Market Logic: Business SpecificationSpecifying the business by classifcation Role in Business Ecosystem Integrator Market Maker Specialist Business Lifecycle Start Up Established Oldtimer Service Category Product Service Pricing Volume (Value) Low Middle High Service Life Cycle Early Stage Growing Mature Shrinkage Contract Category Buying Licence Service … Customer Category B2C B2B B2PS Customer Structure Few Middle Many Mass Market Competitive Structure None Weak Strong Business Model Development and Evaluation 5
  • 6. Market Logic: Service ModelMatching Service features and customer needs [9] [3] [6] Service features Resort to the Quality Function Competing Competing Evaluation Feature 1 Feature 2 Feature 3 Feature 4 Feature 5 Service 1 Service 2 Deployment (QFD) - a Method Service Customer Needs used for ensuring Quality in Product/Service Management [1] [2] Customer Need 1 Weight % [4] (see Akao (1966)) Category A Customer Need 2 Weight % Customer Need 3 Weight % [7] Category Customer Need 4 Weight % B Customer Need 5 Weight % Weighted Importance [5] [8] [1] Identify customer  [4] Measure the contri-  [7]  Identify and evaluate needs with regard to the bution of features to competing services specified product/service satisfy customer needs analogue to [6] as the „voice of customer“ [5] Sum the weighted  [8]  Sum the weighted  Weight the importance [2] importance of each degree of customer of the need out of the feature satisfaction per service customers perspective [6] Evaluate how good  [9] Measure interrelation-  [3] Identify product your service meet ships beetween product features as the „voice of customer needs features the engineer 6
  • 7. Market Logic: Revenue ModelIllustrating transaction mechanisms Price Comparison of price - with competitors + - + - + Revenue Degree of Buying # potential customers + Differentiation Frequence - + + Market Share + (in #) Sales potential Comparison of Sales services from the + service model + • Create a simple illustration explaining the main driving forces determin- ing your business revenue. These illustrations are highly business specific • Behind each arrow in this illustration, a mathematical relation need to be defined by analyzing existing data or rough estimations • Data like differentiation degree measures can be extracted from the service model and used to measure the degree of differentiation between the focused service and those of competitors Business Model Development and Evaluation 7
  • 8. Value Creation Logic: Activity ModelUsing a fitting template to describe business activities Value Chain (see Porter (1985)) Management and Controlling Value Shop Seco Human Resources nda IT & Infrastructure ry Procurement Value Network ary Ingoing Customer Marketing & Prim Logistic/ Production Distribution Services & Sales Dispostion After Sales  The choice of the fitting value creation logic depends on the nature of the business model and the characteristics of process flows  The value creation logic is linking the resource amounts with the planned revenue model Business Model Development and Evaluation 8
  • 9. Value Creation Logic: Resource ModelQuantification of resource input  Estimating the amount of needed tangible and human resources quantitatively by analyzing the revenue and the activity model  Identify in Workshops which intangible resources (e.g. Know How) are needed to enable activities and how valuable (v), rare (r), imitatable (i) and integratable (o) they are. (see Barney (1991))  The possibility to quantify strategic partnerships input depends on nature of business and partnership. A VRIO-Evaluation follows. Business Model Development and Evaluation 9
  • 10. Evaluation Perspective: Business Value Driver Model Building up the top layer  Identifying the top Key Performance Indicator(s) matching the business‘ objective(s)  Build up a top level hierarchy or dynamic graph including the key value drivers and their mathematical relation to the shareholder value  Match the existing partial models of the BMDEF with the key value drivers and estimate their influence on them**in this simple example left out: activity model and service model Business Model Development and Evaluation 10
  • 11. Evaluation Perspective: Business Value Driver Model Disaggregation and Drill Down of Business Value Driver <= Business specific Generic Value Driver Key Value Driver driver Sales Revenues Revenue growth Cash Flow Prices Cost of revenue EBITDA Total Expenditures Net Cash Flow Tax Shareholder Value Wertminderung/ Abschreibung Investments into Total Investments Assets WACC Discount factor Disaggregation*only a very simple example Business Model Development and Evaluation 11
  • 12. Evaluation Perspective: Risk ModelIdentifying potential risks  Identify potential risks by looking at the business model and using additional established screening-methods (e. g. PESTEL-Concept)  Describe the risks with different probability distributions by analyzing data, doing rough estimations in management workshops or using fuzzy-logics in comparison with qualitative surveys  The result is a risk inventory illustrating the identified risk Business Model Development and Evaluation 12
  • 13. Evaluation Perspective: Risk adjusted value driver modelAggregation of single risks and business value drivers  Collect single risks affecting the designed business model  Describe the risks using probability distributions by exploring data or doing subjective estimations Single Risk 1 Single Risk 2 Single Risk 3  Match the risks with the Single Risk % % % value drivers by identifying € € € which risks affects which Aggregation Monte Carlo Simulation value driver Value Driver  Aggregate single risks on Value Driver % value drivers using Monte- Carlo-Simulation €  Aggregate the value drivers within value logic using the same approac  Use the risk inventory as a separate deliverable to interpret the business Business Model Development and Evaluation 13
  • 14. Evaluation Perspective: Risk adjusted value driver modelQuantitative evaluation with static simulation techniques  Implementation of a developed static value driver hierachy based on MS-Excel™ and the Risk Management Software Add In @Risk®  Next to the displayed result the software can support management with sensitivity analysis and adding additional concepts (e. g. Value@Risk) Business Model Development and Evaluation 14
  • 15. Evaluation Perspective: Risk adjusted value driver modelExamplary Illustration of the technique Business Model Development and Evaluation 15
  • 16. Evaluation Perspective: Risk adjusted value driver modelQuantitative evaluation with dynamic simulation techniques € Free Cash Flow Zeit • Implementation of a developed dynamic value driver system based on VenSim® and integrated Monte Carlo Simulation Add In • Dynamic systems are integrating feedback loops and enable management to describe business more realistically • Additionally, dynamic system can be incorporated in established business application like SAP SEM-BPS. Business Model Development and Evaluation 16
  • 17. Evaluation Perspective: Risk adjusted value driver modelQualitative Evaluation by matching the BMDEF and the BM Canvas Inspired by the Business Model Canvas of Osterwalder/Pigneur (2010): 44 Filter function criteria described in orange Model and Data base for the filter function presented with the arrow Business Model Development and Evaluation 17
  • 18. Implementing and Applying the BMDEFMulti-Layer-Architecture for BMDEF-Implementation Layer Configuration Tools and Methods Analysis Learning Applying 5 Understanding | Analysis | Design Objectives Preparation Analysis Learning 4 Defining 1 analytical scope Business Understanding Model Defining Mechanisms Construction Information 3 Demands Transformation and Loading Structural Transformation Understanding Data Base the context from 2 Data & Metadata Data Gathering Data Gathering Business Model Development and Evaluation 18
  • 19. Implementing and Applying the BMDEFPotential beneficiaries of and use cases for the BMDEF Business Model Development and Evaluation 19
  • 20. Modeling tools are a cool thing – but can never replace creativity and the strength of a human mind For the manuscript/paper please contact Ralf.Heim@heimr.de For further Discussion on Business Models join https://www.xing.com/net/pri5ec54ax/businessmodelde/Ralf HeimStrategy and Technology Management Consultantralf.heim@heimr.de 20