1.
Simple rules for
business models
Axel Rodriguez
Based on Simple Rules for designing Business Models, by Sayan Chatterjee*
Professor of Strategy,Weatherhead School of Management

2.
Creating and executing business models
▪ A business model is a configuration of
what a business does (core objectives)
and what it invests in based on the
logic that drives profits (profit logic)
▪ The business model must help figure
out not only the value chain, but also
the value proposition to the customer
and the value capture mechanism
Business
Model
Core
Objectives
Profit
Logic

3.
A business model cannot be developed by
“fill-in the blanks”
▪ There are easy and popular (perhaps because they are easy)
templates that can describe your business model
▪ Ask yourself: can you really understand how these templates help
you to make money – you profit logic
▪ A truly insightful business model will show you how the components
of your business model will interact to deliver profits
– And by the way these components are NOT the same for all business models
▪ At the end of this presentation we give an example of how a business
model can
– Deliver clarity about how to win and what to do
– Simplify complexity

4.
Basic rules to create a business case
Identify initial
target
segment
Identify
business model
category
Understand
how to capture
value
Identify core
objectives
Map necessary
activities
Identify
necessary
resources
Validate
capabilities
and resources
GO
OK
Update
Start

5.
What to look for
▪ What is happening outside our
industry that we could use?
▪ What patterns exist that could be
applicable to this business case?
▪ What capabilities we have that
could be leveraged in a new
business model?
▪ What are the potential
competitors and how strong they
can be?

6.
Product / Service oriented
Relationship oriented
Efficiency
Value
The four quadrants
Operational
efficiency
Perceived
value
Network
efficiency
Network
value

7.
Efficiency based models
Rules:
▪ Maximize asset utilization
– Understand demand and focus on shifting it in time and place to maximize efficiency
– Exploit cross-elasticity of complementary offerings to smooth demand
– Unlock capacity (maximize asset usage)
▪ Price discrimination
– Challenge pricing orthodoxies (reduce price to increase asset utilization) – only possible if
there’s demand but price is too high for the market
Commodities
Market
defines price
Highly
competitive
Marketcharacteristics
Core Objectives:
• Be more efficient than competitors
• Optimize asset utilization (human and/or capital resources)
• Process innovation culture

8.
Perceived value based models
Product or
service drives a
“want”
Market pays a
premium
Perceived
objective or
subjective value
Marketcharacteristics
Rules:
▪ Predict value
– Make visible outputs that create “want” (even if they are invisible)
– Identify and target the influencers who can create and drive the “want” for the product
– Focus on desired outcomes (problem to solve), not just apparent needs
▪ React to market changes
– Rapid prototyping and fast time to market
– Co-opt / engage the customer
– Invest in building blocks that can be used by multiple products
– Reduce cost without sacrificing “want”
Core Objectives:
• Create “want” for the business output
• Reduce risk of output not being valued by the market
• Follow the value and realize the profit

9.
Network value based models
Core group of
“loyal
customers”
Loyal customers
become
promoters
Expansion of
value based
model
Marketcharacteristics
Rules:
▪ Co-opt niche customers, rivals and stakeholders
– What can loyal customers, potential rivals and stakeholders do for you
▪ Get big slowly (under the radar of competitors)
– Keep imitators out, start with the segment of higher loyalty potential
▪ Keep loyal customers engaged
– Retain a critical mass of loyal customers that drive repeat purchases
– Minimize customer acquisition costs
Core Objectives:
• Attract a critical mass of loyal customers
• Keep churn down, increase repeat purchases
• Keep potential rivals out

10.
Facilitate
transactions
between givers and
takers
Profit from
network and
transaction volume
Maintain efficiency
of transactions
Marketcharacteristics
Rules:
▪ Unlock ecosystem capacity
– Build value for stakeholders to come and stay
– Enable efficiency for givers and takers
▪ Evangelize the collaborative logic that attracts customers
– Convince givers (sellers) of the value of “growing the pie”
Core Objectives:
• Maximize volume of transactions (and profit from each one)
• Attract loyal givers (sellers) and takers (buyers) to a common hub
• Win-Win relationships
Network efficiency (Hub) based models

11.
Where does your business model fit?

12.
Network Efficiency NetworkValue
Product / Service oriented
Relationship oriented
Efficiency
Value
Operational Efficiency Perceived Value
Maximize asset utilization
• Shift demand it in time and place to
maximize efficiency
• Smooth demand exploiting cross-
elasticity of complementary offerings
• Unlock capacity (maximize asset
usage)
Price discrimination
• Unlock capacity (maximize asset
usage)
• Challenge pricing orthodoxies (reduce
price to increase asset utilization) –
only possible if there’s demand but
price is too high for the market
Create “want” (predict value)
• Make visible outputs that create
“want” (even if they are invisible)
• Engage influencers to create and drive
the “want” for the product
• Focus on desired outcomes (problem to
solve), not just apparent needs
React to market changes
• Rapid prototyping and fast time to
market
• Co-opt / engage the customer
• Invest in building blocks that can be
used by multiple products
• Reduce cost without sacrificing “want”
Reduce customer acquisition
costs while keeping rivals out
• Co-opt niche customers, rivals and
stakeholders - what can they do for
you?
• Get big slowly (under the radar of
competitors)
Reduce churn
• Retain a critical mass of loyal
customers that drive repeat purchases
• Minimize customer acquisition costs
Grow the pie in the core
business
• Unlock ecosystem capacity
• Build value for stakeholders to come
and stay
• Enable efficiency for givers and takers
Grow the pie in related
businesses
• Evangelize the collaborative logic that
attracts customers
• Convince givers (sellers) of the value of
“growing the pie”
• Be more efficient than competitors
• Optimize asset utilization (human and/or capital resources)
• Process innovation culture
• Create “want” for the business output
• Reduce risk of output not being valued by the market
• Follow the value and realize the profit
• Attract a critical mass of loyal customers
• Keep churn down, increase repeat purchases
• Keep potential rivals out
• Maximize volume of transactions (and profit from each one)
• Attract loyal givers (sellers) and takers (buyers) to a common hub
• Win-Win relationships

13.
What happens next
▪ It is common for business models start from a
value based perspective, and as time progress
they move, morph or migrate towards the
others.
▪ Migrations are complicated and possibly
painful, but properly executed have proven to
be critical for long term sustainability of
businesses.
▪ As business environment is always evolving,
companies should regularly review their
business models and analyze if a migration
should be considered.

14.
When not to change a business model
▪ When changes can affect the trust or implicit agreements with your
customer base
▪ When additional growth would put the company beyond its natural
size
▪ When a change could fundamentally affect your business ecosystem

15.
An example of an Efficiency Based
Business Model: Aldi Grocery Stores
▪ Competes at the very low-price range with high quality products
▪ Has a very loyal following in Germany and is creating similar loyalties in the US
▪ First understand the desired Attributes of the typical Aldi Customers
▪ Simple rule for developing core objectives:
– UnlockingCapacity
– Complementary Products (cross elasticity of demand)
– Challenge Pricing Orthodoxies
▪ From these simple rules you can develop Core Objectives for Aldi – how to win
▪ Now you can develop the Activities and Resources to deliver (what to do) the Core Objectives. The entire model
can be represented using the COAR map.
▪ Note: Once you study this framework, you will realize Aldi has many similarities with Costco’s profit logic even
though it targets a different customer segment. You will be able to see these patterns once you master these
concepts

16.
Source:
Roslyn Chao
EMBA 2016
Weatherhead
School of
Management
Aldi:
Efficiency Based
model
And COAR map

17.
Thank you!
▪ This presentation is based on Sayan Chatterjee’s Simple Rules for
designing Business Models – California Management Review, Vol 55, No
2,Winter 2013, CMR.BERKELEY.EDU
▪ Sayan Chatterjee is a Professor of Strategy atWeatherhead School of
Management
▪ Other references are included in Sayan’s work.
▪ The four quadrant graph is my representation of the four business
models defined by Sayan in his work
Axel Rodriguez

18.
If you have questions
▪ Sayan Chatterjee - sayan.chatterjee@case.edu
▪ Axel Rodriguez – axel.rodriguez@case.edu