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Simple rules for business models

A business model is a configuration (activity systems) of what the business does (activities) and what it invests in (resources) based on the logic that drives the profits for a specific business. This presentation lays out a systematic process for (re)designing a business model by identifying core objectives that lead to improved profitability. There are two broad steps in this process. The first step is to determine the generic category of business model that a firm wants to adopt from the following descriptive taxonomy. The next step is to develop business-specific profit logic or the core objective(s) starting from the generic profit logic for each category.

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Simple rules for business models

  1. 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. 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. 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. 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. 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. 6. Product / Service oriented Relationship oriented Efficiency Value The four quadrants Operational efficiency Perceived value Network efficiency Network value
  7. 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. 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. 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. 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. 11. Where does your business model fit?
  12. 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. 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. 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. 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. 16. Source: Roslyn Chao EMBA 2016 Weatherhead School of Management Aldi: Efficiency Based model And COAR map
  17. 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. 18. If you have questions ▪ Sayan Chatterjee - sayan.chatterjee@case.edu ▪ Axel Rodriguez – axel.rodriguez@case.edu

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