Hello, welcome to another session of corporate strategy where we are going to talk about
business models.
Business models, like unfortunately many terms, are rather broad and misused and abused.
So we are going to put a lot of focus on defining what a business model is and what components
are part of the business model.
So this is what we are going to do.
We are going to look at business models, definitions.
Because there are many definitions and many different ways to slice and dice a business
model, we are going to look at some common themes and elements that are part of all definitions
of business models.
We are going to look at two very specific definitions and ways of conceptualizing a
business model.
One according to Gary Hamel and one according to Alexander Osterwalder.
These are kind of, especially the Osterwalder one, are very common ways of defining business
models.
Last but not least, we want to talk about special business models and the implications
of special business models.
We are going to touch the platform economy and platform business models briefly and slightly
but this would deserve a session on its own but so far we are just brushing it briefly.
So first of all, business model.
Business model, one of the gurus of business model definitions of Osterwalder said that
in the first dot com bubble the term has been abused very much so and to describe everything
and anything often by people who don't really know what this is about.
So let's put some clarity in this.
Unfortunately even researchers are not super clear about what is a business model.
So think about strategy and business model.
How are they related?
Is one kind of part of the other or are they independent of each other?
And this is disputed.
So there's different schools of thought even among researchers and some say business models
are part of the strategy toolkit and vocabulary and we can use them to kind of develop strategy
and some say they're fully independent of our strategy and there's something completely
different.
And as I told you, there are many different ways how we can define a business model and
to create typologies of business models.
So just to mention one of those looking at content, commerce, contacts or connecting
business models is one way of slicing and dicing and create a distinction among different
business models.
We are not going to be hung up on that.
We are pretty pragmatic there and just looking at so what is a business model and well we
will talk about how does it relate to strategy really.
So first of all, definitions.
I picked two and a half definitions, two real definitions.
One is by Armit and Sot who did lots of research on business models during the dot com bubble
and looked at online business models and they say it's content, structure and governance
of transactions designed so to create value through the exploitation of business opportunities.
So it is transactions and how they are organized, what type of transactions there's and there's
value creation going on and we exploit business opportunities.
These are the central elements in the Armit and Sot definition of a business model.
Another famous one is it's an architecture for product service information flows, description
of business actors and their roles and the description of the potential benefits for
various business actors and a description of the sources of revenue.
We also see the transactions in their product service information flows so what is flowing
basically which transactions are going on but it also includes description of the stakeholders.
So business actors, customers, employees, the government, etc. and their role, competitors,
all this and their roles and again potential benefits.
So where's the value added, where's the value created for various business actors and not
to neglect where is the money coming from the sources of revenue.
So if we want to simplify these literal definitions taken from articles then basically Speed and
Snyder summarized it nicely saying it does contain the value offering.
It does contain a value creation architecture and a revenue model.
So it does say what do we offer, how is value being created and where does the money come
from that is basically the elements of the business model.
But we are going to go there when we get to know specific business model definitions and
looking at frameworks to describe them more in detail.
So what is common to all these definitions?
What is common to all these slicing and dicing of business models?
These are two elements and these are important to remember because this is the core of every
business model definition.
It's about value creation and value capture.
So the first is of course how is value created for customers?
What's the added value?
Why are customers willing to pay for a product that we offer or service that we offer?
When you capture this, how is value delivered and monetized?
So if you imagine a full value chain, who captures what element of the monetization
of the value being created?
If you think of old fashioned desktop PCs, most of the value is not captured by the
manufacturer of the desktop PC because they have profit margins that are really low.
I would wager, don't quote me on that, that DHL earns more money on that desktop PC delivered
to your house than HP does in selling that to you.
So how is the value that was created being delivered?
How is it monetized and by whom is it monetized?
When we talk about that, we talk about exchange values and monetary values.
So if there is a product that has a specific price and that is the exchange value, that's
the value at which the product will change owners, a shop sells the product at an exchange
value.
But somehow consumer needs to get some added value because if a consumer wouldn't have
any added value to the product, there would be no reason to buy it after all.
So there's the consumer surplus and that consumer surplus, that's the difference between the
exchange value and the monetary value.
The monetary value is the value that a consumer would be willing to pay at the maximum because
that is the value that a consumer gets out of the product.
And there are only a few situations where that exchange value and that monetary value
are similar or getting very, very close to each other.
For example, in the case of monopolies, where the monopolist is able to raise its exchange
value, the price, nearly up to the point where there's no added consumer surplus.
Or in the case of medication that is important for survival, where basically people would
be willing to pay exactly that, perhaps a bad example.
But you get the point.
Exchange value is the price, monetary value is the value that the customer gets out of
the usage of a product or service.
If you're German, then you might think about Wirchappfung, value creation, and Wirchappfung,
the value capture.
These are basically the German terms for what you create and what you get out of that.
Let's look at two very specific frameworks for business models.
And they are not exactly revolutionary new, but still they're useful for understanding
what a business model is, what it contains, and how it relates to strategy.
One is by Gary Hamel.
And Gary Hamel said, there's four major pillars.
And these major pillars are the customer interface, the core strategy, strategic resources, and
the value network.
And these are connected, consumer customer benefits, configuration of activities and
company boundaries.
So what is all that?
The customer interface, that is really how, where, and why we connect to the customer
and interact with the customer.
Remember the definitions.
These are the transactions, the information flows, the monetary flows, product flows.
These are transactions with the customer.
How do we do fulfillment and support?
Do we have high level of fulfillment and support?
Of course, that's also part of the strategy of a company.
How is our pricing structure and how do we keep our customers in line in terms of customer
relationship management?
So are we kind of very closely allied with our customers, want them to repurchase all
the time?
Or do we basically don't care who they are?
And don't invest into customer relationship.
Core strategy is really, and I slightly changed how Hamel called these to kind of fit better
our dimensions of corporate strategy.
Of course, you will recognize a lot of these terms, the vision mission, the scope, the
range and differentiation, which we still are going to talk about later.
So what kind of products are we offering?
Where are we offering those and which markets are we offering those?
What's our vision mission?
That's really the core corporate strategy.
And to kind of fulfill this strategy, to implement and execute the strategy, we need resources
at hand and this is the resources that we have at our disposal, the strategic resources,
the third pillar.
So which resources do we have available and resources being rather brought here?
So including competences, assets and everything like that.
So what is, and that's then the resource based view configuration of activities.
How do we configure our resources to implement, execute our strategy?
Remember the definition of a business model where it says a description of the business
actors, so the stakeholders.
Firms are not acting in isolation, they are in a system.
So firms in the value network is the fourth pillar.
So this is suppliers, partner, coalitions, competitors.
How do we create value?
How is value captured in collaboration with our suppliers, partners or industry coalitions?
That is us being in a value network becoming more and more important in the age of network
economies and platform economies.
And all of that needs to be kind of nice and fitting and matching and efficient and then
we have a good business model.
This is essentially what Gary Hamel said.
It perhaps gives you a good picture of what is part of the business model framework.
It's how we interact with customers.
It's how we create value in a network, but it's also about our core strategy as part
of the business model and the resources, skills, competences that we have at our disposal to
kind of implement that.
To be honest, let's keep it at that.
I'm not going to go deeper into Hamel's business model framework because I think it's very
useful to get an overview, but we are going to focus on the one that is used much more
widely in practice.
So whenever you read about business models, it's very likely that Alexander Osterwalder
had his hands in in that.
So we are going to focus on that.
Osterwalder has a bit more complicated and complex business model framework and by now
it's been extended to cater for specific industries, but this is the core one.
And whenever you read about things like the business model canvas, which is a very popular
tool to kind of depict and create and analyze business models, then this is based on Osterwalder's
business model.
So basically he says there's nine blocks and we can cluster these nine blocks into four
pillars, related pillars, and they interact.
So they also need you can't just like analyze one or create one and then go on to the next.
They interact, they have effects upon each other.
That's all what this chart is going to say.
So let's look into what these four pillars are and then look into each of these nine
blocks for a while.
First of all, it's about the product or service.
It's in which business is in the firm, which products and which value edit do we offer
actually.
So this is the pillar product, similar to what Gary Hamel had said, we also have a block
customer interface, which has where it's target customers, et cetera, et cetera.
Infrastructure management is also some that can be found in the Gary Hamel model under
different names.
We're going to talk about that in a session, in a second.
And last but not least, the financial aspects.
Of course, this is the revenue part, the cost structure and sustainability of the business
model.
Let's dig deeper into these four pillars and look into which nine blocks are part of that
business model framework.
The product is about value proposition, the added value.
What is the value that we can propose to our customers?
Customer interface or first of all, which customers, which distribution channels, how
do we relate to them?
Which relationship do we establish with them?
Infrastructure management, this contains part of activities and resources that we have,
capabilities that we have, but also partnerships in a value network that we have.
And last, the financial aspects dealing with both cost and revenue.
Let's look briefly at one of these nine blocks.
So we get an overview of what this really means.
And I think we can get an overview best by looking at a couple of typical questions that
one would analyze and one would ask when you did an analysis, a business model canvas analysis,
for example, and wanted to fill in these parts.
So the questions that you ask yourself when you describe your value proposition is, so
what is the value added that we create for our customers?
What is the value creation part that we add on?
And which are the problems that we hope to solve?
So to understand the monetary value of the customers, perhaps a bit better, what problem
is it really that we solve?
And then which products and services or which bundles of products and services do we offer
to help solving these problems?
Also what are the demands, preferences, and requirements that customers have so that we
can actually tailor our products a bit better to do that?
This is really about the value proposition, the product, the service that we offer.
Our interface has a bit more in it.
So of course, also where we talk about value creation, but it's for whom?
Which are the customer segments, for example, for whom we create value?
Is it specific?
Is it to simplify things?
Are we business to business or business to consumer company?
We cater for government agencies.
For whom do we create values?
Is it rich individuals?
Is it kind of the general population?
Is it specific regions?
So for whom do we create value?
And understanding your customers is also part of that.
So who are our most important customers?
Understanding which of these customers are the most profitable, for example, and which
should we take care of the most?
Target customers.
Of course, we also need to sell our things, our products and services.
And to sell products and services, we need distribution channels.
So that is also an important part of the business model.
Which distribution channels do we use to sell our things?
And if we analyze that block, we can also think what other distribution channels that
our customers want.
So is it really online, offline?
Do they care if it's a shop close by?
Do they want a very prestigious and nice shopping experience, et cetera?
So what do they want?
And which do we use now?
So how's the fit there?
And of course, then, should we change something in the end?
Are the distribution channels integrated somehow?
So are there any synergies between online and offline distribution channels?
Something like that.
How do they work?
Which work best?
Which are most popular, famous, efficient things like that?
And are these distribution channels integrated in our customers' processes?
So can we deliver automatically when a customer's supply goes low, for example?
You might have seen these experiments when Amazon tries to automatically send you another
pair of socks when the old ones are used up.
So kind of subscribing to a monthly sock purchase.
This would be an attempt to integrate perhaps in your customers' processes.
But even more so if you can automatically deliver if your customers' supplies really
go low and you are integrated in their bookkeeping system, et cetera, et cetera.
And of course, we also care about what kind of relationship do we have with our customers.
So do customers expect something of us?
So there we compare what they want with what is there.
Are customers really expecting a nice shopping experience when they go into our shop?
And do we deliver that?
Which connections and relationships do we have established with customers?
And looking at the cost, are these really worthwhile or should we change something with
that?
So that is something.
Are they really related to the rest of our business model?
So if we have close relationship and expensive relationship to some customers, are these
really the customers that we want as target customers and that bring in the most money
in the end, for example?
So these are questions that we ask ourselves when we look at customer interface.
You see that the customer interface is rather similar to what Hamel had described earlier.
So this is kind of something that's a bit comparable.
What also is a bit similar to what Hamel does, but under a different name, is what Osterwalder
called infrastructure management.
And there he talks about value configuration.
When we think about value configuration, our mind connects that to the resource-based
view and thinks about resources are configured in a way.
And this is exactly what is happening here.
So it's an analysis about which resources does our firm have available, what's at our
disposal, and which resources do we need to fulfill our value proposition to use in the
distribution channels that we have to kind of keep the customer relationships or build
up the customer relationships that we want.
So you can extend that to all the other blocks.
And these links, the resources that we have and the resources that we basically need to
fulfill the other blocks.
The same analysis we can do not for resources, but also for activities.
So which activities do we need to perform to fulfill our value proposition to use the
distribution channels, et cetera, et cetera.
Similar to resources and activities, Osterwalder looks at capabilities in a separate block
and says which capabilities does our organization possess, which are valuable, rare, and non-substitutable.
Capabilities are terms that should sound familiar to you.
We use them to analyze resources, but of course you can also look at capabilities as an extended
type of resource in a way and see are they valuable, rare, non-substitutable, are they
really kind of we use them, are they exploited, and how could these capabilities be also useful
in other areas in businesses.
You had the example of Amazon building up logistics capabilities and web cloud computing
capabilities and resources, and then looking for like, hey, we can money by selling that
to third parties.
And we can actually offer our logistics and shopping platform to other customers and sellers
or sellers.
So then we can make even more money.
This is a nice example of Amazon expanding the capabilities that it has to create new
businesses.
And then last but not least, this is about partnership.
The value network of a firm, may I have also described something like that, who are our
key partners, who are our suppliers, which resources and activities do we get from our
partners, on which resources do we rely, for example, that others provide with us.
And then you can think about, is it really so smart, if you have a crucial resource that
you absolutely rely on, that is only delivered by a single partner, for example, and that
is what you can look at your partnership block.
That's also part of the infrastructure management is also what I called it.
The last pillar contains the last two blocks.
And these last two blocks are about cost and about revenue.
So what we look at is what are the most important costs, what are the most important resources,
what are the most important costly activities, but also you look at cost structure in terms
of how high are our fixed costs, how high are our variable costs, what percentage of
our total costs are fixed costs, for example, that occur independent of how much we sell.
This is about understanding your cost structure.
It's part of your business model.
And last but not least, the revenue model is also part of your business model.
That is what our customers willing to pay, understanding the monetary value.
How do they pay now, understanding the exchange value, and in which form do they pay, how
do they pay.
We price discriminate customers.
So our different segments of customers paying different prices to us.
And what are the consequences of that.
And then also understanding how much revenue do we get by each of our products and services
to understand if this is a service and product that we basically should still be keeping
or even expanding or one that we should retire because it's really not profitable and it's
really super, super small.
These are the nine blocks that form the business model according to Osterwalder.
Four pillars, nine blocks.
And if you go to consultant and have him analyze your business model, chances are pretty high
that you will be analyzing something which is very similar to the business model canvas.
And that is something that would be nice for tutorial or kind of doing a real world analysis
using a company.
But we're not going there and not going further.
What I do want to go into the rest of the time though is looking at specific and peculiar
business models.
So far we've got to know two frameworks for business model, two definitions of business
models.
Now we're looking at some very specific things.
So one of those is when you are a gatekeeper.
So our choke point as it used to be historically called, this is the dream of each strategist
in a company.
It's a business model that others can't circumvent.
They need to make a business with you.
There's no way around that.
And that's very similar to the small path through the mountains.
There's only a few of those.
And if you can control the height, the paths in the mountain top, then basically you can
demand customs and others have to pay.
So Karl von Clausewitz called them control of hates.
They have been called choke point controls or the enchtele in German, the point of where
you have to go through.
But more recent time we would call them gatekeepers.
And actually that's what the digital service act that the European union is about to create
calls them.
These gatekeepers are companies that you basically dominate a specific point or distribution
channel and you have to, you can't circumvent them.
So think about which examples can pop into your mind.
If you want to create an app for mobile phone, first of all, you have to choose between the
iPhone and Android ecosystems.
And then there's basically no way around the Apple distribution channel, the Apple app
store or the Google play store with both of them basically cashing in 20 to 30 percent
of your revenue.
And even if all the money that you earn with subscription services in app purchases, they're
still cashing in on that because they can.
There are monopolists in these respective areas.
And if you want to create a mobile phone app, unless you are really on the fringe and cater
for the nerds among us, then there's no way avoiding dealing with Apple and Google.
I think these are nice examples of understanding gatekeepers.
Then another very specific business model is one where you bring together customers.
So in essence, when you sell a product or service, you have suppliers and you have customers,
but sometimes you bring together customers from two sides.
The classical example of that is a newspaper that has customers that purchase the newspaper,
but also customers that bring in ads and basically purchase space on your newspaper
to place nets.
And you connect both customers of two sides, you have these and how attractive your product
is depends upon how many of the customers you have on either side.
If there's many purchases of your newspaper, it becomes very attractive for advertisers
to place the ads there.
On the other hand, some amount of advertisers makes the newspaper cheaper to purchase, which
is a little more attractive for purchasers, but at some point, if you only consist out
of advertising, well, you do become less attractive because it's just a marketing piece.
So you see, in some cases, more is better.
In some cases, there might be an optimal amount of a specific customer group.
There is ways in which we can organize and deal with these.
And there's sometimes it's two customer types, think about search engines that bring together
people who search things and advertisers most of the time.
That is also a two-sided platform, eBay and auction platforms that bring together purchasers
and sellers or Uber that brings together people who drive cars with people who want to be
taken from A to B.
There's plenty of examples of two-sided platforms, networks, markets.
You can even think about cases where there's more than two sides and more than two types
of customers.
So that would be then multiple-sided platforms, networks or markets.
There's various terms, essentially describing similar things.
This leads us to the important topic, of course, of platform economies and network
economies, where not only what you sell is important, but the network part that is already
part of our business model frameworks becomes even more and more important.
It becomes more important, bigger is beautiful.
So if you're WhatsApp, you're much more useful to your users than as if you're an instant
messaging platform that is very small and basically nobody has installed.
eBay is much more useful, both to people who want to sell stuff and buy stuff, compared
to other auction platforms that might be free and grant us to use, but where nobody really
offers something and nobody really buys you things.
So size does matter a lot in these cases.
And we might talk about network effects a little bit later this term, but this is, of
course, the network effect and that leads very often to cases of monopolies being created
because the bigger ones are the more attractive ones and get even bigger.
What do platforms offer?
So what's a platform business model?
Basically they offer three types of services.
They help customers or sellers or specific groups of customers to search for what they
want.
They help to compare prices and find the one that they like best and they organize and
help with the payment and transaction that is actually going on.
And for offering that, for connecting services, customer groups, they take 10 to 30 percent
of the revenue that was being created, something like that, depending upon the platform.
And these have been gaining steam and becoming bigger and more important in recent decades,
of course.
So firms are no islands.
They never were really islands, but the firms are no islands, but business model interface
and interlock a lot with those of other firms that they rely upon.
Remember Osterwalder and which resources do we rely upon by partners, for example?
So when the Amazon cloud goes down because some thunderstorms struck their data center,
then Netflix, Instagram, Pinterest and others go down because they rely upon their infrastructure.
This makes business models much more complex.
The last topic that I want to discuss is network, and it's not networks, but it's business models
where things are free, right?
We all rely upon business models where things are free.
So we don't pay Google for our search results.
We don't pay Facebook for our websites, posts and images that we upload and all that.
But there's much more free business models going on.
And of course, they are not really free because somehow, somewhere, well, you need to be not
only created, but also captured.
So it makes sense to look at where's the value capture really going on.
And that is exactly where free business models are interesting.
We could spend a lot of time to come up with a typology like that.
I simplify things and introduce that.
It's based on a typology created by Chris Anderson 10 years ago.
And this distinguishes four different types of free.
First of all, if you ever got a free shaver by Gillette, it's not because there's some
nice company.
Or if you ever bought an ink printer at nearly nothing price, that's not because HP is so
helpful and nice to people.
It's because they sell complimentary products that bring in a lot of money.
So this is actually called the shaver and blades business model.
And this is when there's the direct cross-subvention between two different type of products.
So you get a shaver for free, but you have to buy the plates, which are, to be honest,
quite, quite expensive.
You get an ink printer at below the manufacturing cost by HP and other Canon, other companies.
But ink, the ink cartridges are one of the most expensive, contain one of the most expensive
liquids on the world.
Calculate that ink is really more expensive than gold.
It's amazing.
That's direct cross-subvention.
But also if you get a free credit card, is it free?
Of course it's not free because the bank earns money from the commissions and fees that the
merchants pay whenever you use your credit card.
There's plenty more examples of direct cross-subvention and sometimes it's interesting and fun to
think about that.
Also there's third party markets where the third party pays for you being able to use
the free product.
So that would be advertising, for example.
Google no, advertisers pay for Google providing a free search functionality, search service
for you.
They pay for that.
People really kind of got accepted in Germany, but in other countries there's free newspapers,
paper newspapers lying around in the subway stations each day.
These are paid for by the advertisers putting in the ads and the commuters take them and
basically it's being paid for by a third party.
Then we can think about lots of examples where third party pays for your free product.
Premium has been established as a term based on the combination of free and premium service.
It's a free based product with costly premium features.
So imagine Spotify would offer you free basic service neglecting the ads for now because
that makes it a third party market again, a free based product and you could get additional
features by paying, subscribing for the real Spotify or having different levels of Spotify
subscriptions that would be freemium.
If you ever played a free to play game on your mobile or other console, that is basically
most of the time a freemium product where you can do in-app purchases.
You have a free based product and if you want anything on top of that or there are lots
of different types of models in there, then you have to pay for these added features,
added functionality, freemium models.
And the last one is the one that puzzles economists most because these are the non-monetary markets.
They are free without direct expectation of remuneration.
So these are really the ones where things are free in a way.
What examples could we think of for that?
Just think of Wikipedia.
Wikipedia offers free service.
You can read it without having to pay.
It doesn't really show advertising and it doesn't really expect you to pay directly
for the use.
Also it asks you for donation regularly and increasingly annoyingly but you can't always
use it, the full version of it, without having to pay.
So the gift economy, the tip economy, different names that describe that, this is really about
non-monetary markets and that these are the most difficult ones to explain for economists.
Let's skip one and look at the last specialty that a business model has.
Also due to the digital age, you might remember from your basic management courses something
called ABC analysis.
ABC analysis is when you divide up your products into the products that give you the most revenue
of your total revenue, B products are those that give you kind of lower revenue as part
of the total revenue, and C products are really the fringe products that only add very little
revenue to your total revenue.
And typically if you are an efficient organization, you focus on the A, perhaps B products because
all products that you have, fine capital, they cost in terms of storage, logistics,
so that's what you learn in the basic management courses, do focus on A products.
That's why physical bookstores often, well, they only have limited shelf space, so they
have to decide on which books do we want to put in our shelves, well, they put in the
best sellers because these are the ones that give the most revenue per square meter of
store area or shelf area meter.
If you have digital products, you have infinite shelf space, Amazon doesn't really care how
many products they have in their offering because at least when they kind of are sent
directly from the manufacturers because they are infinite.
If you have an ebook store, you don't really care about how many ebooks you have in your
offering because, well, basically space requirement doesn't cost you anything in addition.
So that changes the calculation that you typically did when you did the ABC analysis because
it does very much allow you to focus on niche markets, on these C products that only interest
customers which have very specific preferences and that simply weren't worth focusing on.
In digital economy, and that's what the long tail is about, the long tail is those C products
which bring in only very, very little revenue are suddenly worth catering for.
They're worth targeting.
In that sense, it's interesting.
You don't only have to focus on best sellers, but you can focus on some weird category of
books that only geeks like.
That's an interesting implication.
We have been talking about business models, got to know two definitions of a business
model, gotten to know two frameworks and how to describe and analyze business models
and talked about specific aspects, specific business models that became increasingly important
in the digital age.
If we think about business model analysis, it's of course something that is important
because it is the core of our organization, but don't forget that it's very easy to abuse
the whole term and to put anything under the cluster of a business model.
You know better now, but if even researchers are not so certain is business model part
of strategy or the other way around, then of course you can, well, I think you get the
point and well, I really, really lost it.
Okay.
Sorry for that and see you in the tutorial.
Goodbye.