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BUSINESS MODEL 101

 

23
MARCH, 2020
A business model describes the rationale of how an organization creates, delivers, and captures value. – Alexander Osterwalder

Starting point for any good discussion, meeting or workshop on business model innovation should be a shared understanding of what a business model actually is.

This concept can then become a shared language to allow every manager to describe and manipulate business models to create new strategic values. Without a common dialect it is considerably difficult for the people in the company to “row” in the same direction and will therefore dwarf innovation.

A business model can best be described through nine basic building blocks, these will show the logic of how a company intends to make profits. These blocks cover the four main areas of a business: customers, offer, infrastructure, and financial viability. It is a blueprint to implement strategies through organizational structures, processes and systems.

  1. Customer Segments
  2. Value Propositions
  3. Channels
  4. Customer Relationships
  5. Revenue Streams
  6. Key Resources
  7. Key Activities
  8. Key Partnerships
  9. Cost Structure
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Customer Segments

The customer segment defines on a basic scale who is your customer, for whom you are creating value. Customers should be at the heart of any business model, and that is why we start with them. Any decision made at the executive level should be guided towards the mindset of giving more value to our customers.

In order to better serve their customers many companies decide to segment them, this way they can bring more tailored products to the market and fulfill their needs in a major scale.

We can find different types of Customer Segments:

  • Mass Market: These type of segment doesn’t distinguish between different customer segments, they bring the same value proposition to every of them. It is often found in the consumer electronics sector.
  • Niche Market: As we see from the word “niche” means tailored, we specialize our product to a single customer segment and completely fulfill its needs. It can be found in the supplier-buyer relationships throughout many companies.
  • Segmented: You offer different value propositions for each customer.
  • Diversified: An organization like Amazon that serves two unrelated segments with different needs and problems.
Value Propositions

This is the building block of any organization. They are the services and products that you are going to provide to your specific customer segment. It is the reason why customers turn to one company over another. The value proposition can be a bundle of benefits or added features and attributes that differentiate your company from another.

These are some common elements of value propositions:

  • Newness
  • Performance
  • Customization
  • Price
  • Design
  • Brand/Status
  • Convenience
  • And, accessibility
Channels

The channels are they different ways the company chooses to deliver its value proposition to the customer segment. They are the company’s interface with the end-user. Companies can choose to serve their customers through its own Channels, through partner Channels, or through a mix of both. There are benefits and drawbacks to each one and deciding which one to use depends on the value proposition each company is delivering to the market. The key is finding the right balance between different types of channels.

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Customer Relationships

This describes the type of relationship the company is going to establish with each customer, each organization should decide whether it wants it to be personal or automated. At the core they are always going to follow these motivations:

  • Customer Acquisition
  • Customer Retention
  • Boosting sales (upselling)

We can also distinguish several categories of Customer Relationships which may co-exist throughout a Business Model:

  • Personal Assistance: Call-centers or e-mails.
  • Dedicated Personal Assistance: Private banking services.
  • Self-service: No direct relationship.
  • Automated services: Book recommendations through an Artificial Intelligence software.
  • Communities: They can be private online communities or forums.
  • Co-creation: Where the user creates their own content, such as Youtube or book reviews in Amazon
Revenue Streams

It represents the cash the company generates from each customer segment. Yves Pigneur describes that “If the customers comprise the heart of the business model, Revenue Streams are its arteries.”.
These streams can come from two different types:

  • Transaction revenues resulting from one-time customer payments.
  • Recurring revenues resulting from ongoing payments to either deliver a Value Proposition or provide post-purchase costumer support.

Also, there are several ways to generate Revenue Streams:

  • Asset sale
  • Usage fee
  • Subscription fees
  • Lending / Renting / Leasing
  • Licensing
And you can have different Pricing Mechanisms:

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Key Resources

They are all the assets required to produce your Value Proposition. Every business model uses different resources depending on the type of organization you have they can be physical, financial, intellectual or human. Also, they can be owned or leased by the company or acquired by partners.

  • Physical: manufacturing facilities, buildings, vehicle machines and distribution networks.
  • Intellectual: brands, proprietary knowledge and copyrights.
  • Human: crucial in knowledge-intensive and creative industries such as Management Consulting or Pharmaceutical Companies.
  • Financial: they can be financial resources and/or financial guarantees.
Key Activities

They describe the most important actions a company must do to make its business model work. For PC manufacturer Dell, these activities include supply chain management. For consultancy Mckinsey, they include problem solving.

Key activities are regularly categorized as follows:

  • Production: designing, making, and delivering a product.
  • Problem solving: new solutions to individual customer problems
  • Platform/Network: matchmaking platforms, software, and even brands can function as platforms.
Key Partnerships

Partnerships are the network of suppliers and partners that make the business model work. Companies normally create alliances to improve their business models, reduce risk, or acquire resources. There are four types of partnerships:

  1. Strategic alliances between non-competitors
  2. Strategic partnerships between competitors
  3. Joint ventures to develop new businesses
  4. Buyer-supplier relationships to assure reliable supplies.
Cost Structure

It describes the most important costs incurred while operating under a particular business model. These costs can be calculated after defining all the key activities of the company. Some models, are more cost-driven than others, one example is the “Southwest Airlines” which has been built entirely around low Cost Structures.
Many business models fall between these two classes of structures:

  • Cost-driven: this model focuses on minimizing the cost wherever possible. It aims at creating and maintaining the leanest possible cost structure. Southwest Airlines and Ryanair are clear examples.
  • Value-driven: in this structure companies are less concerned with the cost implication of a particular design and instead focus on value creation. Luxury hotels form a big category among this type of business model.

Having a clear understanding of what are the main goals of the company and the key activities that will drive its business should be at the core of every organization and using this Business Model structure will help to break it down in a comprehensible way.

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