Simple rules for business models
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This document outlines simple rules for designing business models based on Sayan Chatterjee's framework. It discusses the core components of a business model including objectives, profit logic, value chain, value proposition, and value capture. It then describes four common business model categories - efficiency, perceived value, network value, and network efficiency - along with rules for each. An example of Aldi's efficiency-based business model is also provided. The presentation aims to provide a clear and simple framework for understanding different business model types.
Simple rules for business models
- 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
Editor's Notes
- #2: Sayan Chatterjee – Simple Rules for designing Business Models – California Management Review, Vol 55, No 2, Winter 2013, CMR.BERKELEY.EDU
- #3: “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. An earlier article in this journal had developed a process for mapping out the activities and resources of a business based on the specific profit logic of a business. The specific profit logic was captured by a concept called core objectives. However, the process of identifying the core objectives is not easy. This article 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.” - Sayan Chatterjee – Simple Rules for designing Business Models – California Management Review, Vol 55, No 2, Winter 2013, CMR.BERKELEY.EDU
- #5: The process to create the bases for a business case should start by identifying the initial target segment. Once that is done, the next step is to identify the category or type of business model to implement. This will enable the company to get into the critical next step: how to capture value in a way that is specific to the business and the market. As the method to capture value is identified, core objectives can be defined (COAR methodology). Core objectives should be specific and clear. The simple rules provided by this method provide a guideline to be used to create such objectives. Proceeding then with the COAR methodology the next step is to map activities and available/necessary resources. At this point, before jumping into execution is worth to re-validate the model, and review the cycle if doubts still persist. Once the green light is given, many times is difficult, if not impossible, to change the profit logic.
- #6: Before starting a new business model, it is important to search for ideas and concepts from other industries. A good business model is not necessarily an all new from scratch idea. Many times, leveraging own capacities and looking for patterns and trends in other industries are critical to unlock the innovation needed in locked down industries. Picture: https://flic.kr/p/qPsKJz – Franklin Heijnen - used under creative commons license - https://creativecommons.org/licenses/by-sa/2.0/
- #7: This graph shows the four basic quadrants of most common business models. Most businesses will operate mostly in one of those quadrants (although in almost all cases there will be components of the others). A company’s targeted market could be better addressed by products or services or by creating and incentivizing relationships. An industry could be driven by value or by efficiency (cost). Once the preponderant business model is defined, the following slides will show guidelines for core objectives and simple rules to implement. As stated above, is likely that your business will have some components from two or more quadrants, as such, the rules from those other quadrants could be applied as necessary.
- #8: “The generic value capture logic for an Efficiency-Based model is to be more efficient than competitors in utilizing the assets and, if possible, have better pricing power for at least some segments.” - Sayan Chatterjee – Simple Rules for designing Business Models – California Management Review, Vol 55, No 2, Winter 2013, CMR.BERKELEY.EDU
- #9: “The generic profit logic of this model is to position its output as a “want” item. Whether you are Intel, NVidia promoting your latest chips, IMAX offering a different movie experience, or Prada creating exclusivity, you have to understand the value drivers leading to the “want.” The simple rules for this model help firms to identify the value drivers for their customers more precisely than those that use an ad hoc approach.”- Sayan Chatterjee – Simple Rules for designing Business Models – California Management Review, Vol 55, No 2, Winter 2013, CMR.BERKELEY.EDU
- #10: “The Loyalty-Based model is a very profitable derivative of the Value-Based model. The simple rules from the Value-Based model apply at least in the initial phases of creating the loyalty. The generic value capture logic is to attract a critical mass of loyal customers that will lead to repeat purchases of sufficient magnitude that these can offset the investments needed to offer the products or services. Once the critical mass is reached, the subsequent purchases usually have a very high contribution level. Note that this assumes that you have managed to keep potential rivals away.”- Sayan Chatterjee – Simple Rules for designing Business Models – California Management Review, Vol 55, No 2, Winter 2013, CMR.BERKELEY.EDU
- #11: “The generic value capture logic of a Network-Efficiency model is to increase the volume of transactions (driven by fast turnover), which becomes a virtuous cycle by attracting more suppliers and customers (loyal stakeholders) to a common hub. Of all the models, the Network-Efficiency business model depends on other stakeholders the most” - Sayan Chatterjee – Simple Rules for designing Business Models – California Management Review, Vol 55, No 2, Winter 2013, CMR.BERKELEY.EDU
- #12: At this point is worth asking, where do you think your business model fit? As you can see, represented by the green circles, the model not necessarily needs to fit in the middle of any of the boxes or even in a single one… the purpose of the rules is help you identify the most relevant model and leverage the simple rules to accelerate the systematic approach to the ultimate business model.
- #13: This cheat sheet concentrates all the information in the previous slides. It should be used as a quick reference guide to set up your business models, implement the proper rules and identify the core objectives, related activities and resources.
- #14: Based on your current business, what is the next logical evolution?
- #15: Risk is always at arm length when fiddling with business systems. Affecting the relationship with your business ecosystem could prove extremely dangerous for the business (examples abound). Another risk is growing beyond the company’s or market natural size. Sometimes is better to just coast the business than pursuing additional growth, as cost and risk can grow exponentially and put your business in crossroads.