Once upon a time, all business models were relatively similar and relatively simple. You bought low and sold high. The more you could repeat this simple recipe, the richer you would grow. But the world has become more complex and more competitive.
New technologies have opened up many different ways of doing business and most companies are no longer competing just with the business down the road, they are competing with entities from across the globe. In this environment of increased complexity and heightened competition, a firm’s business model has become a critical source of competitive advantage.
The entrepreneurs and managers who have taken the time to understand what a business model is and how to innovate around their own business model have found new sources of profit and growth. By contrast, those who have failed to adapt their business model have found themselves languishing and giving way to their more inventive rivals.
What is a business model? What is business model innovation? How can a business model be a source of competitive advantage? How can refining a business model drive growth and profit within an enterprise?
Let’s look at the concept of a business model and see what tools and insights are available to enable entrepreneurs and managers to innovate with new business model designs. In doing so, we’ll be drawing on the concepts captured in the recently released book Business Model Generation by Alex Osterwalder and Yves Pigneur.
What is a business model?
Quite simply a business model is a description of the rationale of how an organisation creates, delivers and captures value. A business model describes how a company creates an offering, gets it to customers and generates profit from the transaction.
The research of Alex Osterwalder and Yves Pigneur suggests that a complete description of a company’s business model can be broken down into nine elements:
- Value proposition: A clear description of the company’s offering and how it solves problems or creates value for customers.
- Customer segments: The specific group of people that the organisation aims to serve.
- Channels: The means that a company uses to reach its customer segments to communicate with them and to deliver products and services to them.
- Customer relationships: The methods used to maintain relationships with customer segments.
- Revenue streams: The income generation and collection mechanisms in the business.
- Key resources: The most important assets that the company needs to make the other elements of the business model work.
- Key activities: The most important things that a company must do to make its business model work.
- Key partnerships: The network of suppliers and partners that make the business model work.
- Cost structure: The major costs that need to be incurred to sustain the business model.
These nine business model building blocks can be captured in a single diagram called the business model canvas. It sets the value proposition at the centre of the business model as the primary focus area. The customer building blocks (customer segments, channels and relationships) can be found to the right of the value proposition and infrastructure building blocks (resources, activities and partners) to the left.
The finance-based building blocks (revenue and cost structure) can be found on the lower portion of the diagram.
Building & refining a business model
The nine building blocks and the business model canvas are excellent tools (1) for understanding your current business; (2) for refining a business to make it more profitable; and (3) for designing a new business model.
The process of applying the business model canvas to define or refine a business model is relatively simple but extremely powerful.
Gather the people you want to participate in the process. In a business it is useful to get the entire management team involved. Different people bring new perspectives and insights and therefore having a broad base of participants is often an advantage.
Once you have all the participants gathered together, you should present a copy of the business model canvas and explain to people what the different components of the canvas mean.
Map out your firm’s existing business model on the business model canvas (note, if you are designing a business model for a brand new business, this step can be skipped). The mapping of the business model will give all participants in the process a common understanding of the company’s current operations.
Brainstorm ideas for different ways of doing things within the business model. If you’re designing a new business model the focus will be on how you build up the different elements of the business model to create a valuable enterprise.
If you are refining a company’s existing business model then you can work though each of the nine building blocks and ask the following questions:
“How could we do things differently?”
“How can we create more value for customers?”
“How could we be more efficient?”
As you go through the process of brainstorming ideas for each of the nine building blocks be sure to:
- Encourage everyone to participate:
- Keep asking questions
- Record all ideas:
- Don’t judge ideas immediately, write them down and judge them later
- Be visual:
Put the business model canvas up where everyone can see it and record the ideas in such a way that all participants can see them. One useful way to do this is to draw the business model canvas on a very large sheet of paper or project board, stick it on the wall and then use post-it notes and markers to record all the participants’ ideas in the respective blocks.
Identify the good ideas. The challenge is to create a way for the group to decide on the best ones. One way to do this is to give the individuals in the group a pack of adhesive stars and get them to vote on the best ideas. Another way is to get the people to vote on paper if you prefer.
Bring the best ideas together in a coherent business model. To do this you can give each participant a clean business model canvas and get them to create a new business model for the company, using the best ideas generated in the session. Each person can then present their new business model back to the group. From this a new business model can be devised.
Plan for the implementation of the new business model. Create a set of action steps and allocate responsibility for the implementation of the steps. The process described above, or some variation of it, will provide an entrepreneur or manager with a practical, meaningful and productive way to design a new business model.
Examples of innovative emerging business models
To understand how business models are evolving and to get inspiration for designing an innovative new business model, it is worth examining some of the new patterns emerging. Over the past 20 years we have seen a proliferation of these.
Many new business models are built around the Internet, yet it’s not an essential ingredient of business model innovation. Below are some examples of emerging business models as identified by Alex Osterwalder and Yves Pigneur.
Long tail business models
In long tail business models a company sells lower quantities of more types of products to very niche groups of customers. Traditionally business looked to create ‘hit’ products – products that would appeal to the largest segment of mainstream customers.
Because the cost of finding customers and producing and distributing products in many industries has decreased, some businesses have emerged to service small, dispersed groups of customers.
Global example of a long tail business model:
Publishing industry: Lulu.com
Previously the goal of a book publishing company was to find the next best-seller – Harry Potter and the like. Lulu.com, an emerging book publishing business, turned this model on its head. Instead of focusing on best-sellers, they created a platform that enables any amateur author – you, me or the person next door – to publish a book.
They make their money by providing authors with the tools to self-publish and they also provide a platform for people to buy and sell self-published books.
Other examples of companies that employ a long tail business model include CD Baby (music), Springleap (T-shirts) and Netflix (movies).
Additional reading on long tail business models:
The Long Tail: Why the Future of Business is Selling Less of More, by Chris Anderson, 2006.
Multi-sided platforms bring together buyers and sellers. They create a space where people can transact. The platform creates value by facilitating interactions between different groups. A multi-sided platform becomes more and more valuable as more and more people use it.
Local example of multi-sided platform business model:
Real estate sector: Private Property
Private Property has established a platform that brings together buyers and sellers of real estate on the Internet.
By making it easy for sellers (including traditional real estate agents) to load property descriptions, pictures and videos onto their site and by making it easy for sellers to search and save properties, they have created a business model that has transformed the way many people find property to buy or rent.
There are many industries, local and global, that are being transformed by businesses with multi-sided platform business models. Examples include eBay (auctions), Craigslist (classifieds), Apple App Store (software applications), and Google (advertising).
Additional reading on multi-sided platform business models: Strategies for Two-Sided Markets, Harvard Business Review, by Thomas Eisenmann, Geoffrey Parker and Marshall W van Alstyne, 2006.
‘Free’ as a business model
Many businesses are finding it possible to deliver a product or service to a substantial customer segment at no cost; non-paying customers are financed by some other portion of the business.
Because people are naturally attracted to offerings that are free, many businesses find benefit in providing their offering at no cost to generate demand and create interest in what they are doing. They then find ways to get certain customer segments to access additional services and to pay for those services.
Global example of a free business model:
Anyone with friends, family and acquaintances living abroad has probably discovered the magic of Skype. If you and your friend both have an Internet connection you can call each other at absolutely no cost (except for the Internet bandwidth that you might be paying for).
Skype does this to get people to start using the network. The more people that are on Skype the more valuable it becomes for users. As people depend more and more on Skype for their daily communication needs so they discover that there are a whole lot of additional services that are worth paying for.
You can pay to call people directly on their phone or to set up premium services with all sorts of additional features. I started using Skype as a pure free user and I now spend about $10 a month to access additional services. As more and more people follow this trend it will become an incredibly profitable business.
Other examples of businesses that incorporate free into their business model include Dropbox (online storage), Google (search), Youtube (online video), and Facebook (social networking).
Additional reading on free as a business model:
Free: The Future of a Radical Price, Chris Anderson, 2008
Bait & Hook
The bait and hook business model is the practice of luring a customer in with a relatively cheap upfront purchase but then making money off them with more lucrative ongoing servicing. The most famous example of the bait and hook business model is in the razor blade industry.
Gillette will sell you the actual razor for next to nothing but then make huge margins every time you replace the disposable blade.
Local example of the bait and hook business model:
Motor Industry: BMW Financial Services
BMW retailers in South Africa give their customers very good deals on cars but then get them to utilise the BMW Financial Services package as a means to finance the car. They make the real money on the purchase through the ongoing interest payments that you make in paying off your vehicle.
Other examples of the bait and hook business model include: HP (printers and printer cartridges), cellphones (cheap handset but expensive ongoing contracts), Multichoice (pay TV – give away the decoder but charge high monthly fees for customers to get value from the decoder).
These are just a few of the interesting new business models that are emerging to create value for companies. One of the real challenges is that successful business models are often replicated and after being copied too many times, they are no longer valuable.
Gary Hamel said, “…all too often, a successful new business model becomes the business model for companies not creative enough to invent their own.” Most times the first mover – the firm that comes up with the business model that transforms an industry – benefits immensely from their innovation.
A new business model can be a source of competitive advantage for many years – Southwest has maintained its advantage with the low-cost airline model for over three decades and Gillette has done the same with its bait and hook razor blade model for just as long.
The challenge for today’s entrepreneurs and business managers is to be creative enough to invent a business model that is radical so you can attain advantage in your industry for decades to come. Don’t just copy what others have done. Use the tools provided in this article to help you create something that is new, different and transformative. Good luck!
Business model generation source book
Business Model Generation, by Alex Osterwalder and Yves Pigneur, is available from Kalahari.net
Disruptive new business models are emblematic of our generation. Yet they remain poorly understood, even as they transform competitive landscapes across industries. Business Model Generation offers you powerful, simple, tested tools for understanding, designing, reworking, and implementing business models. It’s a practical, inspiring handbook for anyone striving to improve a business model – or craft a new one.
The book will teach you powerful and practical innovation techniques used by leading companies worldwide. You will learn how to systematically understand, design and implement a new business model – or analyse and renovate an old one. Business Model Generation also has a tightly-integrated, visual, lie-flat design that enables immediate hands-on use.
- Seizing the White Space: Business Model Innovation for Growth and Renewal; By Mark W Johnson; Harvard Business Press; 2010
- Open Business Models: How to Thrive in the New Innovation Landscape; By Henry W Chesbrough; Harvard Business Press; 2006
Want To Change Your Business Model? Answer These 3 Questions
Here are a few pointers on figuring out the best way to grow your business and keep it sustainable for years to come.
To grow sustainably, is it better to take on projects that are frequent and reliable, or sparse but lucrative?
Q: I own a film and production company, and I shot 100 videos last year – 70 weddings and 30 corporate, totaling $330,000 in revenue. The corporate videos are more profitable, but weddings are always happening. I don’t want to turn off a constant source of revenue, but should I spend more time pursuing corporate events to grow my business? – Trevor R.
Welcome, Trevor, to the entrepreneur’s struggle! You build a great product or service, make good money and the next thing you know, you feel like you have to change your model. It’s the age-old question of scale: What’s the best way for your business to grow, and does that mean making less revenue now in order to have more sustainable growth for years to come?
Related: 4 Types Of Business Models
With the bulk of your time being spent on wedding videos, you probably feel stuck in the slow lane, watching better profits pass you by. But remember that scale is not just about margins.
Numbers can be deceiving, and you control what you charge for your services. While your corporate videos are more profitable right now, going all-in might not be the long-term answer.
To figure out the best route for your business, start with a clear vision of your ideal final destination. How much money – and profit – do you want to make per year? It might sound like a frivolous question (who doesn’t always want to make more?), but it will allow you to reverse-engineer your business model and help determine a practical answer.
Let’s say you want $1 million in gross revenue per year. At this time, it sounds like you charge about $5,500 per corporate video and about $2,400 per wedding video. That means you’d need to sell either 182 corporate videos or 417 wedding videos. (That’s a lot of videos!) Use those numbers to guide your vision. Next, consider scale, which depends on a number of growth factors.
First, creating value: Make sure you’re charging the appropriate amount for your services in order to reach your goals.
Second, anticipating growth: Where is the greatest opportunity, not just at the moment, but in the future?
And third, limiting expenses: How can you keep costs down so spending doesn’t outpace revenue?
Related: 3 Types Of Ecommerce Business Models
Answering honestly will help you create several business models. For you, Trevor, those models are (a) weddings and corporate, (b) weddings only or (c) corporate only. As a case study, let’s consider “weddings only.”
Last year, you worked 70 nuptials. Before you consider hitting pause on that side of your business, revisit those growth factors to figure out if you can make it more profitable.
- Should you charge more for each video?
- How many clients did you turn down last year?
- Could you have taken them on if you had extra help?
Weigh the costs, and consider adding another videographer to the staff. If that seems financially impossible, look for ways to at least maintain your current output while trimming production costs.
For a small business, profitability is a mad science of focus, projections, and getting out of your own way. What makes the most money on a per-item basis is not necessarily what will make you the most profit in the long run.
Consider Amazon: It created scale by focusing on smaller margins. It’s a helpful reminder that there are different ways to succeed.
Understand what you can charge, how you should save and who is most likely to buy from you in the future. By simplifying the complicated challenge, you can jump on the fast track to growth.
This article was originally posted here on Entrepreneur.com.
How A Clear Strategy Can Change The Game
Strategy seems to have this mystical aura surrounding it, but it is nothing more than applying some really deep (and perhaps objectively facilitated) thinking about five areas of focus.
At the point of creation, a new business has a strategy. There will come a time when that model is not as attractive as it originally was. Competitors may have entered the space, or upped their game, customers might be more demanding, margins may start coming under pressure, and you as the business owner might be working 12 hour days.
That’s the time when you need to have a formal strategy workshop. You need to think through what you are doing, how you are doing it, why you are doing it and what are its benefits. That’s not going to happen when you’re moving at breakneck speed trying to keep your head above water.
If your business is to succeed in this volatile, uncertain, complex and ambiguous (VUCA) world, then it must understand exactly where it plays in the market that you have chosen, and most importantly, how it intends to succeed in this space.
The challenge that most business owners face is that there is so much pressure to put out fires that very little attention is granted to the spark of industry-defining ideas. If you want to stay in business long-term, making the time to reflect and think deeply about the direction and competitiveness of your business is nothing short of essential.
Every business operates within a far larger matrix. We are affected – positively and negatively – through external events over which we have little or no control. Currency fluctuations, Brexit, trade agreements, economics, the political environment, tax rates, legislation and a host of other influences that impact our business environment.
In a strategic planning workshop, at least a morning needs to be invested in understanding how these external factors impact the business. A PESTLEID analysis can be undertaken, and this follows the process of evaluating the Political, Economic, Social, Technological, Legal, Environmental, International and Demographic landscapes.
This process is not a conversation, but rather an in-depth analysis of each of the PESTLEID factors, each of which is broken down into detail. Each detailed factor is ranked in terms of probability and impact. High probability and high impact factors are firmly placed on the firm’s radar, and scenario planning is completed for these events. Low probability but high impact events are allocated to accountable individuals for observation, and might be scenario planned depending on their severity.
By the end of this process, each person in the room must have a sound idea as to the context in which the business is operating, and what external factors the business is likely to experience within the next year.
Through scenario planning, each individual will also understand what the best course of action will be for the organisation should any of the high-impact scenarios come to be, and will be equipped to play their role in taking those actions in order to minimise business disruption.
The only person who can tell you what your customers want and need is your customer. It is a fatal mistake to believe that anyone in your organisation is qualified to speak on behalf of your most valuable assets.
Key customers can be invited to join you for a portion of your strategy workshop, or you can survey your customers beforehand and present the information on the day.
In this conversation, you are unpacking what it is that your customers want from you. But a note of caution that is magnificently phrased by Henry Ford when he said: “If I’d asked my customers what they want, they would have told me a faster horse”.
Remember that your customers can and will generally only tell you what they want and need given the same operating conditions for both yourselves and themselves. And that’s OK, because it defines the foundational sandpit in which you are operating right now.
Customers can tell you how your service ranks in comparison to competitors, how competitive your pricing structures are, their satisfaction with your sales process, how well your product performs, their experience of your service, and any gaps that might be sitting in your blind spot. This gives you the ‘as is’ situation and is an invaluable starting point.
It is important not to become so fixated on your competitors that you lose sight of your own direction, but you certainly want to know what your competitors are up to, lest you get blindsided by their actions.
Ideally, you would arrive at the strategy session understanding the market shares of your various competitors. In addition, you would know the share of wallet that they attract, and compare this to the share of market. Variances between the two indicate a pricing strategy that may deserve closer inspection. If accessible, a study of the competitors’ financial statements is never wasted as this indicates industry growth rates, profit rates, margin rates and the like for comparative purposes.
Then, a subjective analysis can be completed, but this can be done during the workshop. Here, the focus is on the offering and the softer skills that your competitors bring to the table.
- How strong are their customer relationships?
- How well do they sell against your products?
- How are they achieving their growth?
- What do they do particularly well where your performance is sub-par?
- What do you do particularly well, that outshines them?
The more heads that think through these issues, the more objective the information becomes.
What you’d like to achieve at the end of this session is a list of things that your customers insist you have in your offer, ranked against your competitors. Then, you’ll have a list of ‘order winning’ value added offerings, also ranked against your competitors. You’ll be able to see where you are performing better, and worse, than your rivals.
This is the time to review what your organisation does particularly well, that when combined in the larger context and when compared with that of your competitors, can create a meaningful and valuable differential for your organisation.
What you are seeking here is something that your business does that your competitors cannot match. Often, these are the things that become ingrained in your culture. They are not a process, they are not a pricing point, but rather are embedded into the way you do business. Think Apple, think design and functionality. Think Ferrari, think performance and exclusivity. When I think of your company, what should the association be?
If there is nothing that your business does that can differentiate it, then this becomes the part of the strategy workshop where you decide what skills your organisation needs to develop or acquire in order for it to effectively compete.
There are a number of frameworks that are useful at this juncture, but all of them ask what your organisation can uniquely bring to the market, and how long you believe this uniqueness is achievable. If your competitors are able to replicate your uniqueness quickly, then your competitive advantage can be eroded before its paid for itself. Where little differentiation exists in a market, the common point upon which to compete becomes price. Margins erode in the effort to win business. Either differentiate, or be prepared to become a low-cost producer.
Creating a Unique Space
This is where strategy becomes as much art as it is skill. The real end-game of strategy is to create a space that completely disrupts your industry, and where your organisation sets the rules of the game. Playing by rules set by others means that you are always watching and waiting, instead of setting the pace and direction.
Thinking of a realistic opportunity takes incredible focus, deep thought, creativity and imagination. At times, new industries are created where the borders of current industries exist so this is a good place to look first.
What Happens After All is Said and Done?
The chosen strategy should be captured in an Executive Summary of no longer than 2 to 3 pages. Anything longer creates confusion and apathy by those who are expected to wade through reams of inputs in order to reach the implementation section.
The chosen strategy must be presented to and worked through in a workshop with those who will play any part in its implementation. Ideally, small teams will be tasked with the implementation of certain aspects of the whole picture.
Remember that the contents of that strategy must form the conversation point of the executives from that point forward. If all you talk about is profit, profit is what the business will chase. If you focus on strategic delivery in each of your conversations, the business will deliver. And, when you’re tired of talking about the strategy, you’ve likely only done 10% of the job needed, so keep talking strategy.
4 Types Of Business Models
There are four main types of business models, see which one suits your business concept.
Different types of business models suit different types of businesses. A business model is the way that a company sells products to its customers. It describes how a business creates, delivers, and captures value.
What type of business model should you adopt?
A business model defines how the enterprise delivers value to customers, gets them to pay for that value, and converts those payments to profit.
There are four basic types of business model that any for-profit business will fall into:
A manufacturer takes raw materials and creates a product, or assembles pre-made components into a product (E.g car manufacturers). A manufacturer may sell its products directly to its customers, or it can outsource sales to another company.
A distributor is any business that purchases products directly from a manufacturer for resale either to retail outlets, or directly to the public. For example, a car dealership would purchase vehicles directly from the manufacturer and sell them to the general public.
A retailer purchases product from a distributor or wholesaler, and then sells those products to the public. A retailer usually has a physical location, but may also be an online retailer such as Amazon or Kalahari.
A franchise can be a manufacturer, distributor or retailer, depending on what type of franchise you purchase. Here the franchisee adopts the business model of that franchise.
Under these four types of business, there are various other ways of structuring your business model.
- A company that integrates a physical and an online presence. An example would be a retailer who allows customers to order products online, but lets them pick up their order at their nearest store.
- A company that deals with customers directly via the internet without engaging an intermediary.
- Direct selling to consumers making use of product demonstrations in the person’s home, for example. There are several cosmetic and jewellery companies that use this model in SA.
- The Freemium business model works by offering a basic Web service or product, for free, while charging a premium for advanced or special features.
- Online auctions, which are held over the internet.
- Beauty Of Failure: The Art Of Embracing Rejection
- 3 Tips For Succeeding After You Fail
- South Africa Seeks Innovative Solutions to Payments Systems
- Tsogo Sun Entrepreneurs Takes On 30 New Businesses
- 2018 National Budget: What To expect?
- #SONA2018: Upbeat Address Offers Inspiring Message For South African Entrepreneurs
- LaunchLab Fellows – Great Opportunities For Aspirational Young African Students
Start-up Industry Specific3 months ago
How Do I Start A Transport Or Logistics Business?
Upstarts3 months ago
10 Young Entrepreneurs Under 30 Share Their Start-Up Secrets
Business Plan Advice3 months ago
Writing a Business Plan May Not Be Your Idea Of Fun, But It Forces You To Build These 4 Crucial Habits
Company Posts1 month ago
Enhance Your Entrepreneurial Flair With An Online Postgraduate Diploma From The University Of Pretoria