Business Models

Mike Panesis

Housekeeping
!! Individual registration re-opened for this week. !! Team formation deadline extended to the end of this week. !! Competition entry deadlines:
! ! ! ! Jan 27: DOE FLoW, http://flow.caltech.edu Feb 1: NCIIA E-Team, http://nciia.org/eteam_program Feb 18: Rice Business Plan Competition, http://rbpc.rice.edu Apr 8: International Business Model Competition, http://www.businessmodelcompetition.com

!! Mentor assignments coming.

Seminar Schedule
!! Business Models
! Canvas, 1/16/13 ! Environment, 1/22/13

!! Finance
! Basics, 2/19/13 ! Planning, 2/20/13 ! Measurement, 2/26/13

!! Marketing
! Sizing a Market, 1/29/13 ! Product & Promotion, 2/5/13 ! Pricing & Market Validation, 2/6/13

!! Teams, 2/27/13 !! Technology, 3/5/13 !! Law

! Intellectual Property, 3/12/13 ! Company Formation, 3/13/13

!! Operations, 2/12/13

!! Investors
! Financial, 4/2/13 ! Strategic, 4/9/13 ! Presentation, 4/16/13
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Whats a model?

Whats a Model?
!! A model is a representation of something real. !! A good model has high fidelity. It accurately represents reality. !! A good model is elegant. It achieves high fidelity without excessive complexity.

Business Models and the Business Model Canvas

!! A Business Model describes how your company creates, delivers and captures value. !! Technically a Business Model Canvas is not a Business Model. Its a reflection of a Business Model. !! A Business Model Canvas is elegant. Its based on rigorous research into the most successful business modeling techniques. !! A high fidelity business model isnt built, its discovered. !! High fidelity alone is not sufficient. A business model must be effective, repeatable and scalable. !! The best way to discover a high fidelity, effective business model is to apply scientific method.
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Business Model Canvas and Scientific Method

Hypothesis

Test

Analysis

Adjust and Pivot

!! Hypothesis: make an educated guess about how your business model works !! Test: meet with potential customers and industry participants to confirm !! Analysis: understand what you learned and its effect on the fidelity of your model !! Adjust: incrementally change your model to improve its fidelity !! Pivot: dramatically change your model to improve its effectiveness

Business Model and Its Relatives

Business Model

Business Environment Model Marketing Model Legal & Regulatory Model Investment Model

Financial Model

Wait a minute, dont I need a business plan?

!! Yes, but not yet. !! No business plan survives first contact with the customer. !! A start-up is a temporary organization in search of a repeatable and scalable business model. !! A repeatable and scalable business model is the foundation for an effective business plan. !! Once you find one, then think about spending time & effort on the business plan.

Business Model Canvas

7 6 8 1

4 2

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1.Value Propositions Definition

!! Describe bundles of products or services that create value for a specific customer segment !! Value delivered to the customer (benefit/cost) !! Customer problem being solved !! Customer needs being satisfied !! Value Propositions assigned to Customer Segments

Attributes
!! Newness !! Performance !! Customization !! Full Service !! Design !! Brand/Status !! Price !! Cost Reduction !! Risk Reduction !! Accessibility !! Convenience/Reusability

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2. Customer Segments Definition

!! Defines groups of people or organizations that your business aims to reach and serve !! Customer Segments:
! Have needs that justify a distinct offering ! Are reached though different Distribution Channels ! Require different types of Relationships ! Have different levels of profitability ! May be interested in a sub-set of the Value Proposition
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Types
!! Mass Market !! Niche Market !! Segmented !! Diversified !! Multi-Sided Market

3. Channels Definition
!! Describes how a company communicates with and reaches its Customer Segment to deliver a Value Proposition !! Functions:
! Raising awareness among customers about a companys products and services ! Helping customers evaluate a companys value proposition ! Allowing customers to purchase specific products & services ! Delivering a value proposition to customers ! Providing post-purchase customer support
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Types
Direct Own Partner Sales Force Web Sales N/A Indirect Own Stores Partner Stores Wholesaler

Phases
1.! 2.! 3.! 4.! 5.! Awareness Evaluation Purchase Delivery After Sales

4. Customer Relationships Definition

!! Describes the types of relationships a company establishes with specific Customer Segments !! Contact
! Personal ! Automated

Types
!! Personal assistance !! Dedicated personal assistance !! Self-service !! Automated services !! Communities !! Co-creation

!! Motivations
! Customer acquisitions ! Customer retention ! Boosting sales (upselling)
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5. Revenue Streams Definition

!! The cash a company generates from each Customer Segment !! Represents the Customer Segments quantification of the Value Proposition
!! Periodicity
! One-time ! Recurring

Types

!! Form of generation
! ! ! ! ! ! ! ! ! ! !
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Asset sale Usage fee Subscription fee Lending/Renting/Leasing Licensing Fixed list price Bargaining Auction Market dependent Volume dependent Yield managemement

!! Pricing Mechanism

6. Key Partners Definition Types

!! Describes the network of !! Strategic alliances between nonsuppliers and partners that make competitors the business model work !! Co-opetition: strategic alliances between competitors !! Motivations ! Optimization and economy of !! Joint ventures to develop new scale businesses ! Reduction of risk and uncertaintly !! Buyer-supplier relationships to ! Acquisition of particular assure reliable supplies
resources and activities

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7. Key Activities Definition

!! Describes the most important things a company must do to make its business model work

Types
!! Production !! Problem solving !! Platform !! Network

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8. Key Resources Definition

!! Describes the most important assets required to make a business model work !! Allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments and earn revenues !! Physical !! Intellectual !! Human !! Financial !! Ownership
! ! ! ! Owned Leased Licensed Acquired from Key Partners

Types

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9. Cost Structure Definition

!! Describes all costs incurred to operate a business model !! Cost-driven business models focus on minimizing costs whenever possible !! Value-driven business models are less concerned about cost, focusing instead on value creation

Types
!! Fixed costs !! Variable costs !! Economies of scale !! Economies of scope

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Completing the Business Model Canvas

!! Be brief and to the point !! Theres an Excel template on the web site !! Whiteboarding it and taking a photo are fine !! Treat this like scientific method for start-ups:
! Each item is a hypothesis ! Test each hypothesis by talking to customers (but not yet) market validation

!! Your Business Model Canvas can reflect more than one business model !! Use color coding to highlight related elements !! Zero in on what gives you a competitive edge
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Business Model Patterns

Unbundling by Business Type
Product Innovation Economics Early market entry enables charging premium prices and acquiring large market share, speed is key Battle for talent, low barriers to entry; many small players thrive Employee centered; coddling the creative stars Customer Relationship Management High cost of customer acquisition makes it imperative to gain large wallet share; economies of scope are key Battle for scope; rapid consolidation; a few big players dominate Highly service oriented; customer-comes-first mentality Infrastructure Management High fixed costs make large volumes essential to achieve low unit costs; economies of scale are key Battle for scale; rapid consolidation; a few big players dominate Cost focused; stresses standardization, predictability and efficiency

Competition

Culture

Unbundling the Corporation, Harvard Business Review, Hagel & Singer, March-April 1999

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Business Model Patterns

!! Long Tail
! sell a large number of niche products, each of which sells infrequently ! e.g. Netflix, eBay, Lego

!! Multi-Sided Platforms
! bring together two or more distinct but inter-dependent groups of customers ! Of value to one group of customers only if the other groups of customers are present ! Creates value by facilitating interactions between the different groups ! Grows in value to the extent that it attracts more users (network effect) ! e.g.Visa, Google, eBay, Microsoft Windows

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Business Model Patterns

!! Free
! At least one Customer Segment continuously benefits from a free-ofcharge (or low cost) offer ! Non-paying customers are financed by another part of the business model or by another Customer Segment ! e.g. Flickr, Skype, Google, Gillette

!! Open Business Models

! Create and capture value by systematically collaborating with outside partners ! Outside in exploits external ideas from within the firm ! Inside out provides external parties with ideas or assets lying idle within the firm ! e.g. P&G, GlaxoSmithKline, Open Source
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Example

! Value Proposition? ! Which BMC box makes them special?

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Example

! Which BMC box makes them special?

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Example

! What business are they in? ! Value Proposition? ! Which BMC box makes them special? ! Which of the three unbundled business types are they: ! Product Innovation ! Customer Relationship Management ! Infrastucture Management
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Example

! What are their customer segments? ! Which BMC box makes them special?

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Example

! Pivot Hall of Fame (kind of) ! Which BMC box makes them special?

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Example

! What channels do they use, and why is one of them really important? ! Which BMC box makes them special?

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Example

! Pivot Hall of Fame

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Assignment
!! Create a business model canvas for your business idea. !! Upload to iStart (due date to be published). !! Discuss with your mentor. !! Prepare for market validation. !! We will ask for Business Model Canvas updates throughout the NVC. !! Part of the value of the NVC is explaining how your hypotheses change as you perform market validation. !! Youll need to do a very good job at this if youd like to enter the International Business Model Competition.

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Resources
!! Osterwalder & Pigneur, Business Model Generation !! Blank & Dorf, The Startup Owners Manual !! http://bmdesigner.com !! http://bmfiddle.com !! http://businessmodelhub.com !! http://www.businessmodelalchemist.com !! Business Model Canvas template on NVC web site !! Steve Blank lectures: http://bit.ly/BlankLLP

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