Business Model Design and Innovation For Competitive Advantage 19352

Management2.
0:
Competitive Advantage through Business
Model Design & Innovation
Guadalajara, June 2007
Alexander Osterwalder, PhD
alex@arvetica.com
change is the process by
which the future invades our
lives
-> Alvin Toffler
first of all: what
are YOUR
concerns?
(buzz groups)
what are YOUR biggest issues and fears
you face in strategic management
today?
where do YOU see the largest
opportunities to improve strategic
management today?
your expectations for
today?
what is
innovation?
tell me about the most
important innovations in your
company
types of
innovation?
technology
innovation
process
innovation
product &
service
innovation
business model
innovation
four rings of innovation
business model innovation

product & service innovation
process innovation
technology innovation
which one of your
examples qualify as
business model
innovation?
“Business model innovation matters” and it is
a top priority of CEOs
Operating Margin Growth in Excess of
Competitive Peers
compound annual growth rate over five years
[Source: IBM, CEOs are expanding the innovation horizon: important implications for CIOs]
Benefits Cited by Business Model Innovators
percent of respondents
[Source: IBM, Global CEO Study 2006]

some examples
NetJets: Fractional Ownership
Zopa.com: Peer-to-Peer
lending
Bellum Concepts
why talk about
business models?
how do you describe a
business model?
without a common language
how do you
communicate a
business model?
1% 18%
Strategy
300%
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Development plan
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12%
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Words
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through inappropriate
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sodales. Aenean non justo nec magna lobortis volutpat.
means
Here Ok
Here
CEOs
10°
Managers
60°
Staff
360°
how do you implement a business
model?
with outdated methods
how do you measure the
success of a business model?
we don’t
how do you change a
business model and
innovate?
we re-invent the
wheel
what is a business
model?
business model framework
INFRASTRUCTURE OFFER CUSTOMER

PARTNER CUSTOMER
NETWORK RELATIONSHIPS
CORE VALUE CUSTOMER
CAPABILITIES PROPOSITION SEGMENTS
ACTIVITY DISTRIBUTION
CONFIGURATION CHANNELS
COST FINANCE REVENUE

STRUCTURE STREAMS
a business model describes the value an organization offers to

various customers and portrays the capabilities and partners
required for creating, marketing, and delivering this value and
relationship capital with the goal of generating profitable and
sustainable revenue streams
[Osterwalder (2004) The Business Model Ontology]

case study
you become the new owner of a
soccer club …
describe YOUR
club’s business
model
what value proposition do you offer,
to which customer segments?
describing how a wealth management bank acquires its clients

(model)
OFFER CUSTOMER
VALUE CUSTOMER
PROPOSITION SEGMENTS
value proposition 1 target customer 1

… …
(example)
OFFER CUSTOMER
spectacular
fans
offensive football
advertising space &

advertisers
high visibility
… …
how do you reach your customers?
(model)
OFFER CUSTOMER
COMMUNICATION
VALUE CUSTOMER
& DISTRIBUTION
PROPOSITION SEGMENTS
CHANNELS
value proposition 1 channel 1 target customer 1

value proposition 2 channel 2 target customer 2
… … …
(example)
OFFER CUSTOMER
stadium & box office
spectacular club owned TV

fans
offensive football channel
mobile phone TV
advertising space &

sales force advertisers
high visibility
how do you build relationships?
how do you build
relationships with your
customers? (model)
OFFER CUSTOMER
VALUE CUSTOMER CUSTOMER

PROPOSITION RELATIONSHIP SEGMENTS
value proposition 1 mechanism 1 target customer 1

value proposition 2 mechanism 2 target customer 2
… … …
how do you build
relationships with your
customers? (example)
OFFER CUSTOMER
personalized website
(ticketing)
spectacular
team blog (RSS) fans
offensive football
…
how do you earn your money
with this business model?
(model)
OFFER FINANCE
VALUE REVENUE CUSTOMER

PROPOSITION STREAMS SEGMENTS
value proposition 1 revenue stream 1 target customer 1

… … …
(example)
OFFER FINANCE
ticket sales
spectacular TV channel
fans
offensive football subscriber fees
mobile phone TV
subscriber fees
advertising space &

advertising revenues advertisers
high visibility
the business
models place in a
company
STRATEGY
BUSINESS
MODEL
ORGANIZATION TECHNOLOGY
the business model’s place in the

company
external forces
5 forces
customer technological
needs change
BUSINESS
MODEL
legal social
environment environment
competition
the big picture (business
model)
the big
picture
Partner Network Customer Relationship
• food & beverages • personalized web profile

• ticketing services • newsletter
• promoters • team blog (RSS)
• ad placement • VIP events with team
• telecom operator • …
• TV operator
• …
Core Capability Activity Configuration Value Proposition Distribution Channel Target Customer
• play attractive & win • team management • attractive soccer • stadium • fans (families, etc.)
games • event management • 360º event (match, • POS networks • fan groups
• brand management • venue management dining, shopping) • club website (+online TV) • companies
• video images • ticketing • exclusive VIP lounges • club cable TV channel • event/concert organizers
• channel management • VIP relationship • merchandising • mobile phone TV channel • advertisers
management • renting out stadium • … • …
• video crew •…
•…
Cost Structure Revenue Model
• team & maintenance • Ticket fees & season tickets

• infrastructure management • online TV subscription revenues
• marketing • revenue sharing cable & mobile phone TV
• video • renting out stadium for events
• advertising revenues
• merchandising revenues
value creates
revenues

• TV operator
• …
•…

creating value requires
infrastructure

• TV operator
• …
•…

infrastructure generates
costs

• TV operator
• …
•…

the profit
zone

• TV operator
• …
•…

•
•
marketing
video < •
•
revenue sharing cable & mobile phone TV
renting out stadium for events
the process of
designing innovative
business models
the focus of the
business model
innovator &
designer
user-
centered
PARTNER CUSTOMER
CORE VALUE CUSTOMER
COST REVENUE
STRUCTURE STREAMS
Nokia: Jan
Chipchase
creativity &
exploration
Googleplex
70:20:10
API
PARTNER CUSTOMER
CORE VALUE CUSTOMER
COST REVENUE
STRUCTURE STREAMS
continuous
innovation
interdisciplinary
approach
Grameen Phone
Bangladesh
Grameen
Bank
customer
relationships
telecom
operators
micro-credit
village
phone ladies villager
telephony
mobile activity
telephony configuration
source of Grameen
phone ladies
revenue Bank (billing)
billing
telecom mobile phone

infrastructure revenues
holistic
design
Apple iTunes &
iPod
content
producers
lifestyle brand
hardware
suppliers
hardware & prod. & softw.

softw. dev. design
iPod Apple stores
e-commerce brand
management dealer “high-end”
iBook
network consumer
multimedia hardware
rights mgmt distribution multimedia
iTunes
downloads
content
content
distribution
hardware
revenues
cost structure
multimedia
revenues
strategic fit
the Amazon.com you
know
Amazon Simple Storage Services
(S3)
customer
partners relationships
product
selection
content selling stuff mass
Amazon.com
management on the Web customer
distribution
warehousing Web2.0
Amazon S3 Internet API
& distribution companies
product
search
A9 product e-commerce
data services Internet
search sites
Amazon.com
data grid
selling stuff
IT infra
data storage
fees
marketing
search engine
revenues
the business
modeler’s toolbox
co-creation
ideation
visualization
prototyping
the design
process
1. identify interdisciplinary
stakeholders
-> set-up team
do you have to get the IT
team out of their cubicles?
2. understand (business)
environment
–> frame problem
various starting points / depending on
context
PARTNER CUSTOMER
CORE VALUE CUSTOMER
COST REVENUE
STRUCTURE STREAMS
[Osterwalder (2004) The Business Model Ontology]

3. suspend reality
-> ideate
4. bring back
reality ->
prototype
5. chose suitable
design
-> decide
6. sketch out projects &
workload
-> draw implementation plan
Project Estimated
Area
name workload
10
Project V1
Value man/days
Proposition 120
Project V2
man/days
Distribution 38
Project C1
Channels man/days
…
7. outline key indicators to
follow
-> choose measures
Project Estimated KPI Target
Area
name workload (measure) level
10
Project V1
Value man/days
Proposition 120
Project V2
man/days
Distribution 38
Project C1
Channels man/days
…
8. select the right teams and
people
-> make responsible
Project Estimated KPI Target
Area leader
name workload (measure) level
10
Project V1 Mr. Jan
Value man/days
Proposition 120
Project V2 Ms. Tee
man/days
Distribution 38
Project C1
Channels man/days
…
9. execute the plan
-> manage implementation &
change
10. evaluate, learn and
redesign
-> manage improvement
designing blue
oceans
> market boundaries are
not given
> they are reconstructed
by the actions & beliefs
of industry players
RED OCEAN BLUE OCEAN
• compete in existing markets • create uncontested markets
• beat the competition • make competition irrelevant
• explore existing demand • create & capture new demand
• make the value/cost trad-off • break value/cost trad-off
• align with differentiation OR • align with differentiation

low cost AND low cost
differentiate your value
proposition
working definition value
proposition
• a customer value proposition gives an overall view of a

company's bundle of products, services and client
advice.
• it is the sum of the total benefits a customer is
promised to receive in return for a payment (or other
value transfer)
group warm-
up
what are the 5 most

important competitive
attributes that
characterize a game
console’s offer?
(e.g. price, performance, design)
attribute 1
attribute e.g.
2 performance
e.g. price
5 attributes
1. most important attribute

2. second most important
3. …
3 4. …
4 -
-
1. …
2. …
3. …
4. …
5. …
draw a value proposition
5 - high
bank’s performance
3 - medium
1 - low
1 2 3 4 5
te ute te te te
b u i b i bu bu bu
ttri at
tr
at
tr tr i tr i
a at at
[Kim & Mauborgne (2002) Charting Your Company's Future]

live Excel
eliminate raise
reduce create
strong & valuable approach, but limited
view
PARTNER CUSTOMER
CORE VALUE CUSTOMER
COST REVENUE
STRUCTURE STREAMS
examples
Goldcorp
“geology prize” CUSTOMER

500’000 $US RELATIONSHIPS
exploiting CUSTOMER
mining
mines SEGMENTS
DISTRIBUTION
research
CHANNELS
low costs through REVENUE

open exploration STREAMS
Goldcorp publicly shared all of its geological data and

offered US$ 500’000 in prizes for determining where they
might find the next 6 million ounces of gold
from copyright to creative
commons
Skyp
e
“eBay” website
deliver voice & free VoIP & value global
video quality added services (non segmented)
software
internet
development
software large scale

development low margin
free voice-over-IP VoIP telephony &

value-added services
1291 Cityhomes low-cost hotel/rental in New York City
young
curious
Swiss
CUSTOMER
RELATIONSHIPS
apartment
owners
keep down
low cost
costs renting out DISTRIBUTION the cost
accommodation
rooms CHANNELS sensible
New York
find demand
low cost rents

Tecnovate
“import” young
curious CUSTOMER
Europeans to RELATIONSHIPS
India to work
low-cost multi-
keep down ACTIVITY lingual call DISTRIBUTION European
costs CONFIGURATION center CHANNELS corporations
outsourcing
REVENUE
low cost
STREAMS
business process outsourcing “up-side down” in India

Netflix
independent
profile
films
large movie (niche) movies specialized
database over the clientele
ACTIVITY Internet
Web
CONFIGURATION
COST REVENUE
STRUCTURE STREAMS
online movie rental (with large niche movie database)

from bloated head to the long
tail
Alexander Osterwalder, PhD
alex@arvetica.com
www.arvetica.com
all photos from Flickr
under a creative commons license
authors indicated in comment page of
ppt
Nobody knows your business environment better than
yourself. We co-design your strategic vision by building
we co-create
on your knowledge. Through group thinking we find the
right answers to the right questions together
Having a great vision is not sufficient - implementation

counts. We help you reconcile long term views with short
we operationalize
term actions. We make strategy everyone's job by
translating it into pragmatic and prioritized projects.
Change does not happen accidentally it has to be

managed. We help you align strategy, people and
we manage change
processes with respect to your organizational culture and
values.
When you stop learning, you stop competing. We scan the

knowledge universe for you, across disciplines and
we build knowledge
industries. We transfer the best methods, tools and
theory in business to your organization.
Specific problems require specific skills that you do not

necessarily dispose of in-house. Through our
we connect
interdisciplinary network we connect you with leading
domain experts.
annexes
annex I
business model
template
INFRASTRUCTURE OFFER CUSTOMER
PARTNER CUSTOMER
NETWORK RELATIONSHIP
CORE VALUE TARGET
CAPABILITIES PROPOSITION CUSTOMER
VALUE DISTRIBUTION
CONFIGURATION CHANNEL
COST FINANCE REVENUE

STRUCTURE STREAMS
a business model describes the value an organization offers to

various customers and portrays the capabilities and partners
required for creating, marketing, and delivering this value and
relationship capital with the goal of generating profitable and
sustainable revenue streams
describing a company’s business model
INFRASTRUCTURE PARTNER CUSTOMER CUSTOMER

NETWORK RELATIONSHIP
OFFER
CORE TARGET
portrays the network of explains the
CAPABILITIES cooperative relationships a
CUSTOMER
agreements with other VALUE company establishes
companies with its customers
outlines the capabilities PROPOSITION
describes the
required to run a
customers a company
company's business
wants to offer value to
model DISTRIBUTION
VALUE gives an overall view of
CONFIGURATION a company's bundle of CHANNEL
products and services
describes the channels

describes the to communicate and
arrangement of get in touch with
activities and resources customers
sums up the monetary describes the revenue

consequences to run a
COST FINANCE REVENUE streams through which
business model STRUCTURE STREAMS money is earned
describing a company’s offer
OFFER
VALUE
PROPOSITION
value proposition 1
value proposition 2
…
describing who a company offers value to
OFFER CUSTOMER
VALUE TARGET
PROPOSITION CUSTOMER

… …
describing how a company reaches its customers
OFFER CUSTOMER
VALUE DISTRIBUTION TARGET

PROPOSITION CHANNEL CUSTOMER
value proposition 1 distribution channel 1 target customer 1

value proposition 2 distribution channel 2 target customer 2
… … …
describing the relationships a company builds
OFFER CUSTOMER
VALUE CUSTOMER TARGET

PROPOSITION RELATIONSHIP CUSTOMER
value proposition 1 relationship type 1 target customer 1

value proposition 2 relationship type 2 target customer 2
… … …
describing how a company makes money
OFFER FINANCE CUSTOMER
VALUE REVENUE TARGET

PROPOSITION STREAM CUSTOMER

… … …
describing what capabilities are required
INFRASTRUCTURE OFFER
CORE VALUE
CAPABILITIES PROPOSITION
core capability 1 value proposition 1

core capability 2 value proposition 2
… …
describing what activities are required
CORE VALUE VALUE

CAPABILITIES CONFIGURATION PROPOSITION
core capability 1 activity 1 value proposition 1

core capability 2 activity 2 value proposition 2
… … …
describing the partners that leverage the business model
CORE PARTNER VALUE

CAPABILITIES NETWORK PROPOSITION
core capability 1 partner 1 value proposition 1

core capability 2 partner 2 value proposition 2
… … …
describing the costs of a business model
INFRASTRUCTURE FINANCE OFFER
CORE COST VALUE

CAPABILITIES STRUCTURE PROPOSITION
core capability 1 cost account 1 value proposition 1

core capability 2 cost account 2 value proposition 2
… … …
annex ii
other

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Management2.

business model innovation

[Source: IBM, Global CEO Study 2006]

INFRASTRUCTURE OFFER CUSTOMER

COST FINANCE REVENUE

a business model describes the value an organization offers to

[Osterwalder (2004) The Business Model Ontology]

describing how a wealth management bank acquires its clients

value proposition 1 target customer 1

advertising space &

value proposition 1 channel 1 target customer 1

stadium & box office

spectacular club owned TV

advertising space &

VALUE CUSTOMER CUSTOMER

value proposition 1 mechanism 1 target customer 1

VALUE REVENUE CUSTOMER

value proposition 1 revenue stream 1 target customer 1

advertising space &

the business model’s place in the

• food & beverages • personalized web profile

Cost Structure Revenue Model

• team & maintenance • Ticket fees & season tickets

• food & beverages • personalized web profile

Cost Structure Revenue Model

• team & maintenance • Ticket fees & season tickets

• food & beverages • personalized web profile

Cost Structure Revenue Model

• team & maintenance • Ticket fees & season tickets

• food & beverages • personalized web profile

Cost Structure Revenue Model

• team & maintenance • Ticket fees & season tickets

• food & beverages • personalized web profile

Cost Structure Revenue Model

• team & maintenance • Ticket fees & season tickets

telecom mobile phone

hardware & prod. & softw.

[Osterwalder (2004) The Business Model Ontology]

• compete in existing markets • create uncontested markets

• beat the competition • make competition irrelevant

• explore existing demand • create & capture new demand

• make the value/cost trad-off • break value/cost trad-off

• align with differentiation OR • align with differentiation

• a customer value proposition gives an overall view of a

what are the 5 most

(e.g. price, performance, design)

1. most important attribute

[Kim & Mauborgne (2002) Charting Your Company's Future]

“geology prize” CUSTOMER

low costs through REVENUE

Goldcorp publicly shared all of its geological data and

software large scale

free voice-over-IP VoIP telephony &

low cost rents

business process outsourcing “up-side down” in India

online movie rental (with large niche movie database)

Having a great vision is not sufficient - implementation

Change does not happen accidentally it has to be

When you stop learning, you stop competing. We scan the

Specific problems require specific skills that you do not

COST FINANCE REVENUE

a business model describes the value an organization offers to