Consumer and Market Demand Discussion

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Review Business Models Parts III & IV in the Business Model Generation text. After your review, prepare a post highlighting the five (5) major points from your review. The overarching theme for this posting is “Decision Making.”

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BUSinESS MoDEL EnviRonMEnT: conTEXT, DESign DRivERS, anD conSTRainTS Busi NESS Mo DELS a RE DESi GNED a ND Ex Ecu TED i N SPEci Fic ENV i Ro NMENTS. Developing a good understanding of your organization’s environment helps business models and categorize them using the four areas just mentioned. you conceive stronger, more competitive business models. The pharmaceutical industry, introduced in the previous chapter, is used to Continuous environmental scanning is more important than ever 200 In the following pages, we describe the key external forces that influence illustrate each external force. The pharma sector is likely to undergo substan- because of the growing complexity of the economic landscape (e.g. net- tial transformation in coming years, though it is unclear how the changes worked business models), greater uncertainty (e.g. technology innovations) will play out. Will biotechnology companies, which are currently copying the and severe market disruptions (e.g. economic turmoil, disruptive new Value pharmaceutical sector’s blockbuster drug model, come up with new, disrup- Propositions). Understanding changes in the environment helps you adapt tive business models? Will technological change lead to transformation? your model more effectively to shifting external forces. Will consumers and market demand force changes? You may find it helpful to conceive of the external environment as a We strongly advocate mapping your own business model environment sort of “design space.” By this we mean thinking of it as a context in which and reflecting on what trends mean for the future of your enterprise. A good to conceive or adapt your business model, taking into account a number understanding of the environment will allow you to better evaluate the differ- of design drivers (e.g. new customer needs, new technologies, etc.) and ent directions in which your business model might evolve. You may also want design constraints (e.g. regulatory trends, dominant competitors, etc.). This to consider creating scenarios of future business model environments (see p. environment should in no way limit your creativity or predefine your business 186). This can be a valuable tool for jumpstarting business model innovation model. It should, however, influence your design choices and help you make work or simply preparing your organization for the future. more informed decisions. With a breakthrough business model, you may even become a shaper and transformer of this environment, and set new standards for your industry. To get a better grasp on your business model “design space,” we suggest roughly mapping four main areas of your environment. These are (1) market forces, (2) industry forces, (3) key trends, and (4) macroeconomic forces. If you’d like to deepen your analysis of the landscape beyond the simple mapping we propose, each of these four areas is backed by a large body of literature and specific analytical tools. — FORESIGHT — REGULaToRy TRENDS SociETaL TECHNoLoGY TRENDS aND cuLTURaL TRENDS SocioECONo Mic TRENDS KEY TRENDs MaRKET SEGMENTS NEEDS STaKEHo LDERS KP KA CH INDUSTRy FORCES coMPETiToRS (INCUMBENTs) NEW ENTRaNTS (INSURGENTS) CS MARKET FORCES KR C$ MaRKET R$ SWiTcHiNG suBSTiTUTE PRoDUCTS aND SERVicES REVENUE MACRoEcONOMIC FORCES GLo BaL Ma RKET coNDiTioNS ECONo Mic iNFRaSTRUCTURE CAPITal MARKETs aND DEMaNDS CR VP coMMoDiTiES aND oTHER RESouRcES — MACROEcONOMICS — issuES coSTS aTTRACTivENESS — MARKET ANALysis — — cOMPETITIVE ANALysis — suPPLiERS aND oTHER VaLUE cHaiN ACToRS 201 Main Qs Identifies key issues driving and transforming your market from Customer and Offer perspectives What are the crucial issues affecting the customer landscape? Which shifts are underway? Where is the market heading? Identifies the major market segments, describes their attractiveness, and seeks to spot new segments What are the most important Customer Segments? Where is the biggest growth potentia l? Which segments are declining? Which peripheral segments deserve attention? Outlines market needs and analyzes how well they are serv What do customers need? Where are the biggest unsatisfied customer needs? What do customers really want to get done? Where is demand increasing? Declining? swiTcHiNG coSTS Describes elements related to customers switching business to competitors What binds customers to a company and its offer? What switching costs prevent customers from defecting to competitors? Is it easy for customers to find and purchase similar offers? How important is brand? REVENUE aTTRACTivENESS Identifies elements related to revenue attractiveness and pricing power What are customers really willing to pay for? Where can the largest margins be achieved? Can customers easily find and purchase cheaper products and services? MaRKET issuES MaRKET SEGMENTS 202 MARKET FORCES NEEDS aND DEMaNDS — MARKEt ANALysis — Pharmaceutical Industry Landscape › Skyrocketing healthcare costs › Emphasis shifting from treatment to prevention › Treatments, diagnostics, devices, and support services are converging › Emerging markets becoming more important › › › › › › Doctors and healthcare providers Governments/regulators Distributors Patients Strong potential in emerging markets U.S. remains the predominant global market › Strong, with dispersed need for niche treatments › Need to manage exploding cost of health care › Large, unsatisfied health care needs in emerging markets and developing countries › Consumers are better informed › Monopoly on patent-protected drugs › Low switching costs for patent-expired drugs replaceable by generic versions › Growing amount of quality information available online › Deals with governments, large-scale healthcare providers increase switching costs › High margins on patent-protected drugs › Low margins on generic drugs › Healthcare providers, governments enjoy growing influence over prices › Patients continue to have little influence over prices wHaT NEW KEy RESouRcES Do wE NEED To DEVELoP oR ACQUi RE iN LiGHT oF THE oNGoiNG sHiFT FRo M TRE aTMENT TO PREVENTioN? KP KA How caN ouR VaLUE PRoPosiTioN aDDRESS THE issuE oF ExPLoDi NG HE aLTH coSTS? CR VP wHaT WOuLD a GREaTER Focus oN EMERGiNG Ma RKETS ME aN FoR THE oTHER BUiLDiNG BLocKS IN OUR MODEL? CS CH KR 203 R$ C$ wHaT DoES THE coNVERGENcE o F TRE aTMENT, DiAGNoSTics, DEVicES, aND SUPPoRT SERVicES HOw CAN WE MAIN - ME a N Fo R TaiN E aRNiNGS WHi LE WHaT KiND oF NEW aDDRESSiNG THE PUBLic STRUGGLE To coPE WiTH SKYROCKETING HEALthcaRE coSTS? REVENUE oPPoRTUNiTiES Mi GHT BE cREaTED By THE SHiFT iN EMPHasis FRo M TRE aTMENT To PREVENTioN? ouR KEy RESouRcES aND ACTiviTiES? Main Qs Identifies incumbent competitors and their relative strengths Who are our competitors? Who are the dominant players in our particular sector? What are their competitive advantages or disadvantages? Describe their main offers. Which Customer Segments are they focusing on? What is their Cost Structure? How much influence do they exert on our Customer Segments, Revenue Streams, and margins? NEW ENTRaNTS INSURGENTS) (INSURGENTS Identifies new, insurgent players and determines whether they co ete with a business model different from yours Who are the new entrants in your market? How are they different? What competitive advantages or disadvantages do they have? Which barriers must they overcome? What are their Value Propositions? Which Customer Segments are they focused on? What is their Cost Structure? To what extent do they influence your Customer Segments, Revenue Streams, and margins? suBSTiTUTE PRoDUCTS aND SERVicES Describes potential substitutes for your offers—including those from er markets and industries Which products or services could replace ours? How much do they cost compared to ours? How easy it is for customers to switch to these substitutes? What business model traditions do these substitute products stem from (e.g. high-speed trains versus airplanes, mobile phones versus cameras, Skype versus long-distance telephone companies)? suPPLiERS aND oTHER vaLUE cHaiN ACToRS Describes the key value chain incumbents in your market and spots new, emerging players Who are the key players in your industry value chain? To what extent does your business model depend on other players? Are peripheral players emerging? Which are most profitable? STaKEHo LDERS Specifies which actors may influence your organization and business model Which stakeholders might influence your business model? How influential are shareholders? Workers? The government? Lobbyists? coMPETiToRS (i UMBENTs) 204 INDUSTRy FORCES — cOMPETITIVe ANALysis — Pharmaceutical Industry Landscape › Several large and medium size players compete in pharma › Most players are struggling with empty product pipelines and low R&D productivity › Growing trend toward consolidation through mergers and acquisitions › Major players acquire biotech, specialty drug developers to fill product pipeline › Several players starting to build on open innovation processes › Little disruption of the pharmaceutical industry over the last decade › Main new entrants are generic drug companies, particularly from India FoR WHicH PaRTS oF THE iNDUSTRy vaLUE cHaiN SHouLD KEy PaRTNERSHiPS BE BUiLT as OPPOSED To DEVELOPiNG KEy RESouRcES aND ACTiviTiES iN-HousE? KP › To a certain extent, prevention represents a substitution for treatment › Patent-expired drugs replaced by low-cost generics KA VP CR KR C$ › Increasing use of research contractors › Biotech firms and specialty drug developers as important new product generators › Doctors and healthcare providers › Insurance companies › Bioinformatics providers growing in importance couLD SUPPLiERS sucH as RESEaRcH coNTRACToRS TURN › Laboratories iNTo coMPETiToRS? › Shareholder pressure forces drug companies to focus on short term (quarterly) financial results › Governments/regulators have a strong stake in the actions of pharmaceutical companies because of their pivotal role in healthcare services › Lobbyists, social enterprise groups and/or foundations, particularly those pursuing agendas such as low-cost treatments for developing countries › Scientists, who represent the core talent of the drug manufacturing industry MUST THE VaLUE PRoPosiTioN cHa NGE To acco MMo DaTE SHiFTS iN THE iNDUSTRy (E.G. THE GRowiNG i MPoRTa NcE oF BioTECH fiRMS)? wHicH PaRT oF THE PHaRMa iNDUSTRy oFFERS THE GRE aTEST EARNINGS POTENTIAL? CS CH 205 R$ is iT NECESSaRy To ACQUiRE SMaLLER fiRMS To fiLL PRoDUCT PiPELiNES? WHicH oF THE KEy RESouRcES EMERGiNG aMo NG NEW acToRS iN THE VaLUE cHaiN NEED To BE DEVELoPED iN-HousE (E.G. BioiNFoRMaTics)? Main Qs 206 TECHNoLoGY TRENDS Identifies technology trends that could threaten your business model—or enable it to evolve or improve What are the major technology trends both inside and outside your market? Which technologies represent important opportunities or disruptive threats? Which emerging technologies are peripheral customers adopting? REGULaToRy TRENDS Describes regulations and regulatory trends that influence your business model Which regulatory trends influence your market? What rules may affect your business model? Which regulations and taxes affect customer demand? sociETaL aND cuLTURaL TRENDS Identifies major societal trends that may influence your business m d Describe key societal trends. Which shifts in cultural or societal values affect your business model? Which trends might influence buyer behavior? socioECONo Mic Outlines major socioeconomic trends relevant to your b s n s model What are the key demographic trends? How would you characterize income and wealth distribution in your market? How high are disposable incomes? Describe spending patterns in your market (e.g. housing, healthcare, entertainment, etc.). What portion of the population lives in urban areas as opposed to rural settings? KEY TRENDs — FORESIGHt — TRENDS Pharmaceutical Industry Landscape › Emergence of pharmacogenomics, declining cost of gene sequencing, and the immenent rise of personalized medicine › Major advances in diagnostics › Use of pervasive computing and nanotechnology for the injection/delivery of drugs › Heterogeneous global regulatory landscape in the pharmaceutical industry › Many countries prohibit drug companies from marketing directly to consumers › Regulatory agency pressure to publish data on unsuccessful clinical trials › Generally unfavorable image of big drug makers › Growing social consciousness among consumers › Customers increasingly conscious of global warming, sustainability issues, prefer “green” purchases › Customers are better informed about drug maker activity in developing countries (e.g. HIV/AIDS drugs) › › › › Aging society in many mature markets Good but costly healthcare infrastructure in mature markets Growing middle class in emerging markets Large, unsatisfied healthcare needs in developing countries wHicH TECHNoLoGiES aRE LiKELy To iMPRovE vaLUE PRoPosiTioN coMPETiTivENESS iN THE EVoLVi NG PHaRMa La NDScaPE? wHicH NEW KEy RESouRcES aND ACTiviTiES WiLL PRovE aDVaNTAGEOus wHEN PERSoNa LizED DRUGS aND DiAGNoSTics aRE wiDELy usED? KP KA CR VP KR C$ wHicH PaRTNERSHiPS wiLL BECOME ESSENTiaL wHEN PHaRMacoGENo Mics is aN iNTEGR aL PaRT oF THE iNDUSTRy La NDScaPE? How aRE cuSTo MERS REACTiNG To NEW TECHNOLOGICAL DEVELOPMENTS IN THE PHARMAcEUTicaL iNDUSTRy? CS 207 CH R$ How wiLL TECHNoLoGY sucH as PHaRMacoGE No Mics, PERVasivE coMPUTiNG, aND NaNoTECHNoLoGY a FFECT THE coST STRUCTURE oF a DRUG MaKER’s BUSiNESS MODEL? Do aDVa NcES iN PHaRMacoGENo Mics, DiAGNoSTics, PERVasivE coMPUTiNG, oR NaNoTECHNoLoGY o FFER NEW REVENUE oPPoRTUNiTiES? Main Qs 208 MACRoEcONOMIC FORCES GLo BaL MaRKET coNDiTioNS Outlines current overall conditions from a macroeconomic perspective Is the economy in a boom or bust phase? Describe general market sentiment. What is the GDP growth rate? How high is the unemployment rate? CAPITal MARKETs Describes current capital market conditions as they relate to your capital needs What is the state of the capital markets? How easy is it to obtain funding in your particular market? Is seed capital, venture capital, public funding, market capital, or credit readily available? How costly is it to procure funds? coMMoDiTiES aND oTHER RESouRcES Highlights current prices and price trends for resources required for your business model Describe the current status of markets for commodities and other resources essential to your business (e.g. oil prices and labor costs). How easy is it to obtain the resources needed to execute your business model (e.g. attract prime talent)? How costly are they? Where are prices headed? ECONo Mic iNFRaSTRUCTURE Describes the economic infrastructure of the market in which your business operates How good is the (public) infrastructure in your market? How would you characterize transportation, trade, school quality, and access to suppliers and customers? How high are individual and corporate taxes? How good are public services for organizations? How would you rate the quality of life? — MACROEcONOMICs — DoES THE iNFR aSTRUcTURE AND TRADE ENVIRoNMENT a DEQUaTELy suPPoRT cHaNNELS? Pharmaceutical Industry Landscape › › › › Global recession Negative GDP growth in Europe, Japan, and the United States Slower growth rates in China and India Uncertainty as to when recovery will occur › › › › Tight capital markets Credit availability restricted due to banking crisis Little venture capital available Risk capital availability extremely limited › Fierce “battles” for prime talent › Employees seek to join pharmaceutical companies with positive public image › Commodity prices rising from recent lows › Demand for natural resources likely to pick up with economic recovery › Oil prices continue to fluctuate DoES THE ECONo Mic iNFRaSTRUCTURE aDEQUaTELy suPPoRT KEy ACTiviTiES? KP KA VP CR KR C$ CS CH R$ › Specific to the region in which a company operates Do uNivERSiTiES aND oTHER EDUcaTioNaL iNSTiTUTioNS FURNisH a su FficiENT aMou NT oF QUaLifiED TaLENT? How wiLL LocaL aND NaTioNaL TaxES a FFECT THE BUSiNESS MoDEL? 209 A competitive business model that makes sense in today’s environment How sHouLD youR BUSiNESS MoDEL EVoLVE iN LiGHT oF a cHaNGiNG ENVIRonment? 210 might be outdated or even obsolete tomorrow. We all have to improve our understanding of a model’s environment and how it might evolve. Of course we can’t be certain about the future, because of the complexities, uncertainties, and potential disruptions inherent in the evolving business environment. We can, however, develop a number of hypotheses about the future to serve as guidelines for designing tomorrow’s business models. Assumptions about how market forces, industry forces, key trends, and macroeconomic forces unfold give us the “design space” to develop potential business model options or prototypes (see p. 160) for the future. The role of business model scenarios (see p. 186) in forecasting should also be evident by now. Painting pictures of the future makes it much easier to generate potential business models. Depending on your own criteria (e.g. acceptable level of risk, growth potential sought, etc.) you may then select one option over another. Options Time — PRESENt ENVIRONMENt — — PRoJEcTED ENVIRONMENT — 211 EVaLUaTing BUSinESS MoDELS L IKe SEEIN g TH e DOCTO r FO r A n ANNUA l EXAM, REGULARLy ASSESSING a business model is an important management activity that allows an organization to evaluate the health of its market position and adapt accordingly. This checkup may become the basis for incremental business model improvements, or it might trigger a serious intervention in the form of a business model innovation initiative. As the automobile, newspaper, and music industries have shown, failing to conduct regular checkups may 212 prevent early detection of business model problems, and may even lead to a company’s demise. In the previous chapter on the business models environment (see p. 200), we evaluated the influence of external forces. In this chapter, we adopt the point of view of an existing business model and analyze external forces from the inside out. The following pages outline two types of assessment. First, we provide a big picture assessment of Amazon.com’s online retailing model circa 2005 and describe how the company has built strategically on that model since. Second, we provide a set of checklists for assessing your business model’s strengths, weaknesses, opportunities, and threats (SWOT) and to help you evaluate each Building Block. Keep in mind that assessing a business model from a big picture perspective and assessing it from a Building Block perspective are complementary activities. A weakness in one Building Block, for example, may have consequences for one or several other Building Blocks—or for the entire model. Business model assessment, therefore, alternates between individual elements and overall integrity. — ExTERNAL — — INTERNAL — 213 — POSITIVE — — NEgaTIVE — BiG PicTURE ASSESSMENT: AMAZON.COM Amazon.com’s main strengths and weaknesses in 2005: IT infra FUL INFRAS P OMMEND ARE DEVEL MAINTENANCE items U VERSEAS U 214 cost capital Amazon.com provides a powerful illustration of implementing business model innova- com recorded sales of $8.5 billion in 2005 with a net margin of only 4.2 percent. At the tion based on an analysis of strengths and weaknesses. We’ve already described why it time, Google enjoyed a net margin of 23.9 percent on sales of $6.1 billion while eBay made sense for Amazon.com to launch a series of new service offers under the moniker achieved a net margin of 23.7 percent on sales of $4.6 billion. Amazon Web Services (see p. 176). Now let’s examine how those new offers launched Looking to the future, founder Jeff Bezos and his management team took a two- in 2006 related to Amazon.com’s strengths and weaknesses the previous year. pronged approach to building on Amazon.com’s business model. First, they aimed to Assessing the strengths and weaknesses of Amazon.com’s business model circa grow the online retail business through a continuing focus on customer satisfaction 2005 reveals an enormous strength and a dangerous weakness. Amazon.com’s and efficient fulfillment. Second, they began growth initiatives in new areas. Manage- strength was its extraordinary customer reach and huge selection of products for sale. ment was clear on the requirements for these new initiatives. They had to (1) target The company’s main costs lay in the activities in which it excelled, namely fulfillment underserved markets, (2) be scalable with potential for significant growth, and (3) ($745 million, or 46.3 percent of operating expenses) and technology and content leverage existing Amazon.com capabilities to bring strong customer-facing differentia- ($451 million, or 28.1 percent of operating expenses). The key weakness of Amazon. tion to that marketplace. com’s business model was weak margins, the result of selling primarily low-value, lowmargin products such as books, music CDs, and DVDs. As an online retailer, Amazon. Opportunities Amazon.com explored in 2006: KP KA FULFILLMEN T IT INFRASTRUCTUR E & SOFTWARE DEVELOPMENT & MAINTENANCE Lo GisTics PARTNERS AFFILIATES KR IT INFRASTRUCTURE & SOFTWARE GLoB aL FULfiLLMENT INFRASTRUCTURE C$ MARKETING TECHNOLogy & cONTENT FULFILLMENT TWO ToTaLLy NEW cuSTo MER SEGMENTS WHicH aRE UNDERSERVED as To THE PRoPosED o FFER syNERGiES iN THE USE oF ACTiviTiES aND RESouRcES FOR NEW oFFERS VP CS CR o NLiNE RETaiL SHOP cusToMizED oNLiNE PRofiLES & REcOMMENDaTIONS GLoB aL co NSUMER MaRKET (No RTH aMERica, EUROPE, asia) FULfiLLMENT By AMAZON s aMazo N WEB ERVicES: s3, Ec2, SQS,SERVICE oTHER sWEB DEVELoPERS CH & coMPaNiES iNDiviDUaLS & aMazoN.co M (& cOUNTRIEs) coMPaNiES THaT N EED FULFILLMENT NEW REVENUE STRE a MS WiTH HIGHER MARGINS THAN RETAIL AFFILIATES APIs R$ SALES MARGIN 215 UTILITY cOMPUTING FEES FULFILLMENT HANDLING FEES In 2006 Amazon.com focused on two new initiatives that satisfied the above require- Amazon Simple Storage Systems (Amazon S3) allows developers to use Amazon.com’s ments and which promised to powerfully extend the existing business model. The first massive data center infrastructure for their own data storage needs. Similarly, Amazon was a service called Fulfillment by Amazon, and the second was a series of new Amazon Elastic Compute Cloud (EC2), allows developers to “rent” servers on which to run Web Services. Both initiatives built on the company’s core strengths—order fulfillment their own applications. Thanks to its deep expertise and unprecedented experience and Web IT expertise—and both addressed underserved markets. What’s more, both scaling an online shopping site, the company can offer both at cutthroat prices, yet still initiatives promised higher margins than the company’s core online retailing business. earn higher margins compared to its online retail operations. Fulfillment by Amazon allows individuals and companies to use Amazon.com’s Investors and investment analysts were initially skeptical about these new long-term fulfillment infrastructure for their own businesses in exchange for a fee. Amazon.com growth strategies. Unconvinced that the diversification made sense, they contested stores a seller’s inventory in its warehouses, then picks, packs, and ships on the seller’s Amazon.com’s investments in even more IT infrastructure. Eventually, Amazon.com behalf when an order is received. Sellers can sell through Amazon.com, their own Chan- overcame their skepticism. Nonetheless, the true returns from this long-term strategy nels, or a combination of both. may not be known for several more years—and after even more investment Amazon Web Services targets software developers and any party requiring highperformance server capability by offering on-demand storage and computing capacity. in the new business model. DETaiLED SWoT assESSMENT oF EacH BUILDING BLOCK Assessing your business model’s overall integrity is crucial, but looking at The following pages contain non-exhaustive sets of questions to help its components in detail can also reveal interesting paths to innovation and you assess the strengths and weaknesses of each of your business model renewal. An effective way to do this is to combine classic strengths, weak- Building Blocks. Each set can help jumpstart your own assessments. Results nesses, opportunities, and threats (SWOT) analysis with the Business Model from this exercise can become the foundation for business model change Canvas. SWOT analysis provides four perspectives from which to assess the and innovation in your organization. elements of a business model, while the Business Model Canvas provides the focus necessary for a structured discussion. What are your business model’s . . . SWOT analysis is familiar to many businesspeople. It is used to analyze ties and threats. It is an attractive tool because of its simplicity, yet its use can lead to vague discussions because its very openness offers little direction concerning which aspects of an organization to analyze. A lack of useful outcomes may result, which has lead to a certain SWOT-fatigue among — INTERNAL — an organization’s strengths and weaknesses and identify potential opportuni- sTRE NGths WEAKN Esses — ExTERNAL — 216 OPPORTUNITIEs THREAts — HELPFUL — — HARMFUL — managers. When combined with the Business Model Canvas, though, SWOT enables a focused assessment and evaluation of an organization’s business model and its Building Blocks. SWOT asks four big, simple questions. The first two—what are your organization’s strength and weaknesses?—assess your organization internally. The second two—what opportunities does your organization have and what potential threats does it face?—assess your organization’s position within its environment. Of these four questions, two look at helpful areas (strengths and opportunities) and two address harmful areas. It is useful to ask these four questions with respect to both the overall business model and each of its nine Building Blocks. This type of SWOT analysis provides a good basis for further discussions, decision-making, and ultimately innovation around business models. IMPORtance T o M y B . M . 54321 12345 Our Value Propositions and customer needs are misaligned Our Value Propositions have strong network effects 54321 12345 Our Value Propositions have no network effects There are strong synergies between our products and services 54321 12345 There are no synergies between our products and services Our customers are very satisfied 54321 12345 We have frequent complaints We benefit from strong margins 54321 12345 Our margins are poor Our revenues are predictable 54321 12345 Our revenues are unpredictable We have recurring Revenue Streams and frequent repeat purchases 54321 12345 Our revenues are transactional with few repeat purchases Our Revenue Streams are diversified 54321 12345 We depend on a single Revenue Stream Our Revenue Streams are sustainable 54321 12345 Our revenue sustainability is questionable We collect revenues before we incur expenses 54321 12345 We incur high costs before we collect revenues We charge for what customers are really willing to pay for 54321 12345 We fail to charge for things customers are willing to pay for Our pricing mechanisms capture full willingness to pay 54321 12345 Our pricing mechanisms leave money on the table Our costs are predictable 54321 12345 Our costs are unpredictable Our Cost Structure is correctly matched to our business model 54321 12345 Our Cost Structure and business model are poorly matched Our operations are cost-efficient 54321 12345 Our operations are cost-inefficient 54321 12345 We enjoy no economies of scale 1-10 Our Value Propositions are well aligned with customer needs CERTAINTY OF EVALUaTION 1–10 Value Proposition Assessment IMPORtance T o M y B . M . 1-10 We benefit from economies of scale CERTAINTY OF EVALUaTION 1–10 Cost/Revenu e Assessment 217 IMPORtance T o M y B . M . 54321 12345 Resource needs are predictable 54321 12345 Resource needs are unpredictable We deploy Key Resources in the right amount at the right time 54321 12345 We have trouble deploying the right resources at the right time We efficiently execute Key Activities 54321 12345 Our Key Activities are difficult to copy 54321 12345 Our Key Activities are easily copied Execution quality is high 54321 12345 Execution quality is low Balance of in-house versus outsourced execution is ideal 54321 12345 We execute too many or too few activities ourselves We are focused and work with partners when necessary 54321 12345 We are unfocused and fail to work sufficiently with partners We enjoy good working relationships with Key Partners 54321 12345 Our Key Resources are easily replicated Key Activity execution is inefficient Working relationships with Key Partners are conflict-ridden 1-10 218 Our Key Resources are difficult for competitors to replicate CERTAINTY OF EVALUaTION 1–10 Infrastructure Assessment IMPORtance T o M y B . M . 12345 Customer churn rates are high 54321 12345 Customer base is unsegmented We are continuously acquiring new customers 54321 12345 We are failing to acquire new customers Our Channels are very efficient 54321 12345 Our Channels are inefficient Our Channels are very effective 54321 12345 Our Channels are ineffective Channel reach is strong among customers 54321 12345 Channel reach among prospects is weak Customers can easily see our Channels 54321 12345 Prospects fail to notice our Channels Channels are strongly integrated 54321 12345 Channels are poorly integrated Channels provide economies of scope 54321 12345 Channels provide no economies of scope Channels are well matched to Customer Segments 54321 12345 Channels are poorly matched to Customer Segments Strong Customer Relationships 54321 12345 Weak Customer Relationships Relationship quality correctly matches Customer Segments 54321 12345 Relationship quality is poorly matched to Customer Segments Relationships customers through high bind switching costs 54321 12345 Customers switching costs are low Our brand is strong 54321 12345 Our brand is weak Customer base is well segmented 1-10 54321 Customer churn rates are low CERTAINTY OF EVALUaTION 1–10 Customer Interface Assessment 219 ASSESSING THREATS We’ve described how business models are situated within specific environments, and shown how external forces such as competition, the legal environment, or technology innovation can influence or threaten a business model (see p. 200). In this section we look at threats specific to each business model Building Block, and provide a non-exhaustive set of questions to help you think about ways to address each threat. Value Proposition Threats Are substitute products and services available? 12345 Are competitors threatening to offer better price or value? 12345 Cost/Revenue Threats 220 Are our margins threatened by competitors? By technology? 12345 Do we depend excessively on one or more Revenue Streams? 12345 Which Revenue Streams are likely to disappear in the future? 12345 Which costs threaten to become unpredictable? 12345 Which costs threaten to grow more quickly than the revenues they support? 12345 Infrastructure Threats Customer Interface Threats Could we face a disruption in the supply of certain resources? 12345 Could our market be saturated soon? 12345 Is the quality of our resources threatened in any way? 12345 Are competitors threatening our market share? 12345 What Key Activities might be disrupted? 12345 How likely are customers to defect? 12345 Is the quality of our activities threatened in any way? 12345 How quickly will competition in our market intensify? 12345 Are we in danger of losing any partners? 12345 Do competitors threaten our Channels? 12345 Might our partners collaborate with competitors? 12345 Are our Channels in danger of becoming irrelevant to customers? 12345 Are we too dependent on certain partners? 12345 Are any of our Customer Relationships in danger of deteriorating? 12345 221 ASSESSING OPPORTUNITIEs As with threats, we can assess the opportunities that may lie within each business model Building Block. Here’s a non-exhaustive set of questions to help you think about opportunities that could emerge from each of the Building Blocks in your business model. Value Proposition Opportunities Could we generate recurring revenues by converting products into services? 12345 Could we better integrate our products or services? 12345 Which additional customer needs could we satisfy? 12345 What complements to or extensions of our Value Proposition are possible? 12345 What other jobs could we do on behalf of customers? 12345 Cost/Revenue Opportunities 222 Can we replace one-time transaction revenues with recurring revenues? 12345 What other elements would customers be willing to pay for? 12345 Do we have cross-selling opportunities either internally or with partners? 12345 What other Revenue Streams could we add or create? 12345 Can we increase prices? 12345 Where can we reduce costs? 12345 Infrastructure Opportunities Customer Interface Opportunities Could we use less costly resources to achieve the same result? 12345 How can we benefit from a growing market? 12345 Which Key Resources could be better sourced from partners? 12345 Could we serve new Customer Segments? 12345 Which Key Resources are under-exploited? 12345 Could we better serve our customers through finer segmentation? 12345 Do we have unused intellectual property of value to others? 12345 How could we improve channel efficiency or effectiveness? 12345 Could we standardize some Key Activities? 12345 Could we integrate our Channels better? 12345 How could we improve efficiency in general? 12345 Could we find new complementary partner Channels? 12345 Could we increase margins by directly serving customers? 12345 Could we better align Channels with Customer Segments? 12345 Is there potential to improve 12345 Are there outsourcing opportunities? 12345 Could greater collaboration with partners help us focus on our core business? 12345 Are there cross-selling opportunities with partners? 12345 How could we tighten our relationships with customers? Could partner Channels help us better reach customers? 12345 Could we improve personalization? Could partners complement our Value Proposition? customer follow-up? 12345 12345 12345 How could we increase switching costs? 12345 Have we identified and “fired” unprofitable customers? If not, why not? 12345 Do we need to automate some relationships? 12345 223 usiNG SWoT assESSMENT aNaLysis RESULTS To DESIGN NEW BUSINEss MODEL OPTIONS A structured SWOT assessment of your business model yields two results. It provides a snapshot of where you are now (strengths and weaknesses) and it suggests some future trajectories (opportunities and threats). This is valuable input that can help you design new business model options toward which your enterprise can evolve. SWOT analysis is thus a significant part of the process of designing both business model prototypes (see p. 160) and, with luck, a new business model that you will eventually implement. 224 Future Model(s) 225 Current Model — swoT PROCESS — BUSinESS MoDEL PERSPEcTivE on BLUE OCEAN sTRATEgy I N THIS SE c TION WE BLEND OUR BUSINE ss MODEL TOOLS WITH THE To achieve value innovation, Kim and Mauborgne propose an analytical Blue Ocean Strategy concept coined by Kim and Mauborgne in their tool they call the Four Actions Framework. These four key questions million-selling book of the same name. The Business Model Canvas is a challenge an industry’s strategic logic and established business model: perfect extension of the analytical tools presented by Kim and Mauborgne. Together they provide a powerful framework for questioning incumbent business models and creating new, more competitive models. Blue Ocean Strategy is a potent method for questioning Value Proposi- 226 1. Which of the factors that the industry takes for granted should be eliminated? 2. Which factors should be reduced well below the industry standard? tions and business models and exploring new Customer Segments. The 3. Which factors should be raised well above the industry standard? Business Model Canvas complements Blue Ocean by providing a visual 4. Which factors should be created that the industry has never offered? “big picture” that helps us understand how changing one part of a business model impacts other components. In a nutshell, Blue Ocean Strategy is about creating completely new In addition to value innovation, Kim and Mauborgne propose exploring non-customer groups to create Blue Oceans and tap untouched markets. industries through fundamental differentiation as opposed to competing in Blending Kim and Mauborgne’s value innovation concept and Four existing industries by tweaking established models. Rather than outdoing Actions Framework with the Business Model Canvas creates a powerful new competitors in terms of traditional performance metrics, Kim and Mauborgne tool. In the Business Model Canvas the right-hand side represents value advocate creating new, uncontested market space through what the authors creation and the left-hand side represents costs. This fits well with Kim and call value innovation. This means increasing value for customers by creating Mauborgne’s value innovation logic of increasing value and reducing costs. new benefits and services, while simultaneously reducing costs by eliminating less valuable features or services. Notice how this approach rejects the traditionally accepted trade-off between differentiation and lower cost. a ALUE HAS a a a OMPETED a 227 REDUCE a — vALUE innovaTION — a a a HAS NEVER — FOUR acTIONS FRAMEwork — Source: Adapted from Blue Ocean Strategy. BLENDiNG THE BLUE ocEaN STRaTEGy FRaMEWoRK WITH THE BUSINEss MODEL CANVas Business Model Canvas Value innovation + 228 cosT-SIDE Blending approaches ALUE = ALUE vALUE-SIDE The Business Model Canvas consists of a right-hand Blue Ocean Strategy is about simultaneously increasing Blending Blue Ocean Strategy and the Business Model value and customer-focused side, and a left-hand cost value while reducing costs. This is achieved by identify- Canvas lets you systematically analyze a business model and infrastructure side, as descibed earlier (see p. 49). ing which elements of the Value Proposition can be elimi- innovation in its entirety. You can ask the Four Actions Changing elements on the right-hand side has implica- nated, reduced, raised, or newly created. The first goal Framework questions (eliminate, create, reduce, raise) tions for the left-hand side. For example, if we add to is to lower costs by reducing or eliminating less valuable about each business model Building Block and imme- or eliminate parts of the Value Proposition, Channels, features or services. The second goal is to enhance or diately recognize implications for the other parts of the or Customer Relationship Building Blocks, this will create high-value features or services that do not signifi- business model, (e.g. what are the implications for the have immediate implications for Resources, Activities, cantly increase the cost base. cost side when we make changes on the value side? Partnerships, and Costs. and vice versa). CIRQUE DU SOLEIL KP KA aRTisTic VP STa R PERFo RMERS DEVELOPMENT ANIMAL SHOws ANIMAL CARE aisLE co NSESSio N CR aDDiNG THE aRTiSTic ELEMENT To THE VaLUE PRoPosiTioN c Ha NGES ACTiviTiES & coSTS CS SALES MULTiPLE SHow ARENAS KR ELi MiNaTi NG aNi Ma LS FRoM THE SHow suBSTa NTia LLy REDUcES coSTS FUN & HUMOR T HRILL & DANGER THE VaLUE PRoPosiTioN CH FOcus o N FaMiLiES Focus o N THEaTER & OPERA VISITORS THEME ANIMALS STa R PERFo RMERS RE fiNED ENVIRonment RE fiNED ENVIRonment MUTLiPLE PRODUCTIONS coMB iNES ELEMENTS FRoM ciRcus, THE aTER & oPERa, WHicH aLLows caTERiNG To HiGHER END cuSTo MERS WHo Pay HiGHER Tic KET PRicES aRTisTic MUSic & DANcE 229 UNIQUE VENUE C$ coSTLy a NiMa L MaiNTENa NcE coSTLy STa R PERFoRMER FEES R$ TICKET PRICE INCREASE AISLE cONCESSION SALEs ARTISTIC PRODUCTION ELIMINAte STa R PERFo RMERS ANIMAL SHOws AISLE cONCESSION SALEs MULTIPLE SHOw ARENAS REDUCE Cirque du Soleil features prominently among Blue Ocean refined music. This revamped Value Proposition allowed Strategy examples. Next we apply the blended Blue Cirque du Soleil to broaden its appeal to theatergoers and Ocean and Business Model Canvas approach to this other adults seeking sophisticated entertainment, rather intriguing and highly successful Canadian business. than the traditional circus audience of families. First, the Four Actions Framework shows how Cirque As a consequence, it was able to substantially raise du Soleil “played” with the traditional elements of the cir- ticket prices. The Four Actions Framework, outlined in cus business Value Proposition. It eliminated costly ele- blue and gray in the business model canvas above, illus- ments, such as animals and star performers, while adding trates the effects of changes in the Value Proposition. FUN & HUMOR THRILL & DANGER RAISE UNIQUE VENUE CREATE THEME REFINED ENVIRonment MULTIPLE PRODUCTIONS ARTISTIC MUSIC & DANCE other elements, such as theme, artistic atmosphere, and Source: Adapted from Blue Ocean Strategy. NINTENDO ’s wii w P P MANUF GAME ELIMINAte P U P GAME P REDUCE CREATE UNCHANGED 230 P U P U V U P We’ve discussed Nintendo’s successful Wii game console performance, graphic quality, and game realism: factors as an example of a multi-sided platform business model valued primarily by diehard gaming fans. Nintendo characteristics: A shift in focus from “hardcore” to casual pattern (see p. 76). Now we look at how Nintendo dif- shifted its focus to providing a new form of player interac- gamers, which allowed the company to reduce console ferentiated itself from competitors Sony and Microsoft tion targeted at a wider demographic than the traditional performance and add a new element of motion control from the standpoint of Blue Ocean Strategy. Compared avid gamer audience. With the Wii, Nintendo brought that created more fun; elimination of state-of-the-art to Sony’s PlayStation 3 and Microsoft’s Xbox 360, Nin- to market a console that technologically underperformed chip development and increased use of off-the-shelf tendo pursued a fundamentally different strategy and rival machines, but boosted the fun factor with new components, reducing costs and allowing lower console business model with Wii. motion control technology. Players could control games prices; elimination of console subsidies resulting in prof- through a sort of “magic wand,” the Wii Remote, simply its on each console sold. The heart of Nintendo’s strategy was the assumption that consoles do not necessarily require leading-edge through physical movement. The console was an instant power and performance. This was a radical stance in an success with casual gamers, and outsold rival consoles industry that traditionally competed on technological focused on the traditional market of “hardcore” gamers. Nintendo’s new business model has the following QUESTioNiNG youR caNVas FouR acTioNS FRaMEWoRK wiTH THE The combination of Blue Ocean Strategy tools and the Business Model Canvas provide cost perspective—provide ideal starting points from which to start questioning your a solid foundation upon which to question your business model from value creation, business model using the Four Actions Framework. Changes to each starting point then customer, and Cost Structure perspectives. We propose that three different perspec- allow you to analyze impacts on other areas of the Business Model Canvas (see also tives—the Customer Segment perspective, the Value Proposition perspective, and the innovation epicenters on p. 138). Cost Impact Exploration Exploring Value Proposition Impact Exploring Customer Impact RE RAI RE 231 Identify the highest cost infrastructure elements and Begin the process of transforming your Value Proposition Ask yourself the Four Actions Framework questions evaluate what happens if you eliminate or reduce them. by asking the Four Actions Framework questions. about each business model Building Block on the What value elements disappear, and what would you Simultaneously, consider the impact on the cost side customer side of the Canvas: Channels, Relationships, have to create to compensate for their absence? Then, and evaluate what elements you need to (or could) and Revenue Streams. Analyze what happens to the identify infrastructure investments you may want to change on the value side, such as Channels, Relation- cost side if you eliminate, reduce, raise, or create value make and analyze how much value they create. ships, Revenue Streams, and Customer Segments. side elements. › Which activities, resources, and partnerships have › What less-valued features or services could be › Which new Customer Segments could you focus the highest costs? › What happens if you reduce or eliminate some of these cost factors? › How could you replace, using less costly elements, the value lost by reducing or eliminating expensive resources, activities, or partnerships? › What value would be created by planned new investments? eliminated or reduced? › What features or services could be enhanced or newly created to produce a valuable new customer experience? › What are the cost implications of your changes to the Value Proposition? › How will changes to the Value Proposition affect the customer side of the model? on, and which segments could you possibly reduce or eliminate? › What jobs do new Customer Segments really want to have done? › How do these customers prefer to be reached and what kind of relationship do they expect? › What are the cost implications of serving new Customer Segments? MANAging MULTIPLE BUSINEss MODELS 232 Visio N a R i ES , Ga ME c H a NGERS , a ND c H a LLENGERS a RE GENERAT i NG Synergies, Markides claims, should be carefully exploited even when the new innovative business models around the world—as entrepreneurs and as model is implemented in a standalone unit. workers within established organizations. An entrepreneur’s challenge is Risk is a third variable to consider when deciding whether to integrate to design and successfully implement a new business model. Established or separate an emerging model. How big is the risk that the new model will organizations, though, face an equally daunting task: how to implement negatively affect the established one in terms of brand image, earnings, and manage new models while maintaining existing ones. legal liability, and so forth? Business thinkers such as Constantinos Markides, Charles O'Reilly III, During the financial crisis of 2008, ING, the Dutch financial group, was and Michael Tushman have a word for groups that successfully meet this nearly toppled by its ING Direct unit, which provides online and telephone challenge: ambidextrous organizations. Implementing a new business model retail banking services in overseas markets. In effect, ING treated ING Direct in a longstanding enterprise can be extraordinarily difficult because the more as a marketing initiative than as a new, separate business model that new model may challenge or even compete with established models. would have been better housed in a separate entity. The new model might require a different organizational culture, or it might Finally, choices evolve over time. Markides emphasizes that compa- target prospective customers formerly ignored by the enterprise. This begs nies may want to consider a phased integration or a phased separation of a question: How do we implement innovative business models within business models. e.Schwab, the Internet arm of Charles Schwab, the U.S. long-established organizations? retail securities broker, was initially set up as a separate unit, but later was Scholars are divided on the issue. Many suggest spinning off new busi- integrated back into the main business with great success. Tesco.com, the ness model initiatives into separate entities. Others propose a less drastic Internet branch of Tesco, the giant U.K. retailer, made a successful transition approach and argue that innovative new business models can thrive within from integrated business line into standalone unit. established organizations, either as-is or in separate business units. In the following pages we examine the issue of integration versus separa- Constantinos Markides, for example, proposes a two-variable framework tion with three examples described using the Business Model Canvas. The for deciding on how to manage new and traditional business models simul- first, Swiss watch manufacturer SMH, chose the integration route for its new taneously. The first variable expresses the severity of conflict between the Swatch business model in the 1980s. The second, Swiss foodmaker Nestlé, models, while the second expresses strategic similarity. Yet, he also shows chose the separation route for bringing Nespresso to the marketplace. As that success depends not only on the correct choice—integrated versus of this writing, the third, German vehicle manufacturer Daimler, has yet to standalone implementation—but also on how the choice is implemented. choose an approach for its car2go vehicle rental concept. — SIMILARITY OF NINE BUILDING BLOCKS — — PoTEnTiaL FOR SynERGiES — — PoTEn Tia L conflicTS — FOR cREaTE SynERgiES aMong THE SEPaRaTED BUSinESS MoDELS anD cooRDinaTE BETWEEN THEM as NECESSARy iNTEGRaTioN 233 auToNoMy SEPARATION avoiD conflicTS BETWEEn THE inTEgRaTED BUSinESS MoDELS anD aLLow FoR nEcESSaRy auTOnoMy SMH ’s aUTONOMOUS MODEL FOR SWaTCH In the mid-seventies the Swiss watch industry, which had historically dominated the the potential to anchor a larger product line. This forced engineers to entirely rethink timepiece sector, found itself in deep crisis. Japanese and Hong Kong watch manu- the very idea of a timepiece and its manufacture; they were essentially deprived of the facturers had dislodged the Swiss from their leadership position with cheap quartz watches designed for the low-end market. The Swiss continued to focus on tradi- The result was a watch made with far fewer components. Manufacturing was highly tional mechanical watches for the mid- and high-end markets, but all the while automated: molding replaced screws, direct labor costs were driven down to less than Asian competitors threatened to intrude on these segments as well. 10 percent, and the watches were produced in large quantities. Innovative guerrilla In the early 1980s competitive pressure intensified to the point that most Swiss 234 ability to apply their traditional watchmaking knowledge. marketing concepts were used to bring the watch to market under several different manufacturers, with the exception of a handful of luxury brands, were teetering on designs. Hayek saw the new product communicating a lifestyle message, rather than just collapse. Then Nicolas G. Hayek took over the reigns of SMH (later renamed Swatch telling time on the cheap. Group). He completely restructured a newly formed group cobbled together from companies with roots in the two biggest ailing Swiss watchmakers. Hayek envisioned a strategy whereby SMH would offer healthy, growing brands in all three market segments: low, mid, and luxury. At the time, Swiss firms dominated the Thus the Swatch was born: high quality at a low price, for a functional, fashionable product. The rest is history. Fifty-five million Swatches were sold in five years, and in 2006 the company celebrated aggregate sales of over 333 million Swatches. SMH’s choice to implement the low end Swatch business model is particularly inter- luxury watch market with a 97 percent share. But the Swiss owned only 3 percent of esting in light of its potential impact on SMH’s higher end brands. Despite a completely the middle market and were non-players in the low end, leaving the entire segment of different organizational and brand culture, Swatch was launched under SMH and not as inexpensive timepieces to Asian rivals. a standalone entity. Launching a new brand at the bottom end was provocative and risky, and triggered SMH, though, was careful to give Swatch and all its other brands near-complete fears among investors that the move would cannibalize Tissot, SMH’s middle-market autonomy regarding product and marketing decisions, while centralizing everything else. brand. From a strategic point of view, Hayek’s vision meant nothing less than combin- Manufacturing, purchasing, and R&D were each regrouped under a single entity serving ing a high-end luxury business model with a low-cost business model under the same all of SMH’s brands. Today, SMH maintains a strong vertical integration policy in order roof, with all the attending conflicts and trade-offs. Nevertheless, Hayek insisted on this to achieve scale and defend itself against Asian competitors. three-tiered strategy, which triggered development of the Swatch, a new type of affordable Swiss watch priced starting at around U.S. $40. The specifications for the new watch were demanding: inexpensive enough to compete with Japanese offers yet providing Swiss quality, plus sufficient margins and CENTRALIZED SMH KP DECENTRALIZED KA PRo DU cTio N & QUALITY cONTROL VP CR CS R& D HR, fiNANCE, ETc. B
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