BUSINESS MODEL GENERATION 11
BusinessModel Generation Exercise 1
Thephrase businessmodelis more of a term of art, which simply defines how a business intendsto run its activities and generate revenue. It describes the basicsof how an organization creates, delivers, and captures worth(Osterwalder&Pigneur, 2010).The model should focus on the available product and its distributionchannels, cost configuration, price charged, and the projected profitmargin. Additionally, scholars describe business model as an outlinefor a strategy, implemented through organizational structures,processes, and systems.
Businessmodels primarily tell a story of how a business generates revenue.They form the guide through which emerging and already existingbusinesses take their products to the market. Sako(2012)describes six rudiments of a business model including articulation ofvalue scheme, recognition of the market segments, designation of thevalue chains, cost estimation, and revenue projection, outline of theposition of an organization within the value network, and formulationof a competitive strategy.
Accordingto Chesbrough(2002),scholars create a business model based on nine blocks that comprisesof four core areas of a business including, customers, offer,infrastructure, and financial viability. Firstly, the customersegments refer to various groups an enterprise aims to reach andserve. Value propositions depict products and services offered. Onthe other hand, channels define how an enterprise reaches and servesits customers. Customer relations portray the type of a relationshipa company wants to have with each customer. Revenue representsexpected returns of an enterprise. On its part, resources refer toassets required for the model to work. Further, activities describethe most important things a company must do to make a modelsuccessful while partnerships define a network of suppliers andpartners that make the model work. Finally, a cost structuredescribes all the cost incurred to make a business model work.
Abusiness model describes how a business puts its strategy into actionin order to make money. It describes how a firm conducts its businesswith the buyers, suppliers, and partners. To establish an effectivebusiness model, managers transform their competition strategy into ablueprint of actions and initiatives that support the most importantgoals. Further, they implement this blueprint through structures,processes, culture, and procedures. An effective model is pivotal inhelping a firm to gain and sustain a competitive advantage over itscompetitors.
Accordingto Zott& Amit (2007),there have been different definitions of business model but all ofthem seem to focus mainly on addressing three major phenomena. First,they address e-business and the use of information technology, whichfocus on e-commerce, e-markets, and internet-based business. Theemergence of e-business continues to gain popularity with scholarsdeveloping typologies and taxonomies. Secondly, the strategic issueslead to value creation and competitive advantage as well as theperformance of the firm. A business model is an imperative source ofcompetitive advantage that is unique for a firm and strategicallypositions its products in the market. Lastly, the innovation andtechnological management allow businesses to commercialize theirinnovative business ideas and represent a new way of innovation.
Inaddition, a business model represents a system made up of dynamics,mechanisms, and linkages between components. Sako(2012) arguesthat a business model is a theoretical, rather than financialrepresentation of a company. In fact, a business model promotes atwo-fold focus on value creation and value capture. It explains thesense and provides data and other verifications that reveal how abusiness creates and delivers value to customers. Moreover, itoutlines the manner in which revenues, costs, and profits related tothe business enterprise deliver that value.
Aneffective and reliable value proposition refers to the basicattractions that draw consumers’ attention to a certain product orservice that are either real or perceived. It identifies andsuccinctly articulates what makes a product or service attractive inthe market place. Value proposition makes customers prefer onecompany to another by satisfying their needs. Therefore, itrepresents a selected bundle of goods or services that meet the needsof a certain segment of customers.
Abusiness model and value proposition together forms the elements thatguide a firm in its external and internal orientations (Chesbrough,2002).Thus, effective values help a firm design a robust model by helpingin establishing the market, understanding where the strength of thefirm must be allocated and identifying areas where resources areessential for the process to be successful. It also helps inaddressing issues concerning value of goods and services delivered tothe customers, the customer’s problem, the needs and preferences ofthe customers, and the bundle of goods and services offered to eachcustomer segment.
Valueproposition also assists in creating significance for a customersegment by establishing a distinct mix of items meeting the needs ofthat segment. Experts classify values as either qualitative orquantitative. Effective values are essential in maintaining the brandat the company level. Development of individual value propositionwould require more education that may confuse the market or create acomplex enterprise if done at a product level. Notably, it is vitalto identify the key components and critical resources necessary todeliver on values since they form the key characteristics of aneffective business model.
Developinga new business model requires a careful study of the key concepts,which include customer insight, “what if” questions, positioningof the firm in the market place and how to do it. “What if”questions present a business with an alternative scenario from thepresent based on reinvented business models. These questions play amajor role in generating ideas for successful models by challengingconservative stand that stifles imagination. They assist in breakingfree of any limitations imposed by existing models through provokingand challenging the mode of thinking perspectives. Further, thequestions mark a starting point to discover business models thatcould make suppositions work. While some may remain unanswered forbeing provocative, others may simply require the precise businessmodels for their realization.
Brainstormingto develop a new business model requires a diverse and innovativeteam from various business units, different ages, and varying areasof expertise accompanied by differing levels of rank, a blend ofexperiences and with diverse cultural backgrounds (Osterwalder& Pigneur, 2010).Responding to these questions therefore helps in practicing scenarioplanning by developing business models that help managers visualizevarious scenarios to expect in plausible future. Formulatingresponses to these scenarios capture the key factors of a firm, whichare critical in developing a business model. These key factorsinclude the required resources, strategic initiatives, and theexpected future environment.
Certainbrainstorming regulations remain essential in generating a successfulmodel. Enforcing this set of requirements capitalize on the number offunctional ideas generated. Firstly, managers should stay focused bystarting with a well-formulated problem at hand ideally expressedaround a consumer. Secondly, they should explain and implementbrainstorming regulations through facilitators. Importantly, theyneed to think visually by sketching or writing ideas down foreveryone to see and finally, prepare for brainstorming withengagement experiences that relate to the current problem.
BusinessModel Generation Exercise 2
Inhis research, Yip(2004) presentsthe view that market demand is the main factor influencing businessmodel innovations. The author argues that each rational companyresponds to economic stimuli that results from changes in the rateand activities of an invention determined by demand. He furtherpostulates that growth of demand precedes innovations that take upnew technologies. Therefore, demand enables a company to factor themajor characteristics such as selling prospective, the length, andgrowth in demand, demand inconclusiveness, and elasticity informulating a successful business model.
Demandestablishes consumer needs that provide a good source of informationfor forecasting innovation. They outline the market requirements andanalysis of how to address the anticipated market’s taste andpreferences. If a firm forecast that future sales potential are smalland considerably invisible, then it greatly influences innovationdecision. The issue on what customers need varies across individualsand depends on tastes and preferences, level of income, age, andgeographical locations.
Additionally,demand points out the biggest unsatisfied customer needs. Low numberof customers decreases the potential of a business thus stiflingcommercialization of innovations. Many businesses focus on providingproducts that they think must sell and fail to address the needs ofthe customer. The mistakes arising from misunderstanding customerneeds range from having low number of satisfied customers and losingunsatisfied one to tying up too much cash on inventory that has lowsales (Teece,2010).Unsatisfied customers look for alternative companies that satisfytheir needs, which consequently translate into losing all theinvestments incurred on marketing to source for them.
Yip(2004)further highlights cases where demand is presented by small marketsizes. Little investments are considered on model innovations becauseof the low output is too little to offset high fixed costs. Sinceconsumers are aware of their needs, they also suggest some innovativesolutions and give important opinions to producers. This way, radicalinnovations are possible as consciousness about consumer needs reducethe indefiniteness of potential demand.
Finally,a firm needs to know where demand is increasing or waning. Modernbusiness models are technologically biased and consumers areendlessly demanding tech-based goods and services. Firms have toadapt to these changes in order to survive in this dynamic and fastgrowing way of doing business. Tesla motors has been very successfulin the US market by using new innovative technology but its successis also dependent on how well competing firms respond totechnological changes (Zott& Amit, 2007).
Zott& Amit (2007) performedand analyzed the implications of business model design in firms anddrawn a conclusion that it is a devise of a firm that sets aperiphery of communication with its external parties. They pinpointsix basic model design techniques, which include customer insights,ideation, image thinking, prototyping, storytelling, and scenarios.It represents a deliberate change of a firm’s model to make it moredistinctive and effective or efficient. A successful model design andinnovation should focus on various aspects.
Foremost,it should satisfy the existing and otherwise unanswered wants of themarket it intends to serve. For example, Netjets discovered the needto provide fractional as well as rental of private business jets(Yip,2004).Subsequently, it was the first private company to offer jet chapterand aircraft management services globally.
Secondly,it should convey a fresh technology, product, or service as well asexploit existing intellectual properties. Swatch Company conceived anidea and manufactured a product with its identity and a uniquemarketing concept that its competitors were unable to match. Thecompany presented consumers with a new casual and fun watch withreasonably disposable accessories.
Thethird aspect is that there should be expansion or otherwisedistraction of an existing market. Business model designs need tobring into the market new insights and ideas that expound the alreadyexisting systems. For instance, an international company,UberTechnologies Inc. has launched its services African countriessuch as Kenya where it has improved the taxi services in thosecountries. However, it suffers a considerable resistance from thealready existing taxi operators who view it as disruption to theirusual way of doing business. Uber has a presented a new experience ofdoing taxi business online.
Finally,the process design should create an exclusively new form of abusiness accompanied by a new set of operating policies,instructions, as well as procedures. Diners Club International (DCI)presents this concept where it was the first and independent companyto produce credit cards for entertainment and travel. New entrantshave since copied DCI’S model design to start up similarenterprises.
Day-to-daychallenges are inevitable in any business model design and innovationsimply because it is subject to continuous pressures arising fromboth external and internal factors (Yip,2004).The process of formulating a business model design faces variouschallenges, which include discovering the right model, testing themodel before initiation, inducing the market to assume the latestmodel, constantly adapting the model in response to the marketresponses and managing improbability. These challenges arise due tofactors such as changes in technology, forces of competition,pressure from changes in consumer demand, social environment, as wellas, the legal environment (Thompson& Martin, 2005).
Despitethe ease of performing certain tasks owing to the technologicaladvancement, there exists a challenge in discovering the right model.According to Teece(2010),the challenge arises from the complexity of modern life and businessenvironment.Indeed, the rate at which changes are taking place ishastening and the global economy is becoming more complex. Theever-changing world of business thus challenges development of amodel that suits these dynamic processes.
Theuncertainty by business managers worsens the testing of a modelbefore initiation. There is ever growing uncertainty in the globaleconomy ranging from the credit markets and competitors to howtechnological advances affect businesses. Uncertainty lead todevelopment of short-term based business models disregarding thelong-term prospects.
Inducingmarkets to take on the new model is hindered by the fact somemanagers prefer long-term models instead of jumping from one businessmodel to another from time to time. In addition, some firms lack thecapacity to continuously adapt to new models and therefore discardnew business models (Johnson,2006).Some models bring diversities, which in turn bring various challengeswhere some parties may not agree making it hard for a business torun.
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