MBA Course 1 Module 4 - UIUC 02 01 2021 PDF

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Table of Contents
1. Preface
2. Module 4 Strategic Innovation: Building and Sustaining Innovative Organizations
1. Module 4 Information
1. Introduction of Module 4
2. Lesson 4-1 How Do Innovative Business Model Help Companies?
1. Lesson 4-1.1 How Do Innovative Business Model Help Companies? - Part 1
2. Lesson 4-1.2 How Do Innovative Business Model Help Companies? - Part 2
3. Lesson 4-2 Elements of Business Models and Business Model Canvas
1. Lesson 4-2.1 Elements of Business Models and Business Model Canvas -
Part 1
2. Lesson 4-2.2 Elements of Business Models and Business Model Canvas -
Part 2
4. Lesson 4-3 Designing Innovative Business Models
1. Lesson 4-3.1 Designing Innovative Business Models - Part 1
2. Lesson 4-3.2 Designing Innovative Business Models - Part 2
5. Module 4 Wrap Up
1. Module 4 Summary
6. Application Corner
1. The Case of Newspaper Industry
7. Wrapping Up the Course
1. Course Summary with Professor Geoff Love
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Preface
Thank you for choosing a Gies eBook.
This Gies eBook is based on an extended video lecture transcript made from Module 4 of
Professor Geoff Love and Professor Raj Echambadi's Strategic Innovation: Building and
Sustaining Innovative Organizations on Coursera. The Gies eBook provides a reading
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Copyright © 2019 by Geoff Love & Raj Echambadi
All rights reserved.
Published by the Gies College of Business at the University of Illinois at Urbana-Champaign, and
the Board of Trustees of the University of Illinois
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Module 4 Strategic Innovation: Building and
Sustaining Innovative Organizations
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Module 4 Information
Introduction of Module 4
Media Player for Video
Professor Geoff Love - Slide 1
Business Model
Transcript
Well, hello again. This module is the simplest of the four in some ways. That's because lessons
are entirely focused on one concept, the business model. The business model is new to us even
if we've talked about knowing what business you're in. You see, business models are more than
just knowing the business you're in and that's where there's challenge in this module's simplicity.
Motivation here is that building a deep understanding of the business model, concept is a critical
value. New business models are powerful enough to upend entire industries after all.
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Components of a Business Model - Slide 2
The slide contains an image of four ovals with labels connected to each other in clockwise
direction. Customer Value Proposition, Process, Revenues and Costs, and Resources. Customer
Value Proposition and Revenues and Costs are also connected directly.
Transcript
The first two lessons are all about developing an in-depth understanding of that business model
concept.
Designing Innovative Business Models - Slide 3
The slide contains an image of four circles with labels listed from left to right: Assess, Question,
Reframe, and Design.
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Transcript
Then in the third module, the third lesson, you'll see it's all about how to use this understanding to
come up with a new business model, and you'll see that conceiving a new business model is a
creative process, but it's also a process that can benefit from analysis and structure.
Module 4 Questions (Question 1 and 2) - Slide 4
1. What is a business model to you?

2. How would you go about creating a new business model? What process would you use?
Transcript
So, to get ready, let me ask you something. What is a business model to you? Write down three
fundamental components of a business model as you think about it right now. This time doing this
pre-check is particularly valuable because business models are often not a well-understood
concept, and if you have a clear idea how you look at business models now, you're going to be in
a much better position to confirm that knowledge or revise it.
The second thing to think about is, how would you go about creating a new business model?
What process would you use? Think about that a bit before you start viewing the videos and then
you'll be able to compare your method to the one that Ross works through in the third lesson.
Okay. I'll see you on the other side.
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Lesson 4-1 How Do Innovative Business Model
Help Companies?
Lesson 4-1.1 How Do Innovative Business Model Help

Companies? - Part 1
Professor Raj Echambadi - Slide 5
Transcript
A business model is a combination of the narratives and the numbers about how and why a
company should work. A business model is a story. It has to engage your customers. It has to
engage your internal teams, and it has to engage your external stakeholders. Just as a story has
plotlines and various elements within the plotlines, and if there is a problem with one of the
elements, you have a hole in the story, the same is the case with a business model. A business
model answers a fundamental question. What is the essence of this business? It should also ask
the questions — how do we create value? How do we capture this value back? How are we
going to utilize our capabilities to create unique value? These are all the questions that a well-
defined and well-articulated business model should address.
Nowadays, when we travel, it is fairly easy. If we need cash, wherever we are, we go to an ATM,
automated teller machine, or we use our credit cards for spending. But 150 years ago, life was
not this easy. At that point in time, if people had to travel, they had to have letters of credit, which
effectively entailed a letter from one bank to another that guaranteed payment for a specified
person under specified circumstances. But this was a complication. There were a lot of pain
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points, and as a result, J.C. Fargo, who happened to be the president of American Express in
1892, thought of the traveler's check, and the model was very simple. Travelers would go to
American Express, pay cash, and obtain traveler's checks, which were like cash. They could go
to a merchant, readily exchange the traveler's checks for cash.
Traveler’s Checks from American Express - Slide 6
The slide contains a logo of American Express card (CoolKid1993 2008). There is an image
representing the Business Model of American Express with three boxes Consumers, Merchants,
and American Express connected to each other by two way arrows.
Transcript
For the traveler, it gave them peace of mind. It was very flexible, and more importantly,
extraordinarily convenient. For the merchant, there were advantages as well. American Express
was an extraordinary brand, and the moment they started accepting American Express, their
business volumes increased. So American Express was able to capture both the interests of the
merchant and the consumers, and they became very successful.
While American Express did very well to capture the interests of both merchants and travelers,
what was innovative about this was the business model. Think about it. Let's say you want to go
and buy a TV from the store. The manufacturer has already incurred the costs of making that TV.
So when you buy the TV, and you pay money as a customer, the money goes back and
reimburses the manufacturer for the costs incurred. In the American Express traveler's check
story, this got reversed, because American Express got the cash back first. And they could use
the cash from the customers as an interest-free loan, and this was revolutionary. And it created a
lot of demand, which is what innovative business models do. And traveler's checks were very
popular in the U.S. and around the world until the evolution of the automated teller machines and
credit cards.
Until the 1950s, people used cash for every transaction. While individual department stores, or
gasoline or petrol stations used charge cards that you could only use at that particular
establishment, there was no universal credit card. The story goes as follows. In 1949, Mr.
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McNamara, an executive with Hamilton Credit corporation at that point, was eating at a
Manhattan restaurant, and when the time came for him to settle his bill, he realized that he had
forgotten his wallet. He called his wife, and his wife came in with extra cash. A lot of people
dispute the story, and it's humorously called as The First Supper. But at the end of it was that
Hamilton Credit Corporation created the first credit card. They went to the merchants in lower
Manhattan. They focused on a very small segment and said, "Can you allow people to use cards
in your stores, and we will underwrite the payment for you?" And they went to executives —;
again, a very small segment, and said, "Here is a pain point for you. You have to cash —; carry
cash everywhere, or you have to use traveler's check. Here is a credit card that you can use for
food, drinks, rental cars, and even hotels," and the executives were very happy.
Diners Club Credit Card - Slide 7
The slide contains a logo of Diners Club card (Hitomi 2016 / CC-BY-SA-4.0). There is an image
representing the Business Model of Diner's Club with three boxes Consumers, Merchants, and
Diner's Club connected to each other by two way arrows.
Transcript
So what this credit card did —; and it was the Diner's Club credit card, which was launched in
1950 —; was that they would pay the merchants back, but the cardholders had to pay an annual
fee, plus a transaction fee for every transaction. A year later, Diner's Club was an extraordinary
hit because of its innovative business model, and the rest is history.
Let's take the case of the iPod that was commercialized in 2003. Before iPod, we had Diamond
Multimedia with their Rio players, and we had Best Data with Cabo 64. While they were stylish,
portable, and convenient MP3 players, they were not as success as the iPod. So what did the
iPod do? They asked a fundamental question. What business they are in? While other people
were competing on being product-focused, and developing a better MP3 player, Apple focused
on providing a complement of products.
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Apple iPod - Slide 8
The slide contains two images. One of an iPod (Karonen 2006 / CC-BY-SA-2.0-AT) and another
of iTunes logo (Chabel 2013 / CC-BY-SA-3.0).
Transcript
They decided to become the product that offered a seamless way for customers to download
music onto their MP3 players, and enjoy the listening experiences. So what did Apple do? Apple
took a technology, wrapped that technology in a very unique business model that alleviated the
pain points for the customers, and provided unique benefits for the customers, thereby creating a
multi-billion-dollar portfolio in the next few years.
Songs Downloaded on iTunes! - Slide 9
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The slide contains a line graph with Songs (in Billions) ranging from 0 to 12 with interval of 2 on
y-axis and Year ranging from 2003 to 2010 with an interval of 1 year on x-axis. The line graph
shows a gradual exponential increase from 0 in 2004 to 10 in 2010.
Source: Wikipedia, "iTunes Store," Wikipedia iTunes Store.
Transcript
Why did this combination product of iPod and iTunes succeed? Let's look at the numbers,
numbers of songs downloaded on iTunes over time. In three years after its commercialization,
iTunes had sold a billion songs, two billion songs by 2007, six billion songs by 2009, and 10
billion songs by 2010. Actually, iPod/iTunes combination became a nearly 10-billion product in
just three years. So the model was as follows. You sell a high-margin iPod, along with low-margin
consumables on iTunes, and you provided an integrated product that enabled consumers to
enjoy music in a convenient manner. This complementary model defined value in a totally new
way, thereby providing unprecedented convenience to the consumers
Fundamental Principle - Slide 10
Plans with innovative products are not enough; they need to be complemented with an
appropriate business model.
Transcript
All these examples underscore a fundamental principle, which is plans with innovative products
are just not enough. You need to wrap it with appropriate business models in order for the
business to be successful. A business model actually represents a better way of doing business,
compared to alternative ways. But for a well-articulated business model, you need to understand
the motivations of all parties.
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Business Model: Why and How? - Slide 11
A business model, for a company, represents a better way of doing business than existing
alternatives to accomplish their strategy.
The motivations of all parties must be understood to develop a coherent business model.
Transcript
As in the case of AMEX, and as in the case of Diner's Club, both these companies understood
the motivations of merchants and consumers together in order to define a great business model.
At a very fundamental level, a business model is a cohesive business system that reflects the
underlying economic logic. What does that mean? It has three major components.
Business Plan Components - Slide 12
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1. Create value
2. Utilize company capabilities
3. Recapture the value
Transcript
It has to create value. It has to utilize the capabilities of a company in order to create that value,
and last but not the least, it needs to be able to capture the value back after controlling for the
appropriate costs.
Company-side Customer-side - Slide 13
The slide contains an image of a store in the middle with arrows from left and right sides pointing
towards it. The store is labeled as Selling things (Distribute, sell, and service). The left arrow is
named as Company-side labeled as Making things (Source and manufacture) and right arrow is
named as Customer-side.
Transcript
A business model can be very useful when you are thinking about newer revenue sources, as in
the case of the credit card that we talked about. Or it can also be used to figure out incremental
ways of augmenting your existing revenue sources, as in the case of AMEX traveler's checks.
When you think about the company side, companies do two things. Companies make things,
which effectively means they design a product, source the raw materials, and manufacture the
product, and then, once they make things, they actually sell things. They distribute the product,
market and sell the product, and then service the product. So if you think about it, the value of a
business model can be conceptualized in two different ways. One, you can actually help design a
new product alongside a new business model for an unmet need, or you can actually envision a
better way of distributing, selling, and servicing a product.
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Let's take the personal computer industry in the '80s. You had dominant players, like Hewlett-
Packard, IBM, and Apple selling personal computers. They sold through intermediaries. They
would make the product, based on estimated product demand and what consumers would want,
and then ship it off to the intermediaries or retail outlets. The retail outlets held onto these
computers, educated the consumers, and then sold to the consumers. By some estimates,
personal computers lost about 2% of value each day they sat on retailers' shelves.
Dell Gateway - Slide 14
The slide contains an image of arrows named Dell Gateway and Consumer pointing towards
each other.
Transcript
So what did companies like Dell and Gateway do? Dell and Gateway cut out the intermediaries,
and went direct to the consumers. Therefore, they envisioned a very new way of selling the
product in this particular industry, which is why this was a business model change. More than
cutting out the cost failing, they embarked on a make-to-buy decision. In other words, once the
consumer ordered, Dell and Gateway started making those products. By doing this, they actually
took the uncertainty out of what consumers would want. While IBM and other companies had to
guess, Dell did not. Dell only made products that consumers wanted, and then they shipped
directly to the consumers, thereby avoiding the costs of obsolescence, and hence were able to
outperform rivals in the long run. More importantly, while retailers did an educational function for
the consumers, Dell focused on large corporate accounts, as opposed to the home markets that
IBM and Hewlett-Packard were focusing on. As a result, they were focused on a very powerful
model that catered to delivering high-margin computers to these corporate accounts, and Dell
had a very sustained run in market leadership for the next 20 years.
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Business Model - Slide 15
Improve/tweak existing model to offer better value/revenue sources
Transcript
A business model can help a company to tweak or improve its current business model in order to
capture additional value. In short, it can sometimes help you to reinvent your existing business
model.
References - Slide 16
Chabe01 (2013). iTunes store icon [Online Image]. Retrieved from

https://commons.wikimedia.org/wiki/File:iTunes_Store_icon.svg
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CoolKid1993 (2008). American Express logo [Online Image]. Retrieved from
https://commons.wikimedia.org/wiki/File:American_Express_logo_(2018).svg
Hitomi (2016). Diners club regular Japan 2016 [online Image]. Retrieved from
https://commons.wikimedia.org/wiki/File:Diners_Club_Regular_Japan_2016.jpg
Karonen, Ilmari (2006). Ipod backlight transparent [Online Image]. Retrieved from
https://commons.wikimedia.org/wiki/File:Ipod_backlight_transparent.png
Transcript
No instruction provided during this slide.
Lesson 4-1.2 How Do Innovative Business Model Help

Companies? - Part 2
Improve Business Model - Slide 17
Improve/tweak existing model to offer better value/revenue sources
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Transcript
A business model can help a company to tweak or improve its current business model in order to
capture additional value. In short, it can sometimes help you to reinvent your existing business
model. When you think about the healthcare in the United States and the western world, there is
a pain point. If you are suffering from a minor illness or a minor injury, you call your family
practitioner. You wait for an appointment. In case of a child, especially let's say this happens after
office hours, your choices are very limited. You might have to go to emergency care, which
effectively means a lot of time and a lot of resources.
CVS pharmacy - Slide 18
This slide contains images of the logos for CVS Pharmacy (Connormah 2011 / CC-BY-SA-3.0)
and minute clinic (CVS Health / CC-BY-SA-3.0).
Transcript
CVS decided to address the problem. CVS is the largest pharmacy in the United States, seventh
largest company in the United States, with over 9600 stores. Eighty percent of the US population
lives with a CVS store within 3 miles. CVS sells prescription drugs and a whole assortment of
other convenience goods. So what did CVS do? Out of the 9600 stores, CVS assigned 11,000
stores to a minute clinic. What does that mean? Minute clinics are staffed by nurse practitioners
and physician assistants. They are open 7 days a week, so you don't need any appointment. So
if you have a minor illness, minor injury, you need a vaccination or you need a physical, you just
walk by as a consumer and then you get it taken care of. So it was marked by very high flexibility
and convenience. But what did CVS do? CVS actually broadened the scope of offerings from just
offering prescription services to healthcare services. In an era where brick and mortar stores are
a resort, CVS found an extraordinarily new way to leverage its brick and mortar assets by using a
very clever business model.
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Amazon (1 of 2) - Slide 19
Launched in 1995
The slide contains an image representing the business model of Amazon with the boxes
Consumers, Merchants, and Amazon connected to each other by two way arrows. The arrow
connecting Consumers and Merchants is labeled as $8.5 billion sales and the arrow connecting
Consumers and Amazon is labeled as Low operating margin.
Transcript
Another example is that of amazon.com. They started off as a bookseller in 1995 and in a decade
they had reached top line revenues of about $9 billion. But they were suffering from low operating
margins as opposed to their competitors or their peers such as Google and EBay. Amazon had
amazing reach. Amazon had amazing fulfillment and technology infrastructure. So the way it
worked is all of a sudden they reimagined their business model and in 2006 they launched what
we now call as Amazon Fulfillment Services.
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Amazon (2 of 2) - Slide 20
The slide contains an image representing the business model of amazon web services with
Fulfillment Services in the middle and the boxes Consumers, Amazon, and Merchants connected
to each other by two way arrows.
There is a logo of amazon web services (AWS Trademark Guidelines 2012).
Transcript
Their logic is can merchants use their Amazon networks? Can Amazon store goods from
merchants in their warehouses, pick, pack, ship and provide customer services for these goods?
So in other words, you open up a completely new universe of products that people were selling
directly to consumers themselves and Amazon co-opted them and enable them to use their
infrastructure in order to reach consumers. Thereby, Amazon gave efficiency to these merchants.
Amazon gave peace of mind and in the process, Amazon improved its margins.
The other thing Amazon did was given its technology capabilities, Amazon decided to offer the
slack computing services it had and the slack capacity in terms of servers to outside merchants.
And Amazon Web Services was born. Amazon now offers a suite of cloud computing services
and on demand computing and therefore they are able to give merchants large computing
capacity than building a physical server farm themselves. So what did Amazon do? In summary,
Amazon tweaked existing models and saw innovative opportunities for enhancing their own
revenue sources.
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Strategy - Slide 21
A strategy is a broad plan to differentiate the enterprise either through low-cost leadership or
value differentiation and thereby derive a competitive advantage
The object of strategy is a business model
Transcript
A business model is not the same as strategy. A business model is a self-contained system that
does not involve competition. Strategy on the other hand is a broad plan that enables a firm to
differentiate itself either through a value strategy or a low-cost strategy in order to achieve
competitive advantage relative to its rivals. The object of strategy is a business model.
Object of Strategy - Slide 22
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The slide contains an arrow with the boxes Strategy, Business Model, and Tactics (Execution) on
it from left to right.
Transcript
So in a nutshell, a strategy leads to a business model and a business model dictates the tactics.
A business model provides a frame for the company that can help but also sometimes constrain.
So you need to be extremely careful with developing a business model.
Southwest Airline - Slide 23
Respect to parts
Respect to Service
Respect to inventory
Transcript
Let's take the example of a low-cost airline that we have talked about before. A low-cost airline
decides to have a standardized fleet because the standardized fleet enables it to control the
operating costs and then it can target the budget travelers who are interested in low prices. But
all of a sudden, if a low-cost airline decides to reconfigure the plane and offer seats in business
class so that it can get higher prices, then fundamentally the cost side of the equation is
damaged and therefore it cannot do those kinds of tactics. This is why we say that the strategy
dictates the business model which then allows you to come up with an action set of tactics and it
is very hard to change these tactics once the business model is set in motion.
Let's take the case of IKEA, a Swedish retailer, now happens to be the largest retailer in the world
in the last ten years. IKEA was started in 1943 by a then 17 year old Ingvar Kamprad. And the
contribution of Ingvar was he found out that assembly is what explodes the cost in a furniture.
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IKEA - Slide 24
IKEA embarked on a low-cost, convenience-oriented strategy. Built a business model around that
strategy and executed it to perfection
Transcript
Assembly of furniture costs money and transporting assembled furniture costs money. He
decided to sell ready-to-assemble furniture. Therefore, he was able to ring costs out of the
system and he embarked on a low-cost leadership strategy that offered convenience to his
customers. But more importantly, Ingvar wrapped this low cost leadership strategy with an
appropriate business model in order to harness extraordinary customer benefits.
IKEA-side Consumer-side - Slide 25
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The slide contains an image IKEA logo and a left arrow named as IKEA-side with labels Design,
Modular furniture, and Volumes and scale and a right arrow named as Consumer-side with labels
Quality, Stylish products, and Convenience.
Transcript
From a company side or IKEA side, IKEA invested in design capabilities. They hired a
phenomenal in-house design departments that focused on simplicity of design. They also
developed modular furniture. Modular furnitures are marked by knockdown packages that allow
consumers easy assembly. Instead of preassembly, consumers could self assemble these
furniture pieces. This model of modularity actually enables relationships with long term suppliers
because you can actually guarantee them scale. And because you generate scale, you can
actually lower the cost.
IKEA Consumer-side - Slide 26
The slide contains an arrow with the boxes Stylish design, Quality products, Customer loyalty,
and Enhanced revenues on it from left to right.
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Transcript
So what did the consumer get out of this equation with IKEA? Well, consumers got high quality
products that were very stylish at that point in time. And more importantly, IKEA's business model
afforded a sense of convenience and flexibility for the consumers. What do I mean by that?
Instead of waiting for weeks and months for your furniture to arrive, now you could see the
furniture in the showroom. You could take these packages home and self assemble them
yourselves giving you a sense of flexibility and convenience as a customer. But more importantly,
given the fact that it was modular, there was a lot of product variety. And IKEA was able to pass
on the savings because of its scale, thereby making the furniture that was very stylish, very
affordable for the consumers. Because of IKEA's investment in design and designing stylish
products, they were able to provide quality products to the consumers thereby engendering
customer loyalty and deriving enhanced revenues.
Features of IKEA's products - Slide 27
The slide contains an arrow with the boxes Modular Design, Long-term suppliers, Lower supply-
side costs, and Cost savings for consumers on it from left to right.
Transcript
Because of IKEA's modular design, i.e. they made premade units that can be combined in
different ways to furnish a room, they could offer product variety. And because of the product
variety, they were able to focus on scale, which effectively meant they could guarantee long term
suppliers with scale. This meant they could lower the supply site costs and pass on the cost
savings for the consumers. So what did modular design do for the consumers? Modular designs
enhanced product variety. And product variety lead to heavy cross selling opportunities. Given
the fact that modular furnishings are flat packed for home assembly, they entailed easy
transportation so consumers could buy whatever piece they wanted; therefore, there was a lot of
traffic on the IKEA floors, high turnover of IKEA products, high sales per square foot which
actually lead to enhanced sales in the revenues for IKEA.
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Benefits of IKEA's products - Slide 28
The slide contains an arrow with the boxes Ease of assembly, Immediate gratification, Impulse
buying, Enhanced sales and volumes, and Supply-side scale on it from left to right.
Transcript
Given that IKEA pieces are flat packed for home assembly and entail easy transportation,
consumers could buy it immediately and take it home. This, coupled with an obsessive focus on
the part of IKEA for convenience on the part of the consumers, lead to trial and immediate
gratification, lead to high consumer engagement. So given the fact you could enhance sales and
volumes on one side and reduce the supply sight costs on the other side, entailed value
innovation. So IKEA was simultaneously able to increase value for its consumers and reduce
costs, thereby providing an affordable but winning product.
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Virtuous Cycles Strengthen the Business Model -
Slide 29
The slide contains an image of arrows named Supply-side and Demand-side facing each other. It
also has a pie-chart divided into three equal parts representing Customer Value, Design, and
Modular Furniture in clockwise direction.
Transcript
IKEA's investment in design lead to modular furniture which enhanced consumer value.
Enhanced consumer value created a virtuous cycle in terms of renewed investments in design,
which lead to better modular furniture. This is what a good business model does. Business
models generate virtuous cycles or feedback loop as we saw in the case of the design, modular
furniture, and customer value. These virtuous cycles become crucial elements in the successful
generation of long term competitive advantage. Hence, you should pay a lot of attention to how
you bring the various elements together in order to create virtual cycles or feedback looks that
are synergistic with each other.
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AWS Trademark Guidelines (2012). Amazon web services [Online Image]. Retrieved from
https://commons.wikimedia.org/wiki/File:AmazonWebservices_Logo.svg
Connormah (2011). CVS pharmacy alt logo [Online Image]. Retrieved from
https://commons.wikimedia.org/wiki/File:CVS_Pharmacy_Alt_Logo.svg
CVS Health (2014). Minute clinic logo 2014 [Online Image]. Retrieved from
https://commons.wikimedia.org/wiki/File:MinuteClinicLogo2014.png
Transcript
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Lesson 4-2 Elements of Business Models and
Business Model Canvas
Lesson 4-2.1 Elements of Business Models and

Business Model Canvas - Part 1
Transcript
In this lesson, we'll talk about the elements of the business model. And then talk about the
Business Model Canvas, arguably the most famous framework when it comes to constructing
business models.
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The slide contains the same information as Slide 2 Components of Business Model
Transcript
Let's talk about the various components of a business model. When we talk about a business
model, there are three categories that need to go into a business model. First is what we call as
creation of value. Customer value can be accomplished through a well defined and well
articulated customer value proposition. The second category pertains to value capture, which
basically means that you need to appropriate proper revenues as far as a company is concerned
after controlling for relevant costs. The third category is what we call as capabilities that are
reflected in the resources and processes within an organization.
So as far as the components are concerned, there are four components. You have the customer
value proposition, you have the revenues and costs, and then you have the resources and
processes.
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Customer Value Proposition (CVP) - Slide 33
The slide contains a box labeled CVP in the middle and connected to three other boxes labeled:
What value does the offering deliver?, How are we reaching the segment(s)?, and Who is the
target segment?
What is the BASIS of competition that the company is catering to?
Transcript
Let me reiterate what we have done so far. As far as a customer value proposition is concerned,
it answers three questions. What value or bundle of benefits does a product offer? Who is the
target segment? And how are we going to reach this particular target segment? Through what
channels and what relationships?
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Resources - Slide 34
The slide contains an image with Resources in the middle and Physical, Human Talent,
Intangible, and Financial surrounding it in clockwise direction.
Transcript
When it comes to resources, there are four categories of resources. You have the physical assets
that include tangible assets including land, buildings, machinery, equipment. Physical resources
can easily burden the marketplace by your competitors as well. So they confer little advantage to
the companies in the long run because rivals can actually acquire the same assets. Companies
have people and these people have tacit knowledge inside their heads and that is what we refer
to as the human talent resources. Intangible assets, which are intangible but still can be owned
by a company. Think of brand equity, brand capital, trademarks, intellectual property,
technological knowhow, reputation for fairness, reputation for litigiousness, relationships that you
have with your suppliers and collaborators. Unlike the physical resources, these intangible
resources are tacit. They usually cannot be bought from the market and can become the main
source of sustainable competitive advantage. Last but not the least are what we all as financial
resources, refer to cash, capital, and perhaps commodities
34
Processes - Slide 35
The slide contains an image representing the below mentioned support and primary activities
with Margin associated with both of the activities. Every primary activity will have all the support
activities mentioned.
Support Activities
Firm Infrastructure
Human Resources Management
technology Development
Procurement
Primary Activities
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service
Denis Fadeev (2014) / CC-BY-SA-3.0
Transcript
What are processes? Processes are sequences of procedures that actually utilize resources in
order to convert or transform inputs into outputs. Processes are ways to address recurrent tasks
in standardized and efficient ways. We identified the various processes using a value chain,
which basically is a set of activities that an organization carries out by utilizing resources in order
to transform inputs into outputs through processes. When you think about a value chain, value
chain has primary activities. When we talk about primary activities, they relate directly to the
creation of a product or a service.
35
There are multiple activities that you can do in terms of inbound logistics, operations, outbound
logistics, marketing and sales, and then service. Let's take operations for example in a
manufacturing organization. Value is actually added by sourcing raw materials and converting
these raw materials into a finished product by using various processes. In a similar manner, you
will see that each of these blocks has a variety of processes that actually enable an organization
to do recurring tasks in a standardized manner, in an efficient manner, so as to reduce costs. And
thereby you can identify the various processes for your organization that actually matter.
The slide contains an image with Customer Value Proposition What, Who, and How?, Processes,
Revenues and Costs, and Resources Physical, Talent, Financial, Intangible connected with each
other in clockwise direction. Customer Value Proposition What, Who, and How? and Revenues
and Costs are directly connected to each other.
Source: Johnson, Christensen, and Hagermann, 2018. Retrieving Business Model, Harvard
Business Review.
Transcript
36
Fadeev, D. (2014). Michael Porter's Value Chain [Online image]. Retrieved from
https://commons.wikimedia.org/wiki/File:Michael_Porter's_Value_Chain.svg
Transcript
Lesson 4-2.2 Elements of Business Models and

Business Model Canvas - Part 2
37
Transcript
The business model canvas is arguably a very famous framework when it comes to constructing
business models. It was conceptualized and created by Alex Osterwalder and he has an amazing
book called Business Model Generation that he coauthored with Yves Pigneur. Alex
conceptualizes the business model canvas as really a set of assumptions. There are nine blocks
in the canvas and you use the nine blocks, which correspond to the value creation capabilities
and value creation in order to test your assumptions and actually compare your business model
with the others.
Business Model Canvas - Slide 39
38
The slide contains four blocks labeled as follows:
Value Propositions
Relationships
Channels
Customer Segments
Transcript
The value creation part in a business model canvas is represented by four different blocks. The
four blocks are value propositions, customer segments, relationships, and channels. Let's
examine the value proposition in detail.
What is the Value Proposition? - Slide 40
What value does the offering deliver?
What are the bundle of benefits
What are the pain points?
What are the points of difference?
Transcript
An organization's value proposition is the combination of products and services it provides to its
customers. Alex Osterwalder states that these offerings need to be unique and easily
differentiated from the competition. So you need to figure out what are the bundle of benefits in
your value proposition.
39
Who are the Segments? - Slide 41
The slide contains an image with Segments in the middle and Mass, Multi-segment, Platform,
and Niche surrounding it in clockwise direction.
Transcript
Customers represent the heart of a business model. Segments can actually be defined as
different groups of consumers with different needs and different behaviors. As a result, different
segments require very different value propositions, different channels, different relationships.
There are various approaches to reaching the segments. Companies can reach an entire mass
market. An organization that follows a mass market philosophy opens itself up to the entire pool
of customers because it feels that its product fulfills a relevant need for the entire population.
Think of a gasoline company or a petrol company that comes up with a unique innovative blend.
If the company feels that the blend is applicable to all cars that are available in the marketplace,
then we call it a mass market product. It could be a niche market. A niche market is small and
highly focused. It is based on very highly specific needs and unique traits of the customers. Think
of Tesla and the electric car. Tesla is very focused on consumers who value environmental
sustainability. It is a small product at this point in time catered to a niche market. A company
could follow a segmented approach which effectively means you can divide the mass market up
into unique segments based on variations in customers' demographics and psychographics and
more importantly their needs. Think of an electric car company that can target the sedan market,
the SUV market, or the pickup truck market. When it develops different products catering to
different needs, that is what we call as a multi-segment approach. Last but not the least is what
we call as a platform market.
A platform market has at least two sets of customers. Think about Xbox or Sony PlayStation. You
have the gamers on one side and you have the app developers on the other side who are
developing games for the console. The more number of games you have on the Xbox, the better
off are your users going to be because they have product variety. The more number of games is
actually going to increase the number of users. And the more number of gamers, you are going
to have these game developers coming and develop products for the console. So this is a two-
sided market. By creating a pool with both these customer segments, a platform business will
40
have a very successful business model. How will we reach these segments through the various
channels?
Three Functions - Slide 42
Communications
Distribution
Sales
Transcript
Channels perform three different functions. Channels perform communication functions, channels
perform the distribution function and then the sale functions.
41
How Will we Reach Segments Through the Channels?
- Slide 43
The slide contains an image of a block labeled as Platform with Niche, Multi-segment, and Mass
as steps on it from bottom left to top right.
Transcript
As far as a company is concerned, a company can reach the consumers directly through online
or through a direct sales force. They can also reach consumers directly through a set of company
owned stores. Beyond the company owned stores, you can also use collaborators such as an
independent wholesaler or an independent retail network to reach these consumers. So a
company needs to figure out the appropriate touch points for the segments and that is usually
accomplished through the channels.
42
What Relationships are Entailed with Segments? -
Slide 44
The slide contains an image with Segments in the middle with Low touch engagement, Social
Communications, Co-creation, and High touch engagement surrounding it in clockwise direction.
Transcript
What sort of relationships are entailed with the various segments? A company must select the
kind of relationship it will have with its customer segment in order to have coherence and more
importantly for long term viability.
Customer relationships can be broadly classified into four different types. You have the low touch
engagement, which could be either self service or automated services, high touch engagement,
which entail high levels of interactions between the company and the customers. Then you have
the social communities, which is very easy to form in today's virtual world. Social communities
actually allow organizations to communicate directly, obtain feedback from the consumers that
actually helps in terms of improving the product and customer experiences. Most importantly, in a
community, there is peer learning. Customers learn from one another. They share their
experiences in common and this can actually enable companies to identify potential opportunities
and solutions. Last but not the least is what we call as co-creation where the customer has a
direct hand in the form a company's product or service will take.
Think of YouTube for instance. Customers actually provide videos, upload videos of their own.
And which can be watched by fellow customers but more importantly it adds to YouTube's
repertoire of videos.
The capabilities part of the business model canvas is reflected by three different blocks,
resources, partners and activities.
43
What Resources Should We Use - Slide 45
The slide contains four boxes named: Physical, Human, Financial, and Intangible.
Transcript
Resources as we have studied before could be physical resources, human talent resources,
financial resources, and intangible resources.
What are the Partnerships? - Slide 46
The slide contains four boxes named: Buyer/Seller, Alliance, Co-opetition, and Joint venture.
44
Transcript
Typically companies use one of the following mechanisms in order to derive at key partnerships.
They have a strictly buyer/seller relationships. They may have a strategic alliance with a non-
competitor. Or they may have a co-opetition alliance with a competitor. Or they might embark on
a joint venture relationship. But at the end of the day, the reason why we have key partners is to
fundamentally reduce risk and uncertainty and optimize the allocation of resources.
What are the Activities? - Slide 47
The things that a company should do!
Transcript
Activities are akin to our resources. The things that a company should do in order to provide
unique value. The value capture part of a business model canvas is actually reflected by
revenues and costs.
45
What are the Revenues and Costs? - Slide 48
The slide contains a downward arrow labeled as Revenues: How will we make money? and an
upward arrow labeled Costs: What does it cost to make our product?
Transcript
When it comes to revenues, it is fundamentally about how a company will make money. There
are multiple ways, pricing mechanisms, that you can use to make money. You could sell an asset.
You could have subscription fee. You could rent. You could lease your product. You could charge
for others to advertise their products using your medium and so on. When it comes to the cost
part, it fundamentally asks the question, what does it actually cost to make the product? And
there are a variety of cost structures out there. You have to worry about economies of scale and
economies of scope. But at the very broad level, this can be connected to the strategy part by
asking yourself, are you a cost leadership player, which means you drive down costs? Or are you
a value differentiation player, which means you are focused on providing maximum value to the
consumers?
46
Business Model Canvas - Slide 49
This slide contains the same information as Slide 39 Business Model Canvas. Five new boxes
have been added that are labeled as follows:
Partners
Costs
Resources
Activities
Revenues
Transcript
Now putting it all together, we can see the nine blocks. You can see the value capture part
determined by the revenues and costs. The value creation part determined by value propositions,
customer segments, relationships, and channels, and the capabilities part reflected by resources,
activities, and partners.
47
Lesson 4-3 Designing Innovative Business
Models
Lesson 4-3.1 Designing Innovative Business Models -

Part 1
Transcript
Now that we've talked about the various blocks in the business model canvas, let's illustrate its
real life applicability using an example. The example is from Metro Newspapers and this example
is found in this book Business Model Generation.
48
Illustration of the Business Model Canvas - Slide 51
An example from Metro newspapers:
The slide contains an image of the front page of the Metro newspaper with several news articles.
Mass Transit Media (2014) / CC-BY-SA-3.0
Transcript
Metro Newspapers was founded in Stockholm in 1995. Today it is published in over 18 countries
and hundred cities and it is the largest free newspaper as measured by circulation figures. Metro
is a free newspaper that is ad supported and targets urban commuters.
Business Model Canvas (1 of 3) - Slide 52
49
The slide contains five blocks labeled as follows:
Capabilities
Basic news to fill time FREE., Captive audience for ad messages
Transactive Relationships
Self-serve Salesforce
Urban commuters, Advertisers
Transcript
Now let's focus on the value creation part of the business model canvas. Metro is a free
newspaper that is targeted to urban commuters. But they also are ad supported. The ad support
enables them to give away the newspaper for free. So if you think about it, they have two different
segments that they cater to. They cater to the urban commuters and they also cater to
advertisers.
Now, let's focus on the value proposition for the urban commuters. What do they do? What does
Metro do? First, they help a large number of people fill time and alleviate boredom when they
commute to work and back. And second, they actually quench people's needs for basic
information about what is happening in the world around them. So who is the segment of these
urban commuters? They are the occasional readers who want information but are less committed
perhaps to devoting money to buying physical newspapers. And they are usually reached
through a self serve vending machine outside these transportation outlets, be it a train station or
a bus station. You have a vending machine and you open up the vending machine to get your
free newspaper.
So what is the value proposition for the advertisers? They have a captive audience in a train or a
bus for a fixed amount of time. This audience is usually receptive to ad messages. And in order
to reach them, Metro has a direct sales force and Metro fosters relationships with these
customers. In order to reach these advertisers that want a captive audience, Metro uses a
relationship based approach through its direct sales force. One very interesting thing about Metro
is that the primary advertisers for Metro actually differ from those of the paid newspapers.
Advertisers in Metro generally do not include large retailers. They tend to be small retail outlets,
trendy retailers, and usually entertainment stores. The best estimate of paid circulation losses
attributable to all these free dailies have been found to be less than 2% in most market, which
effectively indicates that the free newspapers and paid newspapers target very different
segments.
50
The slide contains the same information as Slide 52 Business Model Canvas (1 of 3). The
capabilities box has been replaced with four blocks labeled as follows:
Distribution agreements with public transport, Publishers' associations

Manage paper operations, Manage the salesforce
Brand People
Transcript
Now let's focus on the capabilities part or the resources, activities, and key partnerships as far as
the business model canvas is concerned for Metro newspapers. When it comes to resources for
Metro Newspaper, they have a very powerful brand. They have a brand that people identify with a
free newspaper and they have very intensely committed, loyal employees who are interested in
pushing this mission.
Now let's look at the activities for Metro Newspaper. Metro is a free newspaper, which effectively
means they need to gather news. They need to buy newsprint. Print the gathered news in a
newspaper. And then start distributing, marketing, and selling the newspaper through vending
machines. So these are all paper operations that they need to do very effectively in order to
create a paper every day. Beyond the paper operations, Metro also has to manage their sales
force. They need to manage the sales force that has in-depth relationships with the advertisers.
Because as long as the advertisers are happy and they keep advertising in the Metro Newspaper,
the financial viability of Metro Newspaper is going to be sustained.
When it comes to partners for Metro, Metro executes various distribution agreements with public
transportation outlets so that these public transport options allow Metro to use their spaces so
that Metro can continue distributing their papers. Beyond all this, Metro also needs to be part of
publishers associations and press clubs in order to obtain their credibility as a newspaper so that
they can continue in the newspaper business.
51
The slide contains the same information as Slide 53 Business Model Canvas (2 of 3). Two new
boxes have been added that are labeled as follows:
Newspaper operations - gathering news, printing, distribution, administrative, editorial, and

service
Free newspaper that is ad-supported
Transcript
Now let's focus on the value capture component for Metro newspapers. When it comes to the
costs, there are costs as far as newspaper operations are concerned. You need to gather news.
You need to print. You need to distribute. And you need to service your customers. These are all
what we call as administrative costs. Beyond that, you are going to have the editorial costs and
more importantly you're also going to have the operational cost of running and managing a sales
force.
When it comes to the revenue side of the equation, Metro is a free newspaper that is completely
ad sponsored. Being ad sponsored it is free to the reader; therefore, this business model does
not involve price of the newspaper as a part of Metro's tactics. But Metro has to be careful not to
have too many ads. There has to be a balance between news and advertisements. Too much
news and not enough advertising will threaten he financial viability. Too much advertising and not
enough news will make the readers walk away. And if readers walk away, your advertisers are
going to walk away. So Metro must decide on its advertising rates and the number of ads. And as
long as there's a balance, both readers and advertisers are going to be happy and Metro will be
viable financially in the long run.
52
Mass Transit Media. (2014). Journal metro [Online Image]. Retrieved from
https://commons.wikimedia.org/wiki/File:Journal_Metro.jpg
Transcript
Lesson 4-3.2 Designing Innovative Business Models -

Part 2
53
The slide contains the same information as Slide 3 Designing Innovative Business Models
Transcript
When it comes to designing innovative business models, there are four different steps, assess,
question, reframe, and design.
Assess. What is the Current State? - Slide 57
Outline the current business models in the industry. What are the assumptions on creating value?
Evaluate the context. What are the key trends that may impact the business in the future?
54
Transcript
In the assessment stage, you assess what is out there. What is the current state of business
models? What are the assumptions that people make? What are the industry trends? What is the
context? Which leads us to the second stage which is about questioning.
Question: What If? - Slide 58
Question the assumptions.
Question conventional wisdom.
Engage in thought experiments to break the mold.
Look outside for inspiration.
Transcript
Can you question the assumptions from stage 1? Can you question the conventional wisdom?
Can you engage in a thought experiment that enables you to break the mold? For example, think
about Amazon's MechanicalTurk. That asks the question, can we take this large job and break it
down into small chunks and have these small chunks actually done by a global workforce? Or
think about Bharti Airtel, which is a very large telecommunications provider in India that asked the
question, if our capabilities are in the area of customer relationship management, then can we
outsource our network operations to Ericsson and Nokia so that we do the things that we do
really, really, really well and outsource things that other people do really, really, really well? Which
was a radical departure from how telecommunications looked at the industry at that point in time.
55
Pay-as-you-go - Slide 59
The text Pay-as-you-go and Subscription model are on two extreme ends of a double-sided
arrow on top of the image.
The slide contains an image of kindle unlimited web page to start a 30-day free trial. ©Amazon
(2011)
Transcript
Let's say you compete in an industry that has a pay-as-you-go model in which a consumer pays
full fare. And once they pay the full price, they own the product. But what if you engage in a
thought experiment and ask the question, what if? What if we move from pay-as-you-go to a
subscription model? Which is exactly what Amazon did with its Kindle Unlimited program.
Typically people go to the online bookstore, buy a book, and once they buy the book, either the
physical copy or the digital version, the copy is theirs. But Amazon tweaked this model. They
include Kindle Unlimited wherein consumers pay a subscription fee and based on the
subscription fee they are able to download books, read magazines, listen to audiobooks on any
device that they want.
56
Hilti - Slide 60
The text Sell a product and Sell a service are on two extreme ends of a double-sided arrow
The slide contains an image of logo for Hilti (HiltiAG 2013).
Transcript
Let's say you compete in an industry that sells a product. What if you decide that you do not want
to just sell a product anymore? You engage in a thought experiment and decide to sell a service.
Which is exactly what Hilti did. Hilti's customers, who were contractors, had several pain points.
The tools were expensive. They required significant upfront investment. Tool inventories had to
be managed. Spare parts inventory had to be managed. They had to be serviced so that they
remained in proper working order so that the contractors did not lose money on their sites. Hilti,
which was a tool manufacturing company, picked up on these unaddressed pain points, alleviated
them, and in response it shifted from selling tools to selling a tool management service. Hilti,
instead of selling a product, now sells a service.
Same as the case with Starbucks. Instead of other coffee companies that sell cups of coffee,
Starbucks sells experiences.
57
PC Industries in 1980s - Slide 61
The slide contains two logos. One of apple associated with Integrated Value Chain and another of
IBM associated with Disintermeded Value Chain
Transcript
Let's say you compete in an industry that is marked by an integrated value chain as was the case
with the PC industry in the '80s. Apple was an integrated value chain where you made all the
components yourself. You assembled it and you went to the consumers. IBM disintermediated
this value chain, outsourced its components, and the result is history.
Disintermediated Value Chain Industry - Slide 62
58
The slide contains two images. One of Cirque de Soleil (Cirque de Soleil 2016) associated with
Integrated Value Chain and another of Ringling Bros (Created by Courier Company [Public
domain], via Wikimedia Commons) associated with Disintermediated Value Chain on two extreme
ends of a double-sided arrow.
Transcript
What if you competed in an industry that was marked by a disintermediated value chain? That is
what the circus industry was all about. In comes Cirque de Soleil which models itself after the
circus industry and decides to integrate the value chain. So Cirque creates content by itself,
produces the content, and then distributed the content by itself and therefore has integrated the
value chain.
Moving From Asset-heavy to Asset-light Industry -

Slide 63
The slide contains two logos. One of Hilton (Hilton World Wide) associated with Asset-heavy and
control resources and another of Airbnb (Airbnb 2016) associated with Asset-light and
orchestrate resources on two extreme ends of a double-sided arrow.
59
Transcript
Let's say you compete in an industry that is asset heavy and therefore the primary goal of every
firm is to control resources. And you engage in a thought experiment and you ask the question,
what if? What if I move from being asset heavy to becoming asset light? What if instead of
controlling resources I move to orchestrating resources? This is exactly what Airbnb did. Think
about all the hotel chains like Marriott and Hilton that own properties around the world and
therefore they control these resources. Airbnb is an online marketplace for rentals that connects
users with houses to rent and connects them to users looking to rent a space for short term
rentals. Same as the case of Uber. Instead of following the low cab model wherein the cab is
owned and you have to pay a median fee, Uber is an online platform which connects drivers with
cars to rent with users and passengers who are looking to move from one destination to another.
So they became asset light and they are fundamentally about orchestrating the two sides of the
platform.
Complete Product vs Fractional Product - Slide 64
The slide contains two images. One of a Boeing jet (Boeing 2017) associated with Sell a
Complete product and another of (NETJETS 2017) with tagline for business for family for life
associated with Sell a fractional product on two extreme ends of a double-sided arrow.
Transcript
But instead of selling complete product, you engage in a thought experiment and ask the
question, what if? What if I can sell a fractional product? This is exactly what NetJets did. NetJets
sells fractions of specific aircraft. Owners then have guaranteed access for a specified number of
hours per year. And if the aircraft is actually unavailable for some reason, another aircraft of the
same type will be provided. The same scenario thought experiment is what auto companies did.
In the highly competitive auto industry a few decades ago, manufacturers started offering leases
on new cars which helped them in the short term by pumping up unit sales and total revenues.
But in the long run, after the lease period was over, the same auto companies were able to resell
the car again to the resale market, thereby providing a new revenue source.
60
Razor-blade model - Slide 65
The slide contains two images. One of the printers and cartridges associated with the Razor-
blade model and another is a logo for Amazon kindle (Amazon.com 2011) associated with the
Reverse razor-blade model on two extreme ends of a double-sided arrow.
Transcript
Let's say you compete in an industry that is marked by a razor/razorblade model wherein you
have a durable product that can be used in combination with and are usually unusable without
complimentary consumables. So you sell the high margined razor below cost so that you sell
volumes of low margin consumables in order to make money. Printers and cartridges follow this
model. Shaving razors and shaving cartridges follow this model. But what if you are Amazon
Kindle and decide to move away from this razor/razorblade model? And you engage in a thought
experiment and you ask the question, what if I sell a reverse razorblade model in which the
durable product is actually sold at high margins and the consumables are sold at low margin?
The same model was actually used by iPods, which happens to be a high margin product
coupled with low margin songs on iTunes.
61
Reframe in Light of the Context - Slide 66
Reframe. Based on your analyses, what are the opportunities? Within the company, better
leverage of resources, and/or delighting its customers?
Transcript
Once you have done the assessment and questioning stages, you arrive at the reframe. At the
reframe, you ask yourself, what are the innovative opportunities out there? Usually when you
come to the reframe stage, a new mechanism for value creation and value capture suggests
itself. It may be a new way of sourcing raw materials, a new way of manufacture, a new way of
interacting with customers, a new way of servicing the product. But at the end of the day, if you
are a new company, a new business model makes sense. But if you are an existing company,
one issue that you need to grapple with is how do you transition from this existing business
model to this new business model. Once you have completed the reframe stage, then you move
on to the last stage or the design stage.
62
Design Stage - Slide 67
Design the new innovative model. Check. Pilot-test. Iterate. Learn. Scale.
Transcript
In the design stage, you'll start small. You'll test it out. You'll pilot test it with a small market.
Assess the product market fit. But more importantly you obtain the feedback from the market and
then you'll iterate back into your business model and keep on improving. And once the business
model is reasonably perfect you'll go ahead and scale.
Airbnb (2016). Airbnb logo [Online Image]. Retrieved from

https://commons.wikimedia.org/wiki/File:Airbnb_Logo.svg
63
Cirque du Soleil (2016). Untitled [Online Image]. Retrieved from
https://plus.google.com/photos/117560566693154728562/albums/progile/6356931671958848466
Hilti AG (2013). Hilti logo [Online Image]. Retrieved from

https://commons.wikimedia.org/wiki/File:Hilti_logo.svg
NetJets. (2017, January). NetJets Logo [Online image]. Retrieved January 10, 2017, from
https://www.netjets.com/Home/
Transcript
64
Module 4 Wrap Up
Module 4 Summary
Module 4 - Slide 69
Transcript
Well, I hope you came away from this module fascinated by the power of business models. To
recap, in that first lesson, we started with a big picture explanation of the concept, and then Raj
presented many examples that reveal how rich and powerful it actually is.
65
Business Model and 3 things - Slide 70
Create Value
Capture Value
Utilize Capabilities
Transcript
So then, what is a business model? Big picture, it's a system to create value, a way to capture
value and capabilities that enable those things. Now, are these the three things you marked down
at the start? Ask yourself, if what you marked down touched on all three ideas and if one was
missed work to bring it into your personal perspective.
66
Business Model Not a Strategy - Slide 71
Transcript
We saw a couple of the things, we saw what a business model is not. It's not a strategy, it's a
self-contained system, whereas strategy at least in a business unit level is how you compete
against rivals. So, where business models are concerned, the object of that game of strategy is to
create a new business model that's better in some fundamental way than what's out there now.
Now, this idea that business model is a complex system is critically important because it suggests
there's a number of points of leverage you can use in changing and innovating. For instance, we
saw the iPod with a new combination of products, Dell with a new way to sell the product, and
IKEA was changed all three pieces.
67
Business Model Canvas: Value Creation - Slide 72
The slide contains a block named Value Creation.
Transcript
So, we're creating value as concern, we saw this was fundamentally about the customer value
proposition. Now, we're very familiar with that and hopefully you got a sense, I've seen that
before, but now you see it in this broader context.
Business Model Canvas: Value Capture - Slide 73
The slide contains the same information as Slide 49 Business Model Canvas. Here the Costs and
Revenues block is replaced by Value Capture
68
Transcript
Capturing value, well this was just how you create revenues and there's lots of room for creativity
there and that's the key and the cost side.
What are the Revenues and Costs? - Slide 74
The slide contains the same information as Slide 48 What are the Revenue and Costs?
Transcript
Now, often revenues and costs, so the only thing people focus on when they say business model,
now you know they are just part of the story.
69
Business Model Canvas: Capabilities - Slide 75
The slide contains the same information as Slide 52 Business Model Canvas (1 of 3)
Transcript
Capabilities was in the resources, activities, processes, and partners where the focus is on
bringing things in that others can't copy, human knowledge, patterns of interactions. These are
the arrangements that make you better at creating and capturing value than your rivals could be.
So, having a solid framework to analyze business models with, in lesson three the focus was on
coming up with innovative business models.
This slide shows the same information as Slide 3 Designing Innovative Business Models
70
Transcript
Now, the meat of this lesson was in the second part with that structured approach to creativity in
developing new business models. That was the assessment, question, reframe, design
sequence.
Now, I think the key leverage point here is that one about questioning the assumptions. Whatever
is now think about what if it was the reverse, what if it was the opposite, and so on. Now, this is
where your creativity can shine and it's thinking outside the box, but not just thinking outside the
box, it's structured creativity because you've assessed all the pieces of the existing models and
the assumptions underlying them. So, ones questioning leads you to an insight, then you would
go ahead and reframe where you build a new business model in its entirety, in essence a new
mechanism for value creation, value capture capabilities, all built around that insight.
Finally, design is a key to implementation. You start experimenting and testing at a modest scale
initially, and when and if you have a solid way of fulfilling the model, then you scale up. So, that's
the core. I have to emphasize, it's a deceptively simple approach. What I like though is that it
combines a discipline systems view with a wide open opportunity to ask questions and put the
pieces together in different ways.
Recombinant Innovation - Slide 77
Transcript
We've talked about something like this, recombinant innovation. The idea you recombine existing
ideas and technologies to create breakthroughs. Now, one lesson from there is that it's very hard
to pull the pieces apart and put them back together again in new ways that spur those
breakthroughs. I think the same insight is applicable here, and that's why there's great value in
having a process for doing exactly that, which is what this lesson and indeed this module was all
about.
71
Application Corner
The Case of Newspaper Industry

Transcript
Now let's look at business models in the print newspaper industry. That will help us understand
the applicability of the theoretical concepts we studied, and see the practical developments. This
example is drawn from the book by Bharat Anand. It's called "The Content Trap." When you think
about the revenues for a print newspaper, it usually follows an 80/20 split. Eighty percent of the
revenues for a newspaper comes from advertising, and 20% actually comes from the sales of
individual copies, either through subscription sales or through sales in the newsstand. Now, this
revenue mix has changed over time. The latest count is that advertising contributes to about $24
billion, and sales from individual copies is about $11 billion. So this ratio has skewed from 80/20
to much, much, much smaller, something like 65/35. As far as advertising is concerned, there are
three major classes of advertisers — the national advertisers, who advertise in a local newspaper
for branding purposes. You have the local retail outlets, advertising in the local papers, and last
but not the least are what we call as classifieds. Classifieds pertain to job ads, home ads, or car
ads. And the mix in the real world is about 40% for retail advertising, 32% for classifieds, and
about 8% or so for the national advertising.
From a cost side of the equation, newspaper is a very high fixed-cost business. It doesn't matter
whether you're printing 100 newspapers or one million newspapers. The fixed costs of starting up
a business are fairly high, but what is interesting in the newspaper industry is that 50% of these
72
costs pertain to production and distribution costs. And this is where internet can help, in terms of
a physical newspaper.
Printing Advertising as % of Total Advertising - Slide

79
Print is still a common way of reading newspapers.
But newspaper advertising as a % of total advertising dollars is about 10%.
The slide contains a line graph of Print Advertising as % of Total Advertising. There are number
of years on x-axis from 1960 to 2020 with the interval of five years and percent increase on y-axis
with an increment of 5%. The line graph shows a linear decreasing trend starting from 35% in
1960 to around 10% in 2020.
Transcript
Print newspapers are still a common way of reading newspapers. When you look at the national
readership data from Nielsen Scarborough's newspaper penetration report, it indicates that 51%
of those who consume a newspaper read it exclusively in the print form, because they value the
in-depth analysis, while less than 10% read it on desktop, and less than 10% read it on mobile
only. But the interesting part is that newspaper advertising, as a percentage of total advertising
dollars, is about 10% now. It has dropped from a high of 35% in 1960, and when you look at
newspaper advertising revenues as a percentage of total advertising dollars, it has fallen from
35% in the early 1960s to about 10% today. When you look at the online ad revenues for
newspapers, for newspapers that have a digital website, it is about 25% of the total newspaper
advertising.
73
Per Capita Circulation of Print Newspapers - Slide 80
The slide contains a line graph of Per Capita Circulation with Circulation as % of Population on y-
axis ranging from 0 to 0.35 with an interval of 0.05 and Year on x-axis ranging from 1960 to 2010
with an interval of ten years. The line graph shows a gradual linear decreasing trend starting from
around 0.33 in 1960 to 0.15 in 2010.
Transcript
Based on how variance presentation we have calculated the per capita circulation of print
newspapers over time. On the x-axis instead of having the actual years I plotted it as X1 through
X6 and I want you to think about this, and guess what year X1 corresponds to. Are you surprised
that x1 actually corresponds to 1960? And we have actually looked at the per capita circulation of
print news papers that's been on decline for the last 60 years or so.
74
Why did Falling per Capita Numbers not Raise an
Alarm? - Slide 81
75
% of population based on # of newspapers
Population Circulation as a % of population # of newspapers
100,000 10% 10,000
120,000 9% 10,800
76
Price of a newspaper copy
# of newspapers Price of a copy Topline revenues
10,000 $1.00 10,000
9,000 $1.20 10,800
77
Transcript
So what happened? Why did these falling per capita numbers not raise an alarm? Well, typically,
this happens in the real world, and what happens is, increases in population masks these
problems. Let me give you an example. Look at the first panel on the graphic. When you have a
population of 100,000 people, and circulation as a percentage of population is 10%, you sell
about 10,000 newspapers. But on the other hand, when the population increases from 100,000 to
120,000, but the circulation as a percentage of the population drops from 10% to 9%, look at the
number of newspapers, absolute number that you sell. It is 10,800. It represents as a growth of
800 copies over that of the previous year. This is why, when you have adequate population
growth, these numbers don't raise an eyebrow, because people don't notice it.
Another way why these falling per capita numbers don't raise alarm is exemplified using the
second panel. You sell 10,000 newspapers a year. The price of a copy is one dollar, so your top-
line revenues are $10,000. And the next year, the number of newspapers actually falls from
10,000 to 9000, but you enhance the price. You raise the price of a copy by 20% to $1.20. Now,
your top-line revenues are $10,800. Now you can see a growth in your top-line revenues. This is
one reason why I advise managers to have multiple metrics. It is one thing to have aggregate
numbers, and aggregate top-line revenues, but another to have per-capita numbers that can
actually highlight the problems that you may see in the future.
78
Transcript
Newspapers thought that they were in the news business, but as we have studied before, they
were actually in the information delivery business. The advertising cross-subsidized the news
portion, and made the newspapers affordable. But more importantly, at a broader level,
newspapers were also a bundle of two different business models. One was a scale-based
business model, and another one was a non-scale or personalized business model. So what
does that mean? This concept is actually beautifully explained in this book, "The Content Trap,"
by Bharat Anand. Now, let's take a newspaper for example, and I come and read a newspaper.
And I read this newspaper for, let's say, finance, the finance news in "The Wall Street Journal."
Well, I really don't care what other people think about it. It's highly personalized. I come here.
Scale doesn't matter to me, because the finance news provided by this magazine — by this
newspaper is absolutely the best for me. But on the other hand, when I look for advertising in a
newspaper, I go to a place where there are lots of newspaper ads. In other words, scale matters.
People go and see advertising in a place where there are a lot of ads. People go and read news
in a place that is best for them.
The internet actually became the trigger that unbundled these two business models. While the
news business remained, the internet was able to offer a better business model for the
advertisers. Think about it. Classifieds went to Craig's List. Job ads went to monster.com. Car
ads went to cars.com. Realtor ads went to realtor.com. And when you are a smaller newspaper
with a confined geographic area, the internet-based businesses, such as monster.com, was far
better for the patrons of the local newspaper when they wanted to see the ads, and herein lay the
dilemma.
By virtue of the internet unbundling these business models, innovative opportunities arose for
certain companies.
Reader Engagement - Slide 83
Ad revenues depend on reader engagement. So how should newspapers improve engagement?
79
Transcript
Which leads us to the question — how is this all going to unfold in the future? Nobody knows, but
at the end of the day, for a newspaper to survive and thrive in the long run, they need to increase
reader engagement. Now, during the day, when I have to quickly glance at the news, I look at my
phone. I watch the — I get updated on the latest sports scores on my phone. But when I went
detailed, in-depth analysis on a particular topic, I go to a newspaper, and I usually read it at
home. So how can a newspaper manage the dynamic activity of updating during the day, where
people are paying cursory attention during the day, compared to in-depth analysis later? How can
a newspaper put these together to create value? More importantly, how are they going to capture
value with — can they offer value to the advertisers? These are all the large-scale questions that
newspapers have to address in order to survive in the long run. We will see, but ultimately,
figuring out what the right business model, and how they are going to create and capture value
will dictate the future evolution of newspapers.
80
Wrapping Up the Course
Course Summary with Professor Geoff Love

Strategic Innovation - Slide 84
Finding novel ways to compete
Transcript
Well then, here we are for a last time. I hope you found the ideas in this course as fascinating as I
have. I also hope that you take the time now to think about what you're taking away from this
course as it concludes. So, to help you, I'll take us through a quick summary and to set the stage,
remember, strategic innovation is about novel ways to compete or to put it in the vernacular to
change the rules of the game. That's what we've been talking about and hopefully providing you
with an arsenal of knowledge to use in that effort. So where to start? Well, you should know now.
Start with the customer, put customers at the center even if you start without any customers, in
fact, because you may start without any customers. Work on the value proposition, and of course
you should always do that in business. But it's doubly important where innovation is concerned
because customers react to new things differently than they do to what is familiar. Remember
prospect theory. Remember that losses loom larger than gains. So you win by being the one that
addresses the pain points best. We elaborated on this idea with the customer journey map later
on in the course.
81
Products & Services - Slide 85
Transcript
So then, what about products and services though? So that's second, right? Well, perhaps the
big takeaway here is that strategic innovation, it's not always about a relatively linear advanced
down of technology road-map as important as that might be. Here, we brought in the idea that
you can also change the game by thinking about products and new ways, perhaps inspired by
that product configuration map with its maintain, subtract, add, divide framework.
Marketing Myopia - Slide 86
82
Transcript
Another big takeaway here is about marketing myopia and avoiding it, recognizing that innovation
can't happen without technology and products. But be clear that the business is about satisfying
customer needs.
Dynamism & Fast-Pace - Slide 87
Transcript
We also saw the idea of dynamism and fast pace in strategic innovation. We saw this in the
second module about life cycles. That was all about what happens in the life course of an
innovation and how to navigate the different stages. Remember that triangle that we need to
consider the life cycle for the customer, and for products, and for firms? For customers then, the
key thing to remember is this idea of crossing the chasm. What got you here won't get you there.
You get ready by perfecting the product and finding a beachhead segment.
On the product side, the product life cycle highlighted that it's all about experimentation at the
start and then collaboration and building an ecosystem and settling on a dominant design but
later on, avoid the pitfalls of feature creep and overshooting while looking for ways to change the
basis of the competition in mature industries. For firms, the critical question was when do you
enter? We saw that firm takeoff happens before sales takeoff does. The implication was if you
wait until things are clear, you'll be late.
83
The slide contains the same information as Slide 2 Components of a Business Model
Transcript
Finally, we talked about business models. The first takeaway here is simply that the business
model is about more than the revenue, more than the revenue and costs. We saw this with the
business model canvas. That brings in the customer value proposition, it brings in capabilities
and it challenges us to figure out how all of these will be integrated.
Summary - Slide 89
Design the new innovative model. Check. Pilot-test, Iterate. Learn. Scale
84
Transcript
We went through a process to think about re-imagining business models and in doing so bringing
together everything we've talked about in the course. So there you have it. We often hear talk
about changing the rules of the game. Our hope for this course is that you take away tools and
frameworks that will help you make that a reality in your career in your industry. I also want to
invite you to continue on. You may be thinking that these are powerful strategic ideas, but if I
have the strategy right, how do I actually manage an innovation initiative at my firm? That is just
as interesting and just as powerful. That is the subject of the companion course on a strategic
innovation, managing innovation initiatives. I hope to see you there.
85

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Professor Geoff Love - Slide 1

Designing Innovative Business Models - Slide 3

Module 4 Questions (Question 1 and 2) - Slide 4

1. What is a business model to you?

Lesson 4-1.1 How Do Innovative Business Model Help

Professor Raj Echambadi - Slide 5

Traveler’s Checks from American Express - Slide 6

Diners Club Credit Card - Slide 7

Songs Downloaded on iTunes! - Slide 9

Source: Wikipedia, "iTunes Store," Wikipedia iTunes Store.

Fundamental Principle - Slide 10

Business Plan Components - Slide 12

Company-side Customer-side - Slide 13

Dell Gateway - Slide 14

Improve/tweak existing model to offer better value/revenue sources

Chabe01 (2013). iTunes store icon [Online Image]. Retrieved from

No instruction provided during this slide.

Lesson 4-1.2 How Do Innovative Business Model Help

Improve Business Model - Slide 17

Improve/tweak existing model to offer better value/revenue sources

CVS pharmacy - Slide 18

There is a logo of amazon web services (AWS Trademark Guidelines 2012).

The object of strategy is a business model

Object of Strategy - Slide 22

Southwest Airline - Slide 23

IKEA-side Consumer-side - Slide 25

IKEA Consumer-side - Slide 26

Features of IKEA's products - Slide 27

No instruction provided during this slide.

Lesson 4-2.1 Elements of Business Models and

Professor Raj Echambadi - Slide 31

What is the BASIS of competition that the company is catering to?

Denis Fadeev (2014) / CC-BY-SA-3.0

Components of a Business Model - Slide 36

No instruction provided during this slide.

No instruction provided during this slide.

Lesson 4-2.2 Elements of Business Models and

Business Model Canvas - Slide 39

What is the Value Proposition? - Slide 40

What value does the offering deliver?

What are the bundle of benefits

What are the pain points?

What are the points of difference?

Three Functions - Slide 42

What are the Partnerships? - Slide 46

What are the Activities? - Slide 47

The things that a company should do!

Lesson 4-3.1 Designing Innovative Business Models -

Professor Raj Echambadi - Slide 50

An example from Metro newspapers:

Business Model Canvas (1 of 3) - Slide 52

Distribution agreements with public transport, Publishers' associations

Newspaper operations - gathering news, printing, distribution, administrative, editorial, and

No instruction provided during this slide.

Lesson 4-3.2 Designing Innovative Business Models -

Assess. What is the Current State? - Slide 57

Question: What If? - Slide 58

Question the assumptions.

Question conventional wisdom.

Engage in thought experiments to break the mold.