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Business Models

What is a business model?


Business Models tell a good story about: 1. Who are the customers? What do they value? 2. How do we make money? How do we deliver the value at a reasonable cost?

Business Models require articulation of:


1. How will you make the product/service?

2. How will you deliver the product/service?


Product development may focus on either of these and at times on both.

When do new business models fail?


New or proposed business models fail when they cannot pass either of these two tests: 1. The Narrative Test the story about who are the customers, what they value and why they will buy your product makes no sense. 2. The Numbers Test the projected profits do not add up to make money. We are unable to deliver value to customers at reasonable cost.

When do existing business models fail?


Business models often make specific assumptions about customer behavior. If the assumptions become faulty then the projected returns may not materialize. Business models have limits within which they work. If the business model is robust to variations in customer behavior and limits can be stretched then the business may survive with corrective actions. If the business model is sensitive to variations in customer behavior or limits cannot be stretched then even corrective actions may not save the business.

Business Model: Customer Questions


Who are the customers? Who are not? What do these customers value in your business? What will you offer ? What will you not offer? How much will these customers pay? How much will these customers be willing to pay? How will your customers behave? What will make them opt or drop the product/service? Who else will pay you? How much? Why? What will make them opt or drop out?

Business Model: Cost Questions


What will you offer ? What will you not offer? What activities will you perform? Not perform? Is high upfront investment required? Is there float or high working capital? How much will it cost to deliver the value promised? Does cost depend on scale? Will cost to deliver the value vary for different customers and grow over time? Who else will bear the costs? How much?

Business Model: Resource Questions


What resources are required for this business? Which existing resources can be leveraged? What new resources have to be acquired/built? How easy is it for competitors to match them? How long will it be before they get obsolete? How long will resources give advantage given customer choice and technology changes? How flexible are we to these required changes?

Business Model V1: Kozmo.com 1998


One hour delivery of online order small items. No way to smoothen peak demand over day. Must keep delivery people idle for peak load. High cost/time per delivery to be recovered. Order size will typically be small low profits. Buyer unwilling to pay too high for delivery. So profitable only in densely population areas. Failed to limit business to Manhattan like areas. New cities will be worse than the initial cities.

Choosing and specifying products

Source: Mauch, S., Enders, A., Jelassi, T., and Waldman, C., 2002. From A(pples) to Z(oom lenses): Extending the boundaries of multichannel retailing at Tesco.com, INSEAD Case study 307-348-1

Choosing a delivery slot

Source: Mauch, S., Enders, A., Jelassi, T., and Waldman, C., 2002. From A(pples) to Z(oom lenses): Extending the boundaries of multichannel retailing at Tesco.com, INSEAD Case study 307-348-1

Picking trolley interface

Source: Mauch, S., Enders, A., Jelassi, T., and Waldman, C., 2002. From A(pples) to Z(oom lenses): Extending the boundaries of multichannel retailing at Tesco.com, INSEAD Case study 307-348-1

Business Model V2: Tesco.com UK 2001


3 weeks forward delivery slots for online orders. Tesco everyday low prices advantage remains. Differential pricing of the peak demand slots. Booking required - limited deliveries in a slot. Overlaps in slots to combine low demand slots. Order value is typically large with more items. Peak load slots are usually when store is closed. Avoiding driving, parking and UK weather. Door delivery attracts up market customers!

Business Model V3: MaxDelivery 2005


One hour delivery of online order small items. Mothers with infants willing to pay for delivery. Higher margins on mother/infant products. Few delivery people to just match low demand. Added items - only premium items over time. Order value is typically larger premium items. Not competing with the neighborhood store. Profitable only in densely population areas. Max limited this business to Manhattan only.

Business Model V4: Kerala 2009


Sailing mall that serves 53 backwater locations. Reaching villages that cannot support big stores. Fair prices reduce rural monopoly/profiteering. Walk-in (20 max) + hired door delivery options. Phone calls to advance book/order major items. Scheduled arrivals to all rural locations on route. Larger market reach with no land/building cost. Boat costs low and fuel costs covered by sales. Solar panels for internal lighting and computers.

Business Model V5: Tesco Korea 2011


Evening delivery of smart phone ordered items. Visuals of actual goods unplanned purchases! Use idle time at station to pick product codes. Use idle time during travel to make purchases. Order value is typically large with more items. Can update prices data on app for repeat orders. Tesco everyday low prices advantage remains. Part time delivery people for evening delivery. Door delivery to avoid all hassles of shopping.

Business Model V6: Bangalore 2012


Door delivery of phone/online ordered grocery. Local store to local vicinity customers only. Purchase of greens/veggies after getting orders. SMS on options if ordered item is not available. No visible mark-up, minimum Rs.500 per order. Call to check convenience to receive delivery. Organic, fresh, good quality, packaging is key. Greener operations taking back all packaging. Low labor cost, low travel time, low travel cost.

Business Models & Competitive Strategy


A business model describes a formula of unique value creation. It consists of a unique customer value proposition and profit-making scheme, as well as key resources and processes coupled together as a system to operationalise value creation. It often connects strategy, customers, resources, and processes to form a distinct value creation, delivery, and capture system.

Business Models & Competitive Strategy


To be sustainable, the business models must be backed by unique competitive positions that are difficult to replicate. A well articulated business models can facilitate team based implementation. Business models may have to be modified to suit any major change in customer behavior, competitive positions, industry forces, resources, capabilities.

Effective Business Plan


Has a clear and fact based executive summary. Presents and justifies the new business model. Shows how you will reach buyers and convert. Identifies those who will implement the plan. Covers all the risks and how they are covered. Shows how it fits the firms business goals. Shows few and only the most critical numbers. Shows homework - answers obvious questions. Builds credibility of the product and the team.

(Source: Robert Grant; CMR 1991 )

Too Much of a Good Thing is Bad !


Too much money may be worse than less money! Too assertive a leader is as bad as a non-assertive one! Too conscientious a worker performs poorly on job! Too much job enrichment leads to de-motivation! Too much experience reduces workers effectiveness! Too much venture planning reduces venture success! Too much and fast growth most often leads to failure! Too much diversification lowers firm performance! Too much slack for innovation reduces innovation! All these have an inverted U shaped curve relationship.

Too Much of a Good Thing is Bad !


Too much organizational identification, organizational citizenship behavior, morale, trust, autonomy among employees reduces organizational performance. Too much of self-efficacy, creativity and passion among entrepreneurs reduced their enterprise success. Too much of vertical integration, outsourcing, R&D, product differentiation reduces financial returns. Too large a board (>7) reduces financial performance. Aristotle: actions and passions are problematic when taken too far. Does not apply to things good in themselves like wisdom and general mental ability.

The Fundamental Question in Strategy

Why are some firms more successful than others? Industrial Organization Perspective: Profits = f (industry structure)
Choose good industries, adapt your strategy to fit

Resource-Based View: Profits = f (internal firm resources &capabilities)