BUSINESS MODELS (B.M.

)
 BUSINESS MODELS (BM) - Definition
= an abstract representation of an organization (conceptual, textual, and/or
graphical) of all core interrelated architectural, co-operational, and financial
arrangements designed and developed for the present and for the future, as
well as its offer (products and/or services) based on these arrangements, that
are needed to achieve its strategic goals.

= how an organization create, delivers and capture value from costumers!

= is the business’ blueprint!
= “How do you plan to make money?”

Defining a BM – using the following components:

 Product/ service;
 The interface with the customer;
 Management of competences, activities & partenerships;
 Financial arrangements.
 A generic simple business model:
the PCDO model
It stresses the interdependency of the people,
context, deal, and opportunity, which the
entrepreneur must recognize and manage P=People; individuals or groups who perform
accordingly in different situations. services or provide resources for the venture; features:
abilities, attitudes, knowledge, targets, values.
O C=Context, characterized by conditions related to
macroeconomic, legal, institutional, social, political,
cultural, religious, environmental, etc .;

D=Deal, (Who, What is wining? consisting of:

C economic benefits, social recognition, autonomy and
decision rights, satisfaction of personal needs,
profound realization of altruistic purposes;
P D

PCDO = people, context, deal, opportunity

Adapted after Sahlman, W.A.
O=Opportunity: any activity involving the
investment of scarce resources, in the hope of future
gain. It involves a picture of the future and a credible
roadmap to it.
 Basic Business Model Classification (Osterwalder, Pigneur, Tucci, 2005)
By considering 2 dimensions: a.) ownership & b.) assets!

a. ) Ownership/ what type of rights are being sold (to own; to use; to match):
Creator - buys raw materials or components from suppliers and then transforms or assembles them to
create a product then sold to buyers; creators design (more than 50% of the value) the products
they sell; this is the predominant business model in manufacturing;

Distributor - buys a product and resells essentially the same product to someone else; usually provides
additional value by, for example, transporting or repackaging the product, or by providing customer
service; this business model is common in wholesale and retail trade.

Landlord - sells the right to use, but not to own, an asset for a specified period of time; it includes all
types of assets (physical, but also lenders who provide temporary use of financial assets (like
money), and contractors and consultants who provide services produced by temporary use of
human assets);

Broker/intermediate - facilitates sales by matching potential buyers and sellers; does not take ownership
of the product being sold (like a typical distributor). Instead, the Broker receives a fee (or
commission) from the buyer, the seller, or both; this business model is common in real estate
brokerage, stock brokerage, and insurance brokerage.
 Basic Business Model Classification (Osterwalder, Pigneur, Tucci, 2005)
By considering 2 dimensions: a.) ownership & b.) assets!

b.) Assets/ what type of assets are involved and their amount of
transformation:
Physical assets to include durable items (such as houses, computers, and
machine tools) as well as nondurable items (such as food, clothing, and
paper);

Financial assets include cash and other assets like stocks, bonds, and
insurance policies that give their owners rights to potential future cash
flows;

Intangible assets include legally protected intellectual property (such as

patents, copyrights, trademarks, and trade secrets), as well as other
intangible assets like knowledge, goodwill, and brand image;

Human assets include people’s time and effort; of course, people are not
“assets” in an accounting sense and cannot be bought and sold, but their
time and knowledge can be “rented out” for a fee.
Sixteen Basic Business Models (BM):

Type of Human
Financial Physical Intangibil
rights/assets Resources

Entrepreneur Manufacturer Inventor Human

Creator
(1) (2) (3)/ rare BM Creator (4)
Intellectual
Financial Whole seller/ Human
Property
Distributor Trader retailer Distributor
Trader
(5) (6) (8)
(7)

An Intellectual
Financial Physical
Property Contractor
Landlord Landlord Landlord
Landlord (12)
(9/a/b) (10)
(11/a/b/c)

Intellectual Human
Financial Physical
Broker/inter- Property Resources
Broker Broker
mediate Broker Broker
(13) (14)
(15) (16)
Sixteen Basic Business Models (BM/ I):

(1) An Entrepreneur BM creates and sells financial assets, often creating and
selling firms (serial entrepreneurs, “incubator” firms, other active investors in
very early stage firms); this does not include entrepreneurs who never sell
the firms they create;

(2) A Manufacturer BM creates and sells physical assets; a manufacturer is

the predominant type of Creator;

(3) An Inventor BM creates and then sells intangible assets (patents and
copyrights); firms using this business model exclusively are relatively rare,
but some technology firms generate part of their revenues this way;
firms that license the use of their intangible assets while still retaining
ownership are not classified as Inventors; they are Intellectual Landlords;

(4) A Human Creator BM creates and sells human assets; it is illegal and
morally repugnant; this BM is included here for logical completeness;
 Sixteen Basic Business Models (BM/ II):
(5) A Financial Trader BM buys and sells financial assets without significantly transforming (or
designing) them (investment firms, and other financial institutions that invest for their own
account);

(6) A Wholesaler/Retailer BM buys and sells physical assets; this is the most common BM;

(7) An Intellectual Property (IP) Trader BM buys and sells intangible assets; it includes firms
that buy and sell intellectual property (copyrights, patents, domain names, etc.);

(8) A Human Distributor BM buys and sells human assets; it is illegal and rare in most places
and is included for logical completeness;

(9) A Financial Landlord BM - lets others use cash (or other financial assets) under certain
(often time-limited) conditions; there are 2 major subtypes of this BM:

- (9a) Lenders BM provide cash that their customers can use for a limited time in return for
a fee (usually called “interest”), like banks;

- (9b) Insurers BM provide their customers financial reserves that the customers can use
only if they experience losses; the fee for this service is usually called a “premium”;
 Sixteen Basic Business Models (BM/ III):
(10) A Physical Landlord BM sells the right to use a physical asset (like: a location or
equipment); the payments by customers may be called “rent”, “lease”, “admission”, or other
similar terms (real estate rental and leasing, accommodation, airlines and recreation);

(11) An Intellectual Property Landlord BM - licenses or otherwise gets paid for limited use of
intangible assets. There are 3 major subtypes of Intellectual Landlord:

- (11a) Publisher BM provides limited use of information assets (software, newspapers, or

databases) in return for a purchase price or other fee (often called a subscription, or license
fee); when a Publisher sells a copy of an information asset, the customer receives certain
limited rights to use the information, but the publisher usually retains the right to make
additional copies and resell the information (Microsoft); many publishers also receive
revenues from advertising that is bundled with the information assets, but this revenue is
classified as part of the Attractor business model (see below);

- (11b) Brand Manager BM gets paid for the use of a trademark, know-how, or other
elements of a brand; this includes franchise fees for businesses (restaurant or hotel chains);

- (11c) Attractor BM - attracts people’s attention using, for example, television programs or
web content and then “sells” that attention (an intangible asset) to advertisers; the Attractor
may devote significant effort to creating or distributing the assets that attract attention, but the
source of revenue is from the advertisers who pay to deliver a message to the audience that
is attracted; this BM is common in radio and television broadcasting, some forms of
publishing, and some Internet-based businesses (Google).
Sixteen Basic Business Models (BM/ IV):
(12) A Contractor sells a service provided primarily by people (consulting,
construction, education, personal care, package delivery, live
entertainment or healthcare); the payment is a fee for service, often (but
not always) based on the amount of time the service requires; in most
cases, Contractors also require physical assets (such as tools and
workspace), and Physical Landlords also provide human services
(cleaning hotel rooms) associated with their physical assets;

(13) A Financial broker matches buyers and sellers of financial assets;

this includes insurance Brokers and stock Brokerage functions in many
large financial companies;

(14) A Physical broker matches buyers and sellers of physical assets

(eBay);

(15) An Intellectual property (IP) broker matches buyers and sellers of

intangible assets;

(16) A Human Resources (HR) broker matches buyers and sellers of

human services.
Social entrepreneurship(AS)

= process to identify and implement innovative

solutions to solve social problems; it is
considered an altruistic form of
entrepreneurship.

Social entrepreneurs have as their mission, the

idea of creating and supporting social value.

 It can be found both in for-profit or non-profit

entities and also in hybrid format; it usually
addresses social, cultural, environmental, etc.
issues.
 Differences between commercial (CE) and social
entrepreneurship (SE)/ PCDO Model
 For SE, the Opportunity is not governed by market mechanisms, but by their
failures;

 In the business (or Deal), the main concern of a social entrepreneur is vague
and difficult to measure (like moral values, collective and general human
values); demand for social services is unlimited, but the resources that can be
mobilized are limited; the objectives are not related to "market share" but to
resource mobilization; investors and/or supporters do not pursue profit, but a
certain moral satisfaction; therefore, the social entrepreneur must have high
communication skills;

 Regarding resource mobilization, the social entrepreneur relies on social

networking to recruit volunteers and financial resources acquires the
fundraising process ("fund raising"), not through capital investment or loans like
the commercial entrepreneur does.

 Context is for the social entrepreneur a source of opportunities rather than a

plurality of constraints; it takes longer depending on the creativity you put into
service to identify needs and solutions to meet them.
 Emerging Business Models:
1. Free Business Model;

2. Multi-Sided Platforms;

3. Open Business Models;

4. The Long Tail;

5. Unbundling Business Models.

1. “Free” Business Model

 At least one segment of  FREE by itself is not a BM!

consumers can receive free But FREE coupled with a
services continuously;
compelling upgrade path to
paid services, IS!!!
 The non-paying customers are
financed from another
component of the business
model (mostly advertising), or
a second segment of paying
customers; in order to be
viable, this BM requires a high
nr of users; it is imperative to
have a stable source of
income to support the free
offer; (Google, Skype, Flickr
etc.)
 “Freemium” BM:

 It is suitable for online businesses, that

are combining services offered for free
with paid "premium" services;
practically, the customer receives free
basic package, but pays if he wants
access to the entire package;

 It needs a large base of users in the

hope that some (usually less than 3%)
will pay for additional services;
basically paying customers subsidizes
the non-paying ones;

Key values are:

 The average cost of service / user for
free;
 The conversion rate into paying
customers.
 2. Multi-Sided Platforms BM

 Combines two or more interdependent

groups of customers, with value for a
group only if the other groups are
present; such platforms are creating
value by facilitating interactions
between different consumer groups;

 To increase the business’ value new

users must be attracted through the
"network effect";

 It is found in industries that combine

traditional products with additional
services (exp .: credit cards/ owner +
merchant; recruitment site / users. +
advertising firm).
Multi-Sided Platforms – Key questions:

 Are we attracting a sufficient nr of customers for each

"dimension” of the platform?

 Which “dimension” has a higher sensitivity to the price?

 Can we do that “dimension” more attractive by making a

subsidized offer?

 Can the other dimensions of the platform generate

sufficient revenue to ensure the "subsidy"?
3. Open Business Model

Creates and captures the value of systematic collaboration

with external partners;

 the "outside-in" principle - capitalizing ideas / goods

(ext.), In the new firm (exp.: a start-up can harness
ideas and goods of other enterprises that capitalize
them as a partner);

 the "inside-out" principle - the firm can provide ideas or

goods to other partners; (exp.: a start-up can partner
with other companies for marketing ideas / goods within
the company).
(Exp.: P&G; GlaxoSmithKline Pharma.)
Open Business Models – Innovation Principles

 Smart employees are both inside and outside the company ( Closed
BM = smart people must work for us)

 R&D outside the firm can be significant; R&D inside is necessary in

order to claim a part of its results (Closed BM = to take advantage of
R&D we need to create and deliver ourselves);

 If we can best exploit both internal & external ideas we will win
(closed BM = if we generate the best ideas inside the company we
will win);

 We should take advantage of innovations by selling our

ideas/patens to others and by buying the needed ones from others
(closed BM = need to control the entire process of innovation in the
company, so that the competition can not take advantage of them).
4. The Long Tail Business Model

= products that are in low demand or have low sales volume can

collectively make up a market share that rivals or exceeds the
relatively few current bestsellers and blockbusters, but only if the
store or distribution channel is large enough (Netflix, eBay,
Amazon).

The tail of a distribution represents a period in time when sales for less
common products return a profit due to reduced marketing and
distribution costs.

This is used to describe the retailing strategy of selling a large number

of unique items with relatively small quantities sold of each (the
"long tail") — usually in addition to selling fewer popular items in
large quantities (the "head").
5. Bundling/ Unbundling Business Models

 Bundling is offering related products

and services; works successfully in
developed economies.

 Unbundling is the process of

disassembling, or dividing into smaller
units, an existing value proposition. It
can be a voluntary action from a
company, like the example of the
sachets, or can emerge from the
market. From the customers, or more
often from the resellers.
Internet Business Models:
 Business to Business (B2B) Selling to commercial organizations directly
 Business to Customer (B2C) to final users and consumers directly
 Business to Business to Customer (B2B2C) Selling to commercial
organizations and then selling through directly to final users and consumers
 Niches (vertical or horizontal) Selling to a very specific customer segment
(vertically through the supply chain) or selling a very specific set of products
(horizontally to a variety of customers)
 Clicks and Bricks Selling through both the Internet and traditional business
location with a physical presence
 Roll-ups Buying many smaller firms using the same business model
(usually in fragmented industries) and then achieving economies of scale
 Advertising Models Selling advertising in a media (cyberspace,
newspapers, magazines, etc.) and giving away the content
 Pay-for-content Models Selling the content through information rules type
strategies
 Affiliate Models Selling products on a second-party Web site for a fee.
Enables the affiliate to piggyback on a more famous Website like Amazon or
eBay
 Mash-ups Selling a Web-based application that mixes data from different
online sources
Business Model Design – Objectives:

 Entering the existing markets, where there

are unmet needs;

 Bringing on the market, new technologies,

products, services;

 Improving, transforming an existing

market, by designing a new BM;

 Creating a completely new market.

 BM Design - 5 stages:

1. Mobilization - preparing for a successful BM;

 
2. Understanding - research and analysis necessary
to identify the BM’s elements;

3. Generating several options for the BM, testing

them and choosing the optimal;

4. Implementing the BM;

 
5. Adjusting the BM according to the market
reactions.
Innovating the BM

Adaptation is imperative in a changing environment!

Adaptation techniques can range from:

- highly innovative (proposing radical changes / disruptive impact on many
industries, or even the global economy),
- low levels of innovation (proposed changes disruptive impact on a single
industry and a single markets):
 Radical changes (= new answer to a new question);

 BM Reform (= existing question, new answer)

 Translation (= "old" solution moved into a new industry);

 Transfer (= "old“ solution moved into a new market).