Business Model Generation

Definition of Business model

A business model describes the rationale of how an organization creates, delivers, and captures
value.

Main areas of business

 Customers
 Offer
 Infrastructure
 Financial viability

The 9 Building Blocks

1. Customer segments: An organization serves one or several costumer segmentes.

2. Value Propositions: It seeks to solve customer problems and satisfy customer needs with
value propositions.
3. Channels: Value propositions are delivered to costumers through communication,
distribution and sales channels.
4. Customer Relationships: Customer Relationships are established and maintained with each
customer Segment.
5. Revenue Streams: Revenue streams result from value propositions successfully offered to
customers.
6. Key Resources: Key resources are the assets required to offer and deliver the previously
described elements.
7. Key activities: … By performing number of key activities.
8. Key Partnerships: Some activities are outsourced and some resources are acquired outside
the enterprise.
9. Cost Structure: The business model elements result in the cost structure.
Customer Segments

The Customer Segments Building Block defines the different groups of people or organizations an
enterprise aims to reach and serve.

Mass Market

The products of this type of market are supposed to be attractive for very big public and don’t
distinguish between different Customer Segments.

e.g

Electronic products like phones.

Niche Market

Business models targeting niche markets cater to specific Customer segments

Segmented

The case of the banks, they lend money but to different people like a singular client that may borrow
up to $100.000 or big companies that may need more than $500.000, it is the same market; People
or entities that need money but different amounts and type of credit.

Diversified

In this segment the company diversifies its product and enters different markets.

This is the case for companys that offer products very different one from another.

Multi-sided platforms

Some organizations serve two or more interdependent Customer Segments. For example, a credit
card company needs a solid base of card holders but also need a big quantity of merchants who
accept those credit cards.
Values propositions

It’s the reason why a customer turns to a company instead of another. It solves a customer problem
or satisfies a customer need.

Each value proposition consists of a selected bundle of products and/or services that caters to the
requirements of a specific Customer Segment. Thus the Value Proposition is an aggregation, or
bundle, of benefits that a company offers customers.

What value do we deliver to the customer? Which one of our customer’s problems are we helping to
solve? Which customer needs are we satisfying? What bundles of products and services are we
offering to each Customer Segment?

Newness

Some value propositions satisfy an entirely new set of needs that customers didn’t perceive before
because there was no similar offering. E.g Cell phone

Performance

Improving product or service performance has traditionally been a fundamental way to generate
value the technological market as been improving it’s products year after year that’s why we saw
the Xbox-one after the xbox 360, cause it performed “better”.

Customization

Tailoring products and services to the specific needs of individual creates value.

“Getting the job done”

Value can be created by helping the customer get its jobs done, we can see many of this online like
Wolfram or Mymathlab that help the customer with specific mathematical problems.

Design

It is really important that any product may have a design so it will call the attention of a potential
customer, sometimes design its worth more that it’s usedness.

Brand/status

This depends on what type of people the product wants to target cause a Rolex watch may indeed
give the message of wealth but a skateboarder doesn’t care about it and mat find it pathetic, so it
is important to analyze the type of status customers that we want to target.
Price

Price is fundamental as we might want to create a business model based on a low prices policy
affordable for a great number of people or a luxury policy that may be bought only by a very small
group od customers.

Cost reduction

Helping customers reduce cost is an important way to create value… Reduce cost in time and money
to generate a great value to the customer.

Risk reduction

Customers value reducing the risks they may incur when purchasing products or services.

Accessibility

Make a product that was once unavailable available to a group of customers will generate value to
them.

Convenience /usability

Making products easier to use can create substantial value. With iPod and itunes Apple offered
customers unprecedented convenience searching, buying, downloading, and listening to digital
music, so it’s the case that they now dominate the market.

Revenue Streams

Represents the cash a company generates from each Customer segment (Cost must be subtracted
from revenues to create earnings).

A company must ask itself… For what value is each Customer segment really willing to pay?

For what do they currently pay?

How much are they currently paying?

How would they prefer to pay?

How much does each Revenue contribute to the overall revenues?

Ways of generating renvenue streams:

 Asset sale: Selling the rights of a physical or not physical product, the most common one
e.g. Cars, phnes, music, etc.
  Usage fee: Generated by the use of a particular service, the more a customer uses a service,
the more he pays. E.g. A telecom operator charges by the minute that its services are being
used by its customers or a hotel charges by the number of nights that the customers may
stay.
 Subscription fees: Selling access to a service. A gym sells subscriptions to its services just as
Xbox sells the Xbox live gold subscription that allows players to play online and chat while
playing.

 Lending/renting/ Leasing: This revenue streams is nothing but a renting service that lends
a service or a product by charging for the time the customer has it, similar to the Usage fee,
a car renting company would be a good example.

 Licensing: This revenue stream generates wealth by allowing customers to use protected
intellectual property in exchange of fees, this is quite common in the media industry as
songs are usually protected by rights that won´t allow people to use those songs unless they
have paid for the right to use them .

 Brokerage fees: Derives from the intermediation services performed on behalf of two or
more parts, in the stock markets we have the famous brokers while in the real estate
business we can see the real state agents that generate revenue by matching a buyer with
a seller and the product has been bought.

 Advertising: Fees for advertising products and/or services. Nowadays the media industry
relies heavily in this kind of revenue.

Each Revenue Stream might have different pricing. Thus, there might be quite a
huge difference in incomes of each revenue, that is crucial to know so we might
be able to establish which could be the best Revenue Stream for our business.

Key Resources

Every business model requires key Resources in order to create and offer a value Proposition, reach
markets, build and maintain relations with its customers and of course, earn revenues.

Key resources can be physical, financial, intellectual or human.

What Key Resources do our Value Propositions require?

Categories of key resources:

 Physical: Physical assets, such as buildings, factories, machines and vehicles, points of sales
and distribution networks.
 Intellectual: Brands, logos, proprietary knowledge, patents and copyrights like databases
are increasingly important for any company nowadays. E.g., patented products are really
important for many companies like Microsoft or Apple but Consumer goods companies like
Nike or Adidas have made tons of cash with their logos on clothes.
  Human: People are crucial in a business model not only as employees but also as creative
and sales force as we need people to think of new products or services but we may also
need skilled people capable of selling this new products or services.
 Financial: Many (if not all) business models demand financial resources and/or guarantees
like cash or credit lines to maintain its productivity.

Key activities

This section talks about the things a company must do in order to make its business model work.

Supply chains, problem solving, software development, etc., are many activities that each company
must do, obviously depending on the type of market that its business model is operating in.

Key activities are categorized as follows:

 Production: These activities has all to do with the creation of products in substantial
quantities and/or qualities. Production activities dominates the business models of
manufacturing firms.
 Problem Solving: Key activites of this type are the ones that are focused on solving
individual problems for each customer; Consulting companies, hospitals have everything to
do with problem solving as each customer may have a different need, these companies have
the need of being really flexible and dynamic and usually they must be at constant training.

 Platform/Network: Business models designed with one, many platforms as key resources
are dominated by platforms or networks related activities. Companies Ebay need an active
network that gives costumers actualized merchandise without any problems. Visa must
keep its network working no matter what cause even if only for a second its credit card
network fails, millions of dollars would be lost.

Key partnerships

This section talks about the partnerships that a company needs in order to keep up with its business
models.

Companies create alliances to optimize their business models reduce risk or acquire resources.

Types of partnerships:

1. Strategic alliances between non-competitors

2. Cooperation: strategic partnerships between competitors
3. Joint ventures to develop new businesses
4. Buyer-supplier relationships to assure reliable supplies

Who are our Key partners?

Who are our key suppliers?
Which key resources are we acquiring from partners?
Which key activities do partners perform?
Motivations for creating partnerships:
 Optimization and economy scale: By creating a partnership based on this type of
motivation, all parts of the agreement look financial impact reduction as when
two people or two companies divide the cost it will logically be cheaper for each
company, infrastructure sharing is also a very common way of partnerships and
researching projects as wells.
 Reduction of risk and uncertainty: Competitor partners mat cooperate to develop
a technology or service that has not been patented but they do compete by selling
their own version of that product.
 Acquisition of particular resources and activities: Very few companies have all the
resources they need to operate their business models so they extend their own
capabilities by relaying on other firms to furnish particular resources or perform
certain activities.
This type of partnerships may be motivated by need of acquiring knowledge,
licenses or perform certain activities. E.g., an insurance company may rely on
individual sellers to sell their services instead of relying on their own sales force.

Cost structure
The cost structure describes all costs incurred to operate the business model.
Creating and delivering value, maintaining Customer Relationships, and generating revenue
all incur costs.
Cost may be easy to calculate after defining Key Resources, Key Activities, and Key
Partnerships.
There are two broad classes of business model Cost Structures:
Cost-driven and value-driven