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Simple rules for business models
Axel Rodriguez
Based on Simple Rules for designing Business Models, by Sayan Chatterjee*Professor of Strategy, Weatherhead School of Management
Creating and executing business models
▪ A business model is a configuration of what a business does (core objectives) and what it invests in based on the logic that drives profits (profit logic)
▪ The business model must help figure out not only the value chain, but also the value proposition to the customer and the value capture mechanism
Business Model
Core Objectives
Profit Logic
A business model cannot be developed by “fill-in the blanks”
▪ There are easy and popular (perhaps because they are easy) templates that can describe your business model
▪ Ask yourself: can you really understand how these templates help you to make money – you profit logic
▪ A truly insightful business model will show you how the components of your business model will interact to deliver profits– And by the way these components are NOT the same for all business models
▪ At the end of this presentation we give an example of how a business model can– Deliver clarity about how to win and what to do
– Simplify complexity
Basic rules to create a business case
Identify initial target
segment
Identify business model
category
Understand how to capture
value
Identify core objectives
Map necessary activities
Identify necessary resources
Validate capabilities
and resources
GO
OK
Update
Start
What to look for
▪ What is happening outside our industry that we could use?
▪ What patterns exist that could be applicable to this business case?
▪ What capabilities we have that could be leveraged in a new business model?
▪ What are the potential competitors and how strong they can be?
Product / Service oriented
Relationship oriented
Eff
icie
ncy V
alue
The four quadrants
Operational efficiency
Perceived value
Network efficiency
Network value
Efficiency based models
Rules:
▪ Maximize asset utilization– Understand demand and focus on shifting it in time and place to maximize efficiency– Exploit cross-elasticity of complementary offerings to smooth demand– Unlock capacity (maximize asset usage)
▪ Price discrimination– Challenge pricing orthodoxies (reduce price to increase asset utilization) – only possible if
there’s demand but price is too high for the market
Commodities
Market defines price
Highly competitive
Mar
ket
char
acte
rist
ics
Core Objectives:
• Be more efficient than competitors
• Optimize asset utilization (human and/or capital resources)
• Process innovation culture
Perceived value based models
Product or service drives a
“want”
Market pays a premium
Perceived objective or
subjective value
Mar
ket
char
acte
rist
ics
Rules:
▪ Predict value– Make visible outputs that create “want” (even if they are invisible)– Identify and target the influencers who can create and drive the “want” for the product– Focus on desired outcomes (problem to solve), not just apparent needs
▪ React to market changes– Rapid prototyping and fast time to market– Co-opt / engage the customer– Invest in building blocks that can be used by multiple products– Reduce cost without sacrificing “want”
Core Objectives:
• Create “want” for the business output
• Reduce risk of output not being valued by the market
• Follow the value and realize the profit
Network value based models
Core group of “loyal
customers”
Loyal customers become
promoters
Expansion of value based
model
Mar
ket
char
acte
rist
ics
Rules:
▪ Co-opt niche customers, rivals and stakeholders
– What can loyal customers, potential rivals and stakeholders do for you
▪ Get big slowly (under the radar of competitors)
– Keep imitators out, start with the segment of higher loyalty potential
▪ Keep loyal customers engaged
– Retain a critical mass of loyal customers that drive repeat purchases
– Minimize customer acquisition costs
Core Objectives:
• Attract a critical mass of loyal customers
• Keep churn down, increase repeat purchases
• Keep potential rivals out
Facilitate transactions
between givers and takers
Profit from network and
transaction volume
Maintain efficiency of transactions
Mar
ket
char
acte
rist
ics
Rules:
▪ Unlock ecosystem capacity– Build value for stakeholders to come and stay
– Enable efficiency for givers and takers
▪ Evangelize the collaborative logic that attracts customers– Convince givers (sellers) of the value of “growing the pie”
Core Objectives:
• Maximize volume of transactions (and profit from each one)
• Attract loyal givers (sellers) and takers (buyers) to a common hub
• Win-Win relationships
Network efficiency (Hub) based models
Where does your business model fit?
Network Efficiency Network Value
Product / Service oriented
Relationship oriented
Eff
icie
ncy V
alue
Operational Efficiency Perceived Value
Maximize asset utilization• Shift demand it in time and place to
maximize efficiency• Smooth demand exploiting cross-
elasticity of complementary offerings• Unlock capacity (maximize asset
usage)
Price discrimination• Unlock capacity (maximize asset
usage)• Challenge pricing orthodoxies (reduce
price to increase asset utilization) –only possible if there’s demand but price is too high for the market
Create “want” (predict value)• Make visible outputs that create
“want” (even if they are invisible)• Engage influencers to create and drive
the “want” for the product• Focus on desired outcomes (problem to
solve), not just apparent needs
React to market changes• Rapid prototyping and fast time to
market• Co-opt / engage the customer• Invest in building blocks that can be
used by multiple products• Reduce cost without sacrificing “want”
Reduce customer acquisition costs while keeping rivals out
• Co-opt niche customers, rivals and stakeholders - what can they do for you?
• Get big slowly (under the radar of competitors)
Reduce churn• Retain a critical mass of loyal
customers that drive repeat purchases• Minimize customer acquisition costs
Grow the pie in the core business
• Unlock ecosystem capacity• Build value for stakeholders to come
and stay• Enable efficiency for givers and takers
Grow the pie in related businesses
• Evangelize the collaborative logic that attracts customers
• Convince givers (sellers) of the value of “growing the pie”
• Be more efficient than competitors• Optimize asset utilization (human and/or capital resources)• Process innovation culture
• Create “want” for the business output• Reduce risk of output not being valued by the market• Follow the value and realize the profit
• Attract a critical mass of loyal customers• Keep churn down, increase repeat purchases• Keep potential rivals out
• Maximize volume of transactions (and profit from each one)• Attract loyal givers (sellers) and takers (buyers) to a common hub• Win-Win relationships
What happens next
▪ It is common for business models start from a value based perspective, and as time progress they move, morph or migrate towards the others.
▪ Migrations are complicated and possibly painful, but properly executed have proven to be critical for long term sustainability of businesses.
▪ As business environment is always evolving, companies should regularly review their business models and analyze if a migration should be considered.
When not to change a business model
▪ When changes can affect the trust or implicit agreements with your customer base
▪ When additional growth would put the company beyond its natural size
▪ When a change could fundamentally affect your business ecosystem
An example of an Efficiency Based Business Model: Aldi Grocery Stores
▪ Competes at the very low-price range with high quality products
▪ Has a very loyal following in Germany and is creating similar loyalties in the US
▪ First understand the desired Attributes of the typical Aldi Customers
▪ Simple rule for developing core objectives:
– Unlocking Capacity
– Complementary Products (cross elasticity of demand)
– Challenge Pricing Orthodoxies
▪ From these simple rules you can develop Core Objectives for Aldi – how to win
▪ Now you can develop the Activities and Resources to deliver (what to do) the Core Objectives. The entire model can be represented using the COAR map.
▪ Note: Once you study this framework, you will realize Aldi has many similarities with Costco’s profit logic even though it targets a different customer segment. You will be able to see these patterns once you master these concepts
Source: Roslyn Chao EMBA 2016WeatherheadSchool of Management
Aldi: Efficiency Based model And COAR map
Thank you!
▪ This presentation is based on Sayan Chatterjee’s Simple Rules for designing Business Models – California Management Review, Vol 55, No 2, Winter 2013, CMR.BERKELEY.EDU
▪ Sayan Chatterjee is a Professor of Strategy at Weatherhead School of Management
▪ Other references are included in Sayan’s work.
▪ The four quadrant graph is my representation of the four business models defined by Sayan in his work
Axel Rodriguez
