Business Model and Business Model Canvas Part One
Reasons for a Business Model
• Prove you are serious • Establish Milestones
• Understand Competition • Know Customers
• State Assumptions
• Document Revenue Model • Attract Investors
• Reduce Risk
• Attract Employees
Module Objectives
“There is not a single Business Model . . . There are a lot of opportunities and options, we just have to
discover them all”
Tim O’Reilly
• Learn 9 Elements of Business Model Canvas • Understand “painting” the Canvas
• Apply Business Model Canvas to Senior Design Project • Identify “starting points” for Venture Capital
Funding
• Initiate “hands-on” experience - TEAMWORK
Definition: Business Model
Business Model: Describes the rationale of how
an organization creates, delivers, and captures value
Innovative Business Models make the most money Additional detail in Appendix
Business Model is Critical Thinking
• Blueprint . . . . you are serious • Interesting communication
• Compelling story: • Who you are
• Why you are in Business
• What you do, how you do it & where you operate • How you will make money
• What Customers
• Judged by Quality &Appearance of Plan & product novelty
Business Model Canvas
Business Model - 9 Building Blocks
Business Model - 9 Building Blocks
Customer Segmentation Building Block
Defines a group of people, or organizations, an enterprise aims to reach and serve
• Customers are heart of Plan
• Group Customers into distinct
segments with common needs & behaviors
Separate segments if:
•Need a distinct product
•Utilize different Channels •Require special Relationships •Have different profitabilities •Pay for unique
aspects
Types of Customer Segments
Mass Market
Don’t distinguish Segments
Diversified
Serves unrelated
Niche Market Segments
Specific Segments
Multi-Sided
Segmented Interdependent Distinguish between Segments
segments with different needs
Additional detail in Appendix
Value Proposition Building Block
Describes the bundle of products and services that create value for a specific Customer Segment
•Reason why Customers buy from one company over another
•Solves a Customer Problem, or satisfies a set of Needs
Value Proposition Elements
Design
Difficult to measure, but important in
Fashion & Consumer Performance
Electronics Common way to create value
Customization
Tailoring products &
PC sector relied on powerful machines, but has limits
services to specific Customers
Enables customized products & economy
of scale Additional detail in Appendix
More Value Proposition Elements
“Getting the Job
Done” Risk Reduction
Create value by helping Customer get jobs done
Price
Low-price has
Customers value risk reduction
implications for rest
Brand / Status
Customers value use and display of a brand
of Business Model
Cost Reduction
Important way to create value
Accessibility
Provide offering to Customers who lack access
Effective Value Proposition Characteristics
Is the Value Proposition . . .
Simple - Easily understood and communicated
Customer Specific - focused and consistent with their beliefs, knowledge, behavior and/or experiences
Credible Promise - Customers believe you can deliver better than competition
Relevant & Motivating - Addresses Needs, concerns, and outcomes of significant importance
Ownable - Unique relative to competitor’s position
Example: LEGO Factory
Ex: Lego Factory Value Proposition & Segments
LEGO Factory expands scope of off-the-shelf kit by giving fans tools to build, showcase, and sell their
own custom designed kits
Thousands of customer-designed kits complement standard blocks. LEGO Factory connects customers
who create customized designs with other customers, thus becoming a customer match maker
TEAMWORK Case Study
You become owner of a business in one of the following industries:
• Tourism and hospitality
• CCI (digital business, cultural and creative industries)
• Beauty industry
TEAMWORK: Value Propositions to what Segments?
Model . . . Offer Segment
Value Proposition 1 Value Proposition 2
Value Proposition N
Target Customer 1 Target Customer 2
Target Customer N
Hints:
[Link] broadly about Customers......there are more than one to consider
[Link] is a unique Value Proposition for each Customer
Business Model Canvas TEAMWORK
Business Model and Business Model Canvas Part Two
Channels Building Block
Describes how a company communicates with & reaches its Customers to deliver a Value Proposition
• Customer Interface: Communication, Distribution, & Sales • Customer touch points, & important in
their experience
Channels provide:
• Product awareness
• Allow Customers to purchase • Provide post-purchase support
Channel Types and Phases
Channels have 5 distinct phases. Each Channel can cover some or all of these phases
Awareness Evaluation Purchase Delivery After Sales
Raise awareness about company & offerings
Assist Customers evaluate Value Proposition
Allow Customers to purchase products & services
Deliver Value Proposition to Customers
Provide post-purchase support
Customer Relationship Building Block
Describes the types of relationship a company establishes with specific Customer Segments
Must clarify desired relationship with each Customer Segment
Relationship Motivations: •Acquisition
•Retention
•Boost Sales (upselling)
Customer Relationship Categories
Personal Assistance •Direct access for help
Dedicated Personal Assistance
•Customer specific Representative •Intimate relationship
Self-Service •No direct Customer relationship •Provides self-help
Communities •User community
Automated Services •Sophisticated form of self-service
Co-Creation •Beyond traditional relationship to co-create value.
aides connections between members
Additional detail in Appendix
Revenue Streams Building Block
Represents cash a company generates from each Customer Segment (Revenue - Cost = Earnings)
• “Arteries” of the Business
• Must ask....”What is each Customer Segment willing to pay?”
• Each Stream has different pricing: List, bargaining, market dependent, volume dependent, etc
• Types of Revenue Streams: Transaction & Recurring
Ways to Generate Revenue Streams
Asset Sale •Physical product sale
Licensing •Grant to use IP •Common in media
Subscription Fee industry
Usage Fee •Service use fee
•Sell continuous access to service
Brokerage Fees •Intermediation services performed on
Lending / Renting / behalf of two or more Leasing parties
•Temporary grant of right to use asset for
fixed time Additional detail in Appendix
Pricing Mechanisms
Fixed “Menu” Pricing
Dynamic Pricing
List Price
Fixed prices for products, & services
Negotiation (Bargaining)
Price negotiated between parties & is dependent on negotiation skill
Product Feature Dependent
Price depends on number or quality
Yield Management
Price depends on inventory and time frame of purchase
Customer Segment Dependent
Price depends on type & characteristic of Segment
Real-time Markets
Price established based on supply and demand
Volume Dependent
Price as a function of quantity
Auctions
Price determined by competitive bidding
urces Building Block
portant assets required to make iness model work
• Enables production reach markets, & earn revenue
• Required resources are dependent on selected Business Model
• Resources may be physical, financial, intellectual, or human
• Resources may be owned, leased or acquired
Key Resources Catalog
Physical •Buildings, cars, machinery, systems, point-of-sales systems, and distribution
Human •Critical in knowledge
Intellectual •Brands, proprietary knowledge, patents copyrights, partnerships, and Customer data bases
•IP difficult to develop, but powerful
intensive & creative businesses
Financial •Cash, credit, stock
Additional detail in Appendix
Example: LEGO Factory
Ex: LEGO Relationships, Channels, Resources, & Revenue
Community of customers who are interested in niche content & want more than off-the-shelf kits
Web presence Agile Mfg.
Supply Chain User Groups
Web, Retail Stores, and
Small revenues from Customer User Groups designed kits. Valuable addition
to traditional high-volume kits.
TEAMWORK Case Study
You become owner of a business in one of the following industries:
• Tourism and hospitality
• CCI (digital business, cultural and creative industries)
• Beauty industry
TEAMWORK: Channels, Customer Relationships, Revenue Streams, and Resources required for success?
Model
Offer
Value Proposition 1 Value Proposition 2
Value Proposition N
Channel Channel 1 Channel 2 Channel N
Finance Revenue Stream 1 Revenue Stream 2 Revenue Stream N
Relationship Relationship 1 Relationship 2 Relationship N
Resources Resource 1 Resource 2 Resource N
Customer
Target Customer 1 Target Customer 2
Target Customer N
Hint:
For every Customer & Value Proposition pair, one at a time, define required Channel, Customer
Relationship, Revenue Stream & Resources required to succeed
Business Model Canvas TEAMWORK
Business Model and Business Model Canvas Part Three
Key Activities Building Block
Describes most important things a company must do to make its Business Model work
Required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and
earn Revenue
Key Activities Catalog
Production •Design, mfg., & deliver
product in quantity or superior Platform / Network
•Dominates mfg. Business sNetworks, matchmaking, serve as platforms
Problem Solving •Develop new solutions •Dominates knowledge management Business Models
Additional detail in Appendix
nerships Building Block
ppliers and partners that make the ess Model work
Types of partnerships:
1. Strategic alliances between non -competitors
2. Strategic alliance between competitors
3. Joint Ventures to develop new business
4. Buyer-Supplier to assure reliable supply
Partnership Motivations
Optimization & Economy of Scale
•Most basic form of partnership
•Often results in outsourcing
Acquisition of Particular Resources & Activities
Reduction of Risk & Uncertainty
• Competitors form strategic alliance in one area while competing in another
•Extend capabilities by relying on others to furnish part of the required resources / activities
Additional detail in Appendix
Cost Structure Building Block
Describes all costs incurred to operate a Business Model
• Create & deliver value, maintain Customer relationships, & generate revenue all incur cost
• Easily calculated after defining: Key Resources, Key Activities, & Key Partnerships
Cost vs. Value Driven Models
Cost Driven:
Low Cost Value Proposition, automation, & outsourcing
Fixed Cost
Same cost regardless of volume
Variable Cost
Cost vary in proportion with volume
Scale Economy
Cost / unit drops as volume increases
Scope Economy
Same mktg & dist. support many products
Value Driven:
Focused on value creation, not cost. Premium Value Propositions and personalized service
Example: LEGO Factory
Ex: LEGO Factory Key Activities, Partners, & Cost Structure
Provide & manage platform & logistics for producing, packaging & delivery of custom-made sets
Customers who build new designs & post them on-line thereby generating content & value
Utilizes production & logistics already incurred by traditional retail block model
Customers who build new designs & post them on-line thereby generating content & value.
Final LEGO Factory Business Model Canvas
Provide & manage Community of Thousands of LEGO Factory customers who
customer designed
expands scope of are interested in kits complement off-the-shelf kit by niche content &
standard blocks.
giving fans tools
delivery of custom to build, showcase off-the-shelf kits. connects customers and sell their own
who create
customers customized designs designed kits. with other
WEb presence, Web, Retail customers, thus Agile Mfg.,
Stores, and User becoming a
Supply Chain, Groups customer match User Groups
maker
Utilizes production & logistics Small revenues from Customer already in place by traditional
designed kits. Valuable addition
retail block model to traditional high-volume kits.
TEAMWORK Case Study
You become owner of a business in one of the following industries:
• Tourism and hospitality
• CCI (digital business, cultural and creative industries)
• Beauty industry
TEAMWORK: Key Activities, Key Partnerships, and Cost Structure required for success?
Model
Offer
Value Proposition 1 Value Proposition 2
Value Proposition N
Activity Activity 1 Activity 2 Activity N
Cost Cost 1 Cost 2 Cost N
Partnership Partnership 1 Partnership 2 Partnership N
Customer
Target Customer 1 Target Customer 2
Target Customer N
Hint:
For every Customer & Value Proposition pair, one at a time, define required Key Activities, Key
Partnerships, & Cost Structure required to succeed
Blue Ocean Strategy
Red Ocean •Compete in existing markets •Beat the Competition •Explore existing demand •Make
Value / Cost Trade-off
•Align with differentiation OR low cost Blue Ocean
•Compete in uncontested markets
•Make Competition irrelevant •Create & capture new demand •Break Value / Cost Trade-off •Align with
differentiation AND low cost
Measurement of Business Model Success
• Sales Revenue Growth • Profits
• Market Share Gain
• Competitive Reactions
Using the Business Model Canvas
Using the Business Model Canvas
Business Model Fatal Assumptions
• All we need is 5% market share
• No problem in attracting top talent • Competition will not notice us
• Customers will buy because of our cool technology • Customers will not mind switching suppliers
• Product is so cool it will sell itself • We can command premium pricing
• Our financial projections are conservative
Access Venture Capital
Farmington Hills
•SPARK •Beringea LLC •Arboretum Ventures Southfield
•Chrysalis •Wind Point Partners •EDF Ventures •Seneca Partners, Inc
•Seneca Partners Lansing
Battle Creek •Prima Civitas
•Homeland Security Resources Marriott Corp. Fund •Next Little Thing
Additional
National Venture Capital Association
[Link]
Resources
Federal Govt. Programs Small Business Admin. [Link]
Go Big Network [Link]
Sequoia Venture Capital [Link]
Small Business Research [Link]
Small Business Transfer [Link]
Innovation
Technology
TEAMWORK Assignment
Objective: Complete Business Model Canvas for your business idea
Instructions:
•Follow LEGO Factory Model & appendices examples •Development Models for each section & Business
Model Canvas
Appendices
Types of Customer Segments
Mass Market
•Don’t distinguish Customer Segments
•Value Propositions, Distribution Channels, and Customer Relationships all focus on a large group
•Ex: Consumer Electronics
Diversified
•Serves two unrelated Customer Segments with different needs and problems. Ex: [Link] decided
to diversify retail business by selling cloud computing services; online storage space and on-demand
server use
•Totally different Value proposition utilizing powerful IT infrastructure
Niche Market
•Cater to specific Customer Segments
•Value Propositions, Distribution Channels and Customer Relationships are tailored
•Often found in supplier-buyer relationships. Ex: Car part producers dependent on OEM purchases
Segmented
•Distinguish between segments with different needs and priorities
•Has implications for Value Proposition, Distribution Channels, Customer Relationships, and Revenue
Streams
•Ex: Micro Precision Systems provides micro-mechanical design & mfg. solutions to watch and industrial
automation sectors
Multi-Sided Platforms
•Serve two or more interdependent Customer Segments. Ex: Credit card company needs a large
customer base of card holders and a large base of merchants who accept card
•Both segments are required to make the Business Model work
More Value Proposition Elements
“Getting the Job Done”
•Value created by helping Customer get jobs done. Ex: Roll-Royce Customers rely on them to
manufacture and service jet engines
•Arrangement allows Customers to focus on •Satisfy price-sensitive Segments running airline, not
engine service •Low-price Value Propositions have
•Pay Roll-Royce a fee for every hour flown important implications for rest of Business Model
•Ex: No frills airlines - Southwest, easyJet, and Ryanair designed entire business to
•Customers value simple act of using and enable low cost air travel.
displaying a brand •Ex: Nano car produced by Tata makes cars
•Ex: Wear a Rolex watch affordable to new segment of population
•Skateboarders wear “underground” brands
to show they are “in” Customer Cost Reduction
•Important way to create value
•Ex: [Link] sells a hosted Customer Relationship Management (CRM) application that relieves
buyers from expense and trouble purchasing, installing, and managing CRM software
Risk Reduction •Customers value reduction of risk
•Ex: Used car buyer values one year warranty to cover repairs
•Service level guarantee reduces risk in outsourced IT services
Accessibility
•Make offering available to Customers who lacked access
•Can result from Business Model innovation, new technologies, or a combination of both
•Ex: Net Jet popularized concept of fractional private jet ownership
•Ex: Mutual Funds made it possible for those with modest wealth to build diversified investment
portfolios
Customer Relationship Categories
Self-Service
•No direct relationship with Customer •Provides necessary means for self-help
Communities Personal Assistance
•User communities involved with •Human interaction Customers / prospects and facilitate
connections between community members Representative for help during, or after, •Maintains online
communities so users can the sale
exchange knowledge and solve each other’s •Happens on-site, through call centers, by e-mail, or other
means
•Help companies understand Customers
Automated Services
•Sophisticated form of Customer self-service
•Online profiles give Customers access to customized services
•Automated service stimulate a personal relationship. Ex: Book and movie recommendation
Co-Creation
•Beyond traditional Customer -Vendor relationship to co-create value. Ex: Amazon invites Customers to
write reviews creating
•Ex: GlaxoSmithKline launched a Alli community for weight loss
Dedicated Personal Assistance
•Customer specific Customer Representative at company
•Deep and intimate relationship and develops over a long time. Ex: Private Banking, dedicated bankers
serve high net worth individuals
•Key Account Managers maintain personal relationships with important Customers
value for other readers
•Customers assist with new and innovative product design. Ex: YouTube solicits Customer’s content for
public consumption
Ways to Generate Revenue Streams
Asset Sale
•Widely understood and results from selling ownership of a physical product
•Ex: Amazon sells books, music, electronics and more on-line
Usage Fee Subscription Fee
•Generated by service use Selling continuous access to a service •More service is used, more
Customer pays eEx: Gym sells subscriptions to access
•Ex: Telecom charges by the minute •Ex: Nokia’s Comes With Music provides music library access
Lending / Renting / Leasing
•Temporary grant of exclusive right to use an asset for fixed time period
•Lender gets recurring revenue, and renters enjoy benefits without full cost of ownership
•Ex: [Link] rents cars by the hour in large NA cities
Licensing
•Generated by giving Customers permission to use IP
•Right-holders generate revenue without product manuf. or commercialization
•Common in media industry
Brokerage Fees
•Intermediation services performed on behalf of two or more parties
•Ex: Credit card providers take a percentage of all transaction fees
•Ex: Brokers and real estate agents are paid in commissions
Key Resources Catalog
Physical
•Includes mfg. facilities, buildings, vehicles, machinery, systems, point-of-sales systems, and distribution
•Retailers rely heavily on physical resources.
Human
•Critical in knowledge intensive and creative businesses
•Novartis has an army of scientists developing next generation drugs
Financial •Cash, lines of credit, stock
Intellectual
•Brands, proprietary knowledge, patents and copyrights, partnerships, and Customer data bases
•IP difficult to develop, but powerful •Consumer goods companies, Nike and Sony, rely heavily on
Brands
•Microsoft and SAP rely heavily on IP developed over decades
•Qualcom (mobile device chips) earns substantial license fees
Key Activities Catalog
Production
•Designing, making, and delivering a product in substantial quantity and / or superior quality
•Dominates Business Models of mfg. firms
Problem Solving
•Developing new solutions for Customer problems
•Consultancies, hospitals and service organizations
•Business Models dominated by knowledge management and continuous training
Platform / Network
•Networks, matchmaking, software and brands can serve as platforms
•Ex: eBay’s Business Model requires continuous development to maintain the platform
•Ex: Microsoft’s Model requires managing interface between vendors -hardware and other software
suppliers
Partnership Motivations
Optimization & Economy of Scale •Most basic form of partnership •Illogical for a company to own all
resources or perform every activity
•Often results in outsourcing of an activity
Reduction of Risk & Uncertainty • Competitors often form a strategic alliance in one area while
competing in another
•Ex: Blue-ray was developed by leading consumer electronics, computer and media
mfgs.
Acquisition of Particular Resources & Activities
•Few companies own all the resources or perform all activities described in their Business Models
•Extend capabilities by relying on other firms to furnish part of the required resources / activities
•Ex: Mobile phone company licenses operating system vs. developing one
THANK YOU FOR THE ATTENTION!
