Business Model Alchemist

Vijaya Thyil and Geoffrey Durden from La Trobe University in Melbourne, Australia invited me to contribute to a quantitative study on business models of Australian companies. I found this quite interesting and accepted the invitation because I think it will help us better compare business models and maybe it will even lead to identifying patterns of business model success.

In a quick brainstorming session I came up with some ideas for different scales for each of the 9 business model building blocks which I use to map a company’s business model. These scales can help describe the characteristics of each business model building block of a company in a more quantitative way. The whole set of variables of the 9 building blocks will then give us a representation of the entire business model. If we combine this representations with measures of success, such as profit growth or stock performance we might be able to find particular patters. For example, we might find that the business models of successful companies are characterised by decentralised and deversified distribution channels. Or, we might find that business models focusing on niche markets are more successful than business models focusing on mass markets… and so on.

Here the set of scales for the buidling blocks that I came up with during my brainstorming:

Value Proposition:

• low cost/value – high cost/value
• follower (e.g. mass market MP3 players) – innovator (e.g. MySpace.com)

Customer Segments:

• niche markets (e.g. long tail) – mass markets

Distribution Channels:

• reliance on owned channles (e.g. retail stores) – reliance on partner channels (e.g. affiliation)
• centralised – decentralised

Customer Relationship:

• owned/direct relationship (e.g. Dell) – partner/indirect relationship (e.g. Nokia)
• transactional – relational

Value Activities/Configuration:

• owned activities – distributed activities (e.g. Cisco)
• simple activites – complex activities

Core Capabilities:

• self-reliance (e.g. Telcos own their network) – dependant (e.g. Skype relies on Internet infrastructre)
• centralised – decentralised

Partnerships:

• few partners – complex value webs

Cost structure:

• lean (e.g. Dell) – fat (e.g. Pharma)

Revenue Streams:

• limited (e.g. Google from advertising, Pharma from blockbusters) – diversified (e.g. General Electric)
• controlled – uncontrolled

Of course these are just some uncooked ideas that really would need some more thinking. However, I think this approach could help to find some interesting patterns in business model comparison…

In general I also find the theme of how much a company controls the building blocks of its business model interesting. I wrote about this loss of cotrol in an earlier blog and think this could become a very hot topic in the future. For example, eBay does not entirely control what (value) is offered on its platform (except for eliminating some illegal offers). Or, most companies do not control the communities that discuss their products. Or, sales are increasingly made through marginally controlled affiliates. Or, take the example of Skype which does not control the infrastructure through which its services are delivered… This theme of loss of control for each business model building block in comparison with performance could also be something to measure in research.

I’ll try to summarize what comes out of my visit to Australia at the end of February – so stay tuned for further progress in thinking

Emerging economies like India and China have brought a lot of innovation, competition and new business models to the global economy. But so-called “online game farms” or “game factories” are certainly among the most exotic ones. And I am not talking about companies that make games Let me try to explain “game farms” by using my business model approach with the 9 building blocks…

Value Proposition: Gaming farms offer online computer game players of rich OECD countries a number of things to improve their position in an online game. This can range from “getting from level 1 of a game to level 40″ over “the sales of online weapons” like swords and spells all the way to “the sales of online properties” like complete castels or dark forests.
Target Customers: Gamers of rich countries that don’t have the time to play enough to advance quickly in a game or that are too bad got get anyware… However, they do have the money to buy virtual goods to improve their gaming position.

Distribution Channles: Some gaming farms like UCdao.com have set up websites to get hired for particular requests of rich gamers. Others sell their goods through online auction platforms like eBay.

Customer Relationship: Gamers with little time and fat purses usually get addicted to this easy entry to higher levels of online games.

Activities: Gaming, gaming, gaming. Game farms mostly rely on the cheap labor costs in China and hire gamers that will do nothing else than gaming, gaming, gaming to amass virtual goods like weapons, virtual gold and property. These are then swapped against hard currency from rich online gamers in OECD countries.

Core competencies: Kill the monster, grab the gold and memorize that deadly spell. It’s all about attracting the best cheap and most deadly online mercenaries to your game farm in China.

Partnerships: Definetly not with the companies that produce the online games. Gaming farms are increasingly fought like hell by game producers (e.g. Sony entertainment) and even hardcore gamers.
Cost structure: An online game laborer cost between 75 and 250 USD in China depending on his skills.

Revenue model: Selling or auctioning off virtual castels at good locations, revealing deadly spells for currency and trading shiny virtual gold against green dollars. And as mentioned above, some can farms allow you to hire their gamers for specific gaming jobs.

Companies and their managers like to be in control. They like to control their products (e.g. six sigma), they like to control communications & brand (e.g. press releases & PR stunts), they like to control which customers they address (e.g. high networth individuals), they like to control the channels through which their products are distributed (e.g. DVD country codes) and they like to control processes.

Forget that! It’s a thing of the past. I predict that the most thriving companies of the coming years will be those that are able to successfully lose control. This doesn’t mean that they will let things get totally out of hand, but they will replace control with governance in order to create space for creativity. The reason? This new openness will allow people to live out their full potential, they will be able to focus on what they like and do best and they will have space to implement their best ideas. Openness will also allow people to install collaboration beyond traditional roles such as customer, marketer or engineer.

Uncontrollable Value Propositions: The value proposition of many striving Internet companies lies in the content its customers create and provide. While they might control the platform (governance) they don’t control the actual product (content). Flickr gets its value from the photos its users upload and the communities formed, Google’s Adsense gives advertisers targeted visibility but heavily relies on the quality of its members’ websites and eBay has to hope that offer and demand match on their platform. None of them is truely in control.
Out: product design
In: enabling solutions and value co-creation

Unpredictable Customers: Isn’t the customer best suited to know what his needs are? It has been said over and over again that we have moved from a mass-market push economy to an environment of very informed and knowledgeable customers that carefully research product information on the Internet. But many managers are still not realizing how to best cope with this fact. Take the music industry. The major record companies are still building on a business model that banks on pushing/creating hits for specific customer segments: step 1 identify potential stars, step 2 market them with big bucks through all possible channels, step 3 materialize on the few hits and flip the flops. But platforms like MySpace are giving the majors increasing headaches. On MySpace stars and fan communities alike emerge out of nowhere around different styles and bands of music. The platform has been hugely successful in giving unknown artists visibility and music fans choice.
Out: customer segmentation
In: matching offer and demand

Unguardable Communication Borders: Communication departments think they have to control every message that goes out of the company. That doesn’t work anymore. In the era of blogs companies have to let their employees directly communicate with customers, employees of competitors and stakeholders. Company frontiers will become much more porous. IBM leads the way and has fully embraced blogging. By letting employees directly interact with the “outside world” companies get a much more human touch and feel. And that is important in a world where a a group of uncontrollable customer bloggers can potentially create a lot of negative publicity.
Out: controlled communications & company borders
In: from speaking to listening: permeability and customer collaboration

Liberalize Distribution Channels: Selling is difficult. What could be better than getting others to sell for you? Rather than trying to manage & control your distribution channels it makes sense to capitalize on the entrepreneurial capacities of others to get your value proposition to the market. Amazon.com has long ago made the affiliation model popular by mobilizing thousands of small, specialized and often personal websites to market Amazon books. Grameen Phone of Bangladesh uses microcredits and entrepreneurial village women to sell their phone services. This so-called trend of minipreneureurship is one of the strongest flavors of the day.
Out: direct-to-customer
In: minipreneurship

Adaptive Diversity: Innovation is hard to spark and even harder to manage. Nokia tries to foster innovation around its telecom products by running The Nokia Ventures Organization that invests money in promising ideas. But this almost seems outdated when thinking of how google brings home innovation: By opening up their application programming interface (API) to the world they allowed thousands of programmers around the globe to access to their database and content. These developers then tinker with innovative applications built around google search, which the company picks-up on as soon as one strikes success. It’s innovation at zero and gives google access to talentend and innovative programmers around the world… At zero cost (read more about this trend). It’s sort of a shift from venture capital to open innovation platforms.
Out: deciding and allocating
In: prototyping & adaptive diversity

In the future the most successful organizations will be those that are able to design business models that successfully build on participation, involvement and an enabling environment – but it will almost definitely be at the price of control.
Out: reigning
In: governance

Yesterday I had a very good discussion with Dietmar Kottmann of the Boston Consulting Group (BCG) about conceptual business models and their use in business thinking. Our conversation ended with an interesting analogy between what Computer-Aided Design (CAD) has brought to engineering and what could be achieved in business by similar tools tailored to business design. But where the heck are those tools today?

Computer-Aided Design (CAD) englobes a whole family of computer-based tools that assist engineers, architects and other design professionals in their design activities. In product development CAD is nowadays used to streamline the whole Product Lifecycle Management (PLM) from conception and collaborative product design to manufacturing, service and disposal. In architecture CAD has helped to rapidly create 3D models and prototypes for visualization and exploration.

In short, CAD has brought speed, rapid prototyping, quicker visualization, integration, better collaboration, simulation and better planning to engineering, architecture and other design areas. It hase helped eliminate cumbersome tasks that had to be done manually (e.g. drawing & redrawing, sharing of blueprints) and opened up a whole new world of opportunities (e.g. rapid visual 3D prototyping & exploration). All this sounds extremely exciting, but the adoption of CAD has taken many years and only recently moved towards collaborative design & PLM.

It seems obvious to me that the improvements that have been achieved in the abovementioned design fields through CAD will soon be replicated in more abstract design areas such as business managment and business strategy. Of course it is more straightforward to build tools that help design concrete objects (e.g. houses & bridges) than to craft tools that will help design abstract concepts (e.g. value propositions & core competencies). However, if we look at the history of modelling and computer aided modelling tools in Information Systems (IS) we can observe a constant move from the relatively detailed and concrete towards more abstract business concepts. The IS field started out with modelling bits & bytes, moved towards data modelling, then systems modelling and got from workflow modelling all the way to process modelling. This is now being done quite well with a large range of useful computer-aided tools.

In my opinion the next step towards computer-aided tools in business will be the facilitation of business model design. It could be observed soon and I call this process Computer Aided Business Design (CABD)… But what would we get out of such tools? The analogy with what today’s CAD tools have brought to the fields of architecture, engineering and product design can be quite helpful:

• Speed: Manual work (e.g. drawing) was accelerated by computer-assistance.
• Sharing & Collaboration: CAD programs brought standards that could be shared across developer groups inside and outside organizations.
• Prototyping: CAD has not only brought increased speed but allowed to easily create various versions and completely different sets of prototypes.
• Visualization: In architecture CAD has allowed architects and their customers to virtually walk through a prototype of a building and get a better feel of the potential end-product.
• Integration: In car- and airplane manufacturing CAD has allowed different divisions and collaborating companies (e.g. design, suppliers, etc.) to integrate their processes of conceiving and manufacturing a particular product.
• Product Lifecycle Management (PLM): CAD has made it possible to manage the integrated process from conception over design to manufacturing and disposal.
• Simulation: With CAD it become possible to simulate certain aspects of a model (e.g. if a bridge won’t collapse).

Based on the above we can extrapolate for the field of business design and particularly for business model design that Computer Aided Business Design (CABD) will bring:

• Speed: we will move from “handwritten” business model design to models crafted rapidly with the help of software tools. Standardization of some tasks will improve the speed and quality of designing. Changes of an existing model can easily be achieved.
• Sharing & Collaboration: software typically standardizes some aspects of the design process while it leaves space for creativity. CABD will bring a standardized format to business model design that will become exchangeable among different people and groups.
• Prototyping: CABD will allow groups to rapidly develop different versions and sets of prototype business models based on their ideas.
• Visualization: CABD could help make abstract concepts more visual and understandable. In a business model the links between the different building blocks would become more apparent. Maybe it would even become possible to navigate through a business model protype, for example, by exploring which customer segments a particular value proposition addresses and through which distribution channels it is delivered.
• Integration: CABD will allow people from different areas (e.g. strategic planning, process design, IS) work together around one common model.
• Business Model Lifecycle Management (BMLM): CABD will make it possible to easily move from conception towards implementation and steering by allowing the definition of indicators for balanced scorecards.
• Simulation: With CABD it will become possible to simulate certain aspects of the model (e.g. if under a given scenario the revenue streams will cover the cost structure).

Let’s see how long it will take for such tools to appear. Some first successful attempts to provide computer aided design for some aspects of business design have already been made by some of my Dutch colleages (e3-value). Is there anybody out there who would want to give me the funds to make a Computer Aided Business Design (CABD) tool for business models happen?

I’ve been living in Chiang Mai, Thailand, for 9 months now and as a consultant and manager I work better when I get my daily dose of premium espresso. I usually get this caffeine supply from a small local coffee chain called “Wawee Coffee”. They have a shop just around the corner from where I live. But when I realized that a huge Starbucks was being built just across the fence I feared that “my” coffee shop might be endangered of extinction. So I was wondering if Wawee’s business model design would withstand Starbuck’s global power-brand…

Wawee is a small local chain from Chiang Mai with 4 shops (and one planned in Bankok), while Starbucks is a global gorilla with currently 3 shops in Chiang Mai (over 60 in whole Thailand). Their offerings are roughly similar and they both serve a range of high quality coffees. Regarding price, however, there is a big difference. Starbucks serves a small espresso for 60 THB (1.45 USD) while Wawee asks for 50 THB (1.20 USD) after a rise of 5 THB since January 1st. That is a full 20% more. For an hour WiFi access to the Internet at Wawee you pay 30 THB and a full 150 THB at Starbucks. That’s 400% more!

The difference in pricing gives us a pretty good clue of both chain’s different market focus. Wawee seems to be aiming at the mid-market of well-off students, service professionals and the generally growing middle class, while they leave the low-end market to small coffee shops that serve an espresso for 20 THB. Starbucks seems to cater mainly to an expatriate and tourist community and to relatively wealthy Thais (a selected but growing species). If you look into either chain and study origin, style and closing of the customers you’ll find this hypothesis confirmed. However, Wawee seems to please a larger and more diverse range of customer types.

Location speaks the same language as pricing: Starbucks is present in two places frequented by tourists and one classy shopping center. Wawee has two shops close to the University, one in the biggest bookstore of Chiang Mai and another one beside a mid-range shopping center. The coffee shop I am writing this posting from is just beside Chiang Mai University and coincidently at a booming shopping street.

Until this point the business design between the building blocks of each chain’s business model form a coherent total with a nice fit. Strangely the customer relationships at both chains don’t really reflect their market identity. At Wawee you pay for the coffee at the counter and get it served at your table with a smile while at Starbucks you pay and wait until you can take it away. Latter treatment doesn’t really seem to fit the high end of the market they are serving but it doesn’t seem to deter classy customers either. Probably the strong Starbucks brand makes up for this.

Regarding the infrastructure side both business models seem to build on similar capabilities. Starbucks needs more capital for its presence in its generally more expensive places. They also spend more money on advertising and special events. Both chains have standardized their coffee making process that offers great quality.

Concluding it looks like both business models can coexist because they address rather different market segments. Wawee probably makes more income from scale and Starbucks from the higher margin. However, latter bears heavier investments and a weightier cost structure.

As far as I’m concerned I’ll stay loyal to Wawee. It feels more authentic than Starbucks. Particularly the young committed Wawee team that seems to manage, serve, clean and also train staff for other outlets is a pleasure to watch. Even with the best business design this example proves how execution plays a major role in building business success. And this team works so hard and does such a good job that I’d think they’d own the place – even though they don’t. As a consequence of their hard work the appearance of Starbucks has, quite surprisingly, brought even more customers to Wawee. The indicator: Since Starbucks opened in my neighborhood I have a much harder time to find a free table at my local coffee shop.