Business Model Alchemist

Today I came across a blogpost from Dave Gray, Founder and CEO of XPLANE about “a brief history of LEGO” (disclosure: I admire Dave for his work in the domain of visual thinking . LEGO always reminds me of two things: Firstly, I have to think about the great time I am having these days and weeks with my son who is currently discovering LEGO (yeah, it allows me to play without finding excuses Secondly, I have to think about how similar business model design is to playing with LEGO.

For me, LEGO and business design are both about:

• Creative minds;
• Analytical and conceptual capacity to imagine the ouctome;
• Putting building blocks together piece by piece to form a coherent whole;
• Understanding that it’s the whole that counts, not the pieces.

A nice example of creating value block by block is Apple’s business model design in the music industry. It is the whole that makes their business model powerful not the pieces – it is the iPod (hardware), iTunes (software & shop), the available music (content) and partners (content suppliers) combined that create a coherent whole and competitive advantage. Each business model building block alone is almost like the various shapes and colors of LEGO pieces:

• the iPod competes with various similar music players (i.e. LEGO pieces of same shape and color) – of which some have better performance and price/quality ratios;
• the iTunes online shop is only one of several music sites where a customer can download the latest tunes (i.e. LEGO pieces of same shape and color);
• the iTunes software competes with numerous other music software (i.e. LEGO pieces of same shape and color);
• Apple is not the only company that has struck a deal with music majors (i.e. LEGO pieces of same shape and color).

Apple’s genius was to design a competitive business model from several pieces, that, each one taken alone, are similar to the others in their respective market. It’s just like building a beautiful castle from a bunch of quite similar LEGO blocks…

PS: For more about LEGO and creativity have a look at Serious Play (wiki) developed at the IMD management School in Lausanne, Switzerland by Johan Roos and Bart Victor. Yep, we have a hotbed for creativity and business design here in the region

In my last consulting assignment I worked on the formalization and description of the value proposition of a company. To do this I came up with a template as illustrated in the image accompanying this blog. You can download the “value proposition design template” as a word document from my website.

The template forces a company to think of its value proposition across the different phases of the value proposition life cycle (the value proposition being a cornerstone building block of a business model). The template or canvas helps a company identify and describe where it creates value for the customer, starting from the moment a potential customer evaluates a value proposition all the way to the moment a customer stops using/needing the value proposition. A company can create value in each of the 8 phases:

1. Evaluation Process: A company can create customer value by making the evaluation process as easy as possible. In the phase of the life cycle a customer will try to understand if a company’s value proposition satisfies its needs.
   Example: Software companies often allow their customers to freely and easily test their products.
   Example: Ski gear companies organize special camps to allow their best customers to test all their newest material.
2. Value Co-Creation: Through various technological advances the integration and participation of the customer in the value creation process is increasingly possible.
   Read more: Frank Piller of TU Munich and MIT writes a lot of interesting material on mass-customization.
   Watch more: Eric Van Hippel of MIT outlines in a video how customers can be integrated to design new and innovative products that correspond to their needs. You can also download his book on democratizing innovation.
3. Purchase Process: Customers highly value an efficient, simple and convenient purchase process.
   Example: Amazon’s “one click shopping” makes buying on its website a very quick and efficient process.
4. Set-up/Installation: In some cases set-up or installation is necessary. The simplification of this process is of enormous value to the customer.
5. Use & Operation: In many cases most of the value in a value proposition comes from the use or operation of an actual product or service. However, to differentiate themselves companies try to create value beyond a simple product or service.
   Example: For customers the main value from Salesforce.com’s value proposition comes from the use of its hosted sales force solution. Yet, Salesforce is carefully creating additional value by offering continuous updating “behind the scences” and providing easy access to complementary products by third party vendors.
6. Complementary Products/Services: Value is also created if a value proposition boosts the value of complementary products and services or is itself a platform for valuable complementary products/services.
7. Maintenance & After-Sales: Value is often created during the maintenance and after-sales phase. This can be either by offering high quality service or by offering a value proposition that minimizes the need for maintenance & after-sales.
   Example: The attractiveness of Salesforce.com’s value proposition essentially comes from the fact that the hosted software model (application service provider – ASP) minimizes the need of software maintenance by the customer.
8. Ending & Value Transfer: In many cases once a customer does not need a product or service anymore he has to terminate the service or dispose of the product.
   Example: ending the subscription of a magazine
   Example: disposing of batteries

I introduced an additional vertical axe of so-called “categories of value creation” in order to stimulate the reflection on value creation among the 8 phases. These five categories are:

• Productivity & Returns: value is created by increasing a customer’s productivity, his returns and his utility.
• Simplicity: value is created by making each phase of the value proposition life cycle as simple as possible to understand. For example, a software company can make the parametrization of its software as simple as possible.
• Convenience: value is created by making a customer’s life as convenient as possible. For example, an online grocer creates value by delivering goods at the time the customer desires.
• Risk: value is created by minimizing a customer’s various risks. For example, a customer risks choosing a product/service that does not satisfy his needs, or he may incur a physical risk by using the product (e.g. lawn mower) or he may risk choosing a product at the wrong moment (e.g. buying a plasma TV just before an important price decrease).
• Image: value is created by the image a product/service gives its purchaser (e.g. iPod)

In my work the value proposition design template has essentially three functions. Firstly, it stimulates a structured thought process about a company’s value proposition. Regarding this thinking process it is very important that the reflections about the value proposition do not come from the consultant alone, but are done in a group in order to get buy-in and an increased group understanding. Secondly, once the template is filled out it can be used to design and introduce a set of key performance indicators (KPI) to measure the performance of the value proposition. In addition the template and the KPIs should be regularly revisited by the management team which will lead to continuous improvements in the value proposition design. Thirdly, the value proposition template and the corresponding KPIs are a great tool to communicate a company’s value proposition to all its employees.

Remark: I like using Kim & Mauborgne’s strategy canvas to describe a company’s value proposition in addition to the value proposition canvas because it allows a visual comparision with competitors (I wrote about their work here / or read more about the strategy canvas in their book “Blue Ocean Strategy“).

(To design the template I drew on the work of Kambil, Ginsberg and Bloch – “Re-inventing Value Propositions” and my PhD dissertation – “The Business Model Ontology“)

While reading Kaplan & Norton’s book “The Strategy Focused Organization” for a consulting assignment, I came a across a paragraph about three different strategies an organization can use to differentiate itself in the marketplace. These strategies developed by Treacy and Wiersema in their book “The Discipline of Market Leaders” are:

*Product Leadership
*Customer Intimacy
*Operational Excellence

While I wasn’t aware of Treacy and Wiersema’s book, these three trajectories of differentiation strongly reminded me of John Hagel’s work on “Unbundling the Corporation“. As I already described in an earlier blog on unbundling in the mobile phone market, Hagel believes that companies will focus on one of three specific types of businesses:

In a nutshell, [...] most enterprises today are an unnatural bundle of three very different kinds of businesses – infrastructure management businesses, product innovation and commercialization businesses and customer relationship businesses.

I applied Treacy & Wiersema’s as well as Hagel’s thinking to my business model framework which is composed of 9 generic business model building blocks. The outcome is illustrated in the graphic above:

• The first model outlines the 9 generic building blocks of a business model which make it possible to describe the business logic of a company.
• The second model outlines a company that follows a product/service leadership strategy. The most important building block for this strategy are naturally the value proposition, which is highlighted i red.
• The third model outlines a company that follows a customer relationship leadership strategy. Companies persuing this strategy focus on the building blocks, distribution channel, target customers and customer relationships
• The third model outlines a company that follows an infrastructure/operations leadership strategy. Companies persuing this strategy focus on cost and concentrate on the building blocks, value configuration (activities), core capabilities, partner network and cost structure.

In general I find it an interesting exercice to describe a company’s business model with the described framework and then reflect on which strategy it follows…

Good communication skills between individuals and in a group are an important foundation for the strategy design and formulation process. I was reminded of this when recently a colleague mentioned that there are three different channels involved in the communication process. Only when we pay attention to and master all three we achieve a sound communication process and get good business results.

The three channels to master during the communicaiton process are:

1. Communication/speaking channel: This is simply the act of somebody speaking and trying to get a message across. What counts here is clearness, story telling capacities and the ability to express things in a language that the interlocutor understands (i.e. using the interlocutors reference frame not ones own).
2. Affirmation/understanding channel: This is simply the act of listening of the interlocutor and his regular affirmation through nodding or saying “yes”, “mhm” etc. On the other hand the person speaking should try to observe if his interlocutor is still with him and still understands the message trying to be conveyed. He can check if the interlocutor was not left behind by constantly analyzing affirmation signs (here “affirmation” does not necessarily mean an interlocutor agrees – here I’m just talking about the process of listening and following).
3. Context/processing channel: This is the act of paying attention to and processing context by the person speaking and the interlocutor. Both have to constantly ask themselves questions like: is the counterpart distracted (e.g. because he has a meeting afterwards)? Is the topic discussed adequate to the place and moment of discussion? Is the communication relationship biased (boss/employee)? Is there tension in the room during a group discussion? Is anybody being left out in a group discussion? Does anybody show signs of wanting to speak?

In addition to these three channels I would add that people come from different backgrounds (e.g. IT, marketing, operations), have different experiences (e.g. work experience, living abroad) and have different mental models to process information (pragmatic, conceptual, world view). So even when people speak the same language they do not necessarily understand each other.

However, in the strategy design process it is essential that people try to excel at communication skills in order to craft useful strategic plans that achieve a buy-in. This implies that executives follow the basic rules of communication and aim at mastering the three communication channels outlined above. As a rule of thumb they may want to start with the following “bonmot”:

• bad communicators only talk
• good communicators are able to listen
• great communicators adapt to context

Last week I got to know Yvo Galli, a fellow business consultant who was formerly at the Swiss food industry giant Nestlé. We had a great discussion about several topics, but from a business model design perspective I found one issue that Yvo mentioned particularly interesting.

Yvo pointed out a design flaw in Nestlé Switzerland’s business design. The flaw concerns the handling of the Thomy brand (mayonnaise, etc.) and the Maggi brand (bouillon cubes, seasoning, instant meals, etc.). The former is brand leader (Nr.1), while the latter is brand challenger (Nr.2). However, in Switzerland both brands are managed and marketed by the same sales force. This leads to a situation where the same vendors use contradictory arguments when they sell either Thomy or Maggi. In the case of Thomy, the brand leader, vendors will use defensive arguments (e.g. “there is no need for other brands in this domain”). In the case of Maggi, the brand challenger against Knorr of Unilever, vendors will use aggressive sales arguments (e.g. “you need a second brand to foster competition and innovation).

I tried to rapidly illustrate this business model design flaw and a possible solution in the image above. The first model describes the flawed business design. In terms of COMPETENCIES Nestlé only uses one sales & marketing department to bring both, the Thomy & Maggi brand (VALUE PROPOSITIONS) to market. This is done through the same CHANNEL of one SALES FORCE. As mentioned above, this leads to a contradictory argumentation of the vendors depending on if they are selling Thomy or Maggi.

The second model describes the “should be” business design, which could be a solution to the above flawed design. The difference lies in the fact that two different sales & marketing competencies are identified as opposed to the flawed model above. An defensive one for Thomy and a more aggressive one for Maggi. This should lead to two different sales teams that market through their own channels with their own argumentation for each individual brand. The consequence would be a more coherent approach to the market…