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APA format500 wordsReview Business Models Parts I & II in the Business Model Generation text. After your review, prepare a post highlighting the five (5) major points from your review. The overarching theme for this posting is “Strategic Thinking.” Model 1 is Canvas Model 2 is Patterns
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The starting point for any good discussion, meeting,
or workshop on business model innovation should
This concept can become a shared language that
be a shared understanding of what a business model
allows you to easily describe and manipulate business
actually is. We need a business model concept that
models to create new strategic alternatives. Without
everybody understands: one that facilitates descrip-
such a shared language it is diΩicult to systematically
tion and discussion. We need to start from the same
challenge assumptions about one’s business model
point and talk about the same thing. The challenge is
and innovate successfully.
that the concept must be simple, relevant, and intuitively understandable, while not oversimplifying the
We believe a business model can best be described
complexities of how enterprises function.
through nine basic building blocks that show the
logic of how a company intends to make money. The
In the following pages we oΩer a concept that allows
nine blocks cover the four main areas of a business:
you to describe and think through the business model
customers, oΩer, infrastructure, and financial viability.
of your organization, your competitors, or any other
The business model is like a blueprint for a strategy
enterprise. This concept has been applied and tested
to be implemented through organizational structures,
around the world and is already used in organizations
processes, and systems.
such as IBM, Ericsson, Deloitte, the Public Works and
Government Services of Canada, and many more.
[
The 9 Building Blocks
CS
1
Customer
Segments
An organization serves
one or several Customer
Segments.
VP
2
Value
Propositions
It seeks to solve customer
problems and satisfy
customer needs with
value propositions.
3
CH
CR
Channels
Customer
Relationships
Value propositions
are delivered to customers
through communication,
distribution, and sales
Channels.
Customer relationships
are established and
maintained with each
Customer Segment.
17
R$
5 Revenue
KR
Streams
Key
Resources
Revenue streams result
from value propositions
successfully oΩered to
customers.
Key resources are the
assets required to oΩer
and deliver the previously
described elements . . .
KA
7
Key
Activities
. . . by performing a number of Key Activities.
KP
8
C$
Cost
Structure
The business model
elements result in the
cost structure.
18
KA
Key Activities
KP
Key Partners
KR
Key Resources
C$
Cost Structure
19
CR
Customer Relationships
CS
Customer Segments
VP
Value Propositions
CH
Channels
R$
Revenue Streams
CS
1 Customer Segments
The Customer Segments Building Block deftnes
the diΩerent groups of people or organizations an
enterprise aims to reach and serve
Customers comprise the heart of any business model. Without
(profitable) customers, no company can survive for long. In order
to better satisfy customers, a company may group them into
distinct segments with common needs, common behaviors,
or other attributes. A business model may define one or several
large or small Customer Segments. An organization must make
a conscious decision about which segments to serve and which
segments to ignore. Once this decision is made, a business model
can be carefully designed around a strong understanding of
specific customer needs.
Customer groups represent separate segments if:
} Their needs require and justify a distinct oΩer
} They are reached through diΩerent Distribution Channels
} They require diΩerent types of relationships
} They have substantially diΩerent profitabilities
} They are willing to pay for diΩerent aspects of the oΩer
For whom are we creating value?
Who are our most important customers?
21
Diversified
An organization with a diversified customer business
model serves two unrelated Customer Segments
with very diΩerent needs and problems. For example,
There are diΩerent types of Customer Segments.
in 2006 Amazon.com decided to diversify its retail
business by selling “cloud computing” services: online
Here are some examples:
Segmented
storage space and on-demand server usage. Thus
Mass market
Some business models distinguish between market
it started catering to a totally diΩerent Customer
Business models focused on mass markets don’t
segments with slightly diΩerent needs and problems.
Segment—Web companies—with a totally diΩerent
distinguish between diΩerent Customer Segments.
The retail arm of a bank like Credit Suisse, for example,
Value Proposition. The strategic rationale behind this
The Value Propositions, Distribution Channels, and
may distinguish between a large group of customers,
diversification can be found in Amazon.com’s powerful
Customer Relationships all focus on one large group
each possessing assets of up to U.S. $100,000, and
IT infrastructure, which can be shared by its retail sales
of customers with broadly similar needs and problems.
a smaller group of aΩluent clients, each of whose net
operations and the new cloud computing service unit.
This type of business model is often found in the
worth exceeds U.S. $500,000. Both segments have
consumer electronics sector.
similar but varying needs and problems. This has
Multi-sided platforms (or multi-sided markets)
implications for the other building blocks of Credit
Some organizations serve two or more interdepen-
Niche market
Suisse’s business model, such as the Value Proposi-
dent Customer Segments. A credit card company, for
Business models targeting niche markets cater to
tion, Distribution Channels, Customer Relationships,
example, needs a large base of credit card holders
specific, specialized Customer Segments. The Value
and Revenue streams. Consider Micro Precision
and a large base of merchants who accept those credit
Propositions, Distribution Channels, and Customer
Systems, which specializes in providing outsourced
cards. Similarly, an enterprise oΩering a free news-
Relationships are all tailored to the specific require-
micromechanical design and manufacturing solutions.
paper needs a large reader base to attract advertisers.
ments of a niche market. Such business models
It serves three diΩerent Customer Segments—the
On the other hand, it also needs advertisers to finance
are often found in supplier-buyer relationships. For
watch industry, the medical industry, and the industrial
production and distribution. Both segments are
example, many car part manufacturers depend heavily
automation sector—and oΩers each slightly diΩerent
required to make the business model work (read
on purchases from major automobile manufacturers.
Value Propositions.
more about multi-sided platforms on p. 76).
VP
2 VALUE Propositions
The Value Propositions Building Block describes
the bundle of products and services that create
value for a speciftc Customer Segment
The Value Proposition is the reason why customers turn to one
company over 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. In this sense, the Value Proposition is an aggregation, or bundle, of benefits that a company
oΩers customers.
Some Value Propositions may be innovative and represent a
new or disruptive oΩer. Others may be similar to existing market
oΩers, but with added features and attributes.
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 oΩering
to each Customer Segment?
A Value Proposition creates value for a Customer
for instance, created a whole new industry around
Customization
Segment through a distinct mix of elements cater-
mobile telecommunication. On the other hand,
Tailoring products and services to the specific
ing to that segment’s needs. Values may be quan-
products such as ethical investment funds have
needs of individual customers or Customer
titative (e.g. price, speed of service) or qualitative
little to do with new technology.
Segments creates value. In recent years, the
concepts of mass customization and customer
(e.g. design, customer experience).
Elements from the following non-exhaustive list
can contribute to customer value creation.
Performance
co-creation have gained importance. This approach
Improving product or service performance has
allows for customized products and services,
traditionally been a common way to create value.
while still taking advantage of economies of scale.
Newness
The PC sector has traditionally relied on this factor
Some Value Propositions satisfy an entirely new set
by bringing more powerful machines to market.
of needs that customers previously didn’t perceive
But improved performance has its limits. In recent
because there was no similar oΩering. This is often,
years, for example, faster PCs, more disk storage
but not always, technology related. Cell phones,
space, and better graphics have failed to produce
corresponding growth in customer demand.
23
2
“Getting the job done”
Price
Value can be created simply by helping a customer
OΩering similar value at a lower price is a common
get certain jobs done. Rolls-Royce understands this
way to satisfy the needs of price-sensitive Cus-
very well: its airline customers rely entirely on Rolls-
tomer Segments. But low-price Value Propositions
Royce to manufacture and service their jet engines.
have important implications for the rest of a busi-
This arrangement allows customers to focus on
ness model. No frills airlines, such as Southwest,
running their airlines. In return, the airlines pay
easyJet, and Ryanair have designed entire business
Rolls-Royce a fee for every hour an engine runs.
models specifically to enable low cost air travel.
Another example of a price-based Value Proposi-
Design
tion can be seen in the Nano, a new car designed
Design is an important but diΩicult element to mea-
and manufactured by the Indian conglomerate Tata.
sure. A product may stand out because of superior
Its surprisingly low price makes the automobile
design. In the fashion and consumer electronics
aΩordable to a whole new segment of the Indian
industries, design can be a particularly important
population. Increasingly, free oΩers are starting to
part of the Value Proposition.
permeate various industries. Free oΩers range from
free newspapers to free e-mail, free mobile phone
Brand/status
Customers may find value in the simple act of using
and displaying a specific brand. Wearing a Rolex
watch signifies wealth, for example. On the other end
of the spectrum, skateboarders may wear the latest
“underground” brands to show that they are “in.”
services, and more (see p. 88 for more on FREE).
25
Cost reduction
Accessibility
Helping customers reduce costs is an important
Making products and services available to custom-
way to create value. Salesforce.com, for example,
ers who previously lacked access to them is another
sells a hosted Customer Relationship management
way to create value. This can result from business
(CRM) application. This relieves buyers from the
model innovation, new technologies, or a combina-
expense and trouble of having to buy, install, and
tion of both. NetJets, for instance, popularized the
manage CRM software themselves.
concept of fractional private jet ownership. Using an
innovative business model, NetJets oΩers individu-
Risk reduction
als and corporations access to private jets, a service
Customers value reducing the risks they incur
previously unaΩordable to most customers. Mutual
when purchasing products or services. For a used
funds provide another example of value creation
car buyer, a one-year service guarantee reduces
through increased accessibility. This innovative
the risk of post-purchase breakdowns and repairs.
financial product made it possible even for those
A service-level guarantee partially reduces the
with modest wealth to build diversified investment
risk undertaken by a purchaser of outsourced IT
portfolios.
services.
Convenience/usability
Making things more convenient or easier to use
can create substantial value. With iPod and iTunes,
Apple oΩered customers unprecedented convenience searching, buying, downloading, and listening to digital music. It now dominates the market.
CH
3 CHANNELS
The Channels Building Block describes how a
company communicates with and reaches its
Customer Segments to deliver a Value Proposition
Communication, distribution, and sales Channels comprise a
company’s interface with customers. Channels are customer touch
points that play an important role in the customer experience.
Channels serve several functions, including:
} Raising awareness among customers about a company’s
products and services
} Helping customers evaluate a company’s Value Proposition
} Allowing customers to purchase specific products and services
} Delivering a Value Proposition to customers
} Providing post-purchase customer support
Through which Channels do our Customer Segments
want to be reached? How are we reaching them now?
How are our Channels integrated? Which ones work best?
Which ones are most cost-eΩicient? How are we
integrating them with customer routines?
27
Partner Channels lead to lower margins, but they
own Channels, through partner Channels, or through
allow an organization to expand its reach and benefit
between direct Channels and indirect ones, as well as
a mix of both. Owned Channels can be direct, such as
from partner strengths. Owned Channels and particu-
between owned Channels and partner Channels.
an in-house sales force or a Web site, or they can be
larly direct ones have higher margins, but can be costly
indirect, such as retail stores owned or operated by the
to put in place and to operate. The trick is to find the
Finding the right mix of Channels to satisfy how
organization. Partner Channels are indirect and span a
right balance between the diΩerent types of Channels,
customers want to be reached is crucial in bringing
whole range of options, such as wholesale distribution,
to integrate them in a way to create a great customer
a Value Proposition to market. An organization can
retail, or partner-owned Web sites.
experience, and to maximize revenues.
Direct
choose between reaching its customers through its
cover some or all of these phases. We can distinguish
Own
Channels have five distinct phases. Each channel can
How do we raise aware-
How do we help custom-
4. Delivery
5. After sales
How do we allow custom- How do we deliver a Value How do we provide
Indirect
Partner
support?
CR
Customer RELATIONSHIPS
The Customer Relationships Building Block
describes the types of relationships a company
establishes with speciftc Customer Segments
A company should clarify the type of relationship it wants to
establish with each Customer Segment. Relationships can range
from personal to automated. Customer relationships may be
driven by the following motivations:
} Customer acquisition
} Customer retention
} Boosting sales (upselling)
In the early days, for example, mobile network operator Customer
Relationships were driven by aggressive acquisition strategies
involving free mobile phones. When the market became saturated,
operators switched to focusing on customer retention and increasing average revenue per customer.
The Customer Relationships called for by a company’s business
model deeply influence the overall customer experience.
What type of relationship does each of our Customer
Segments expect us to establish and maintain with them?
Which ones have we established? How costly are they?
How are they integrated with the rest of our business model?
We can distinguish between several categories of
Self-service
solve each other’s problems. Communities can also
Customer Relationships, which may co-exist in a
In this type of relationship, a company maintains no
help companies better understand their customers.
company’s relationship with a particular
direct relationship with customers. It provides all the
Pharmaceutical giant GlaxoSmithKline launched a
Customer Segment:
necessary means for customers to help themselves.
private online community when it introduced alli, a
new prescription-free weight-loss product.
GlaxoSmithKline wanted to increase its under-
Personal assistance
Automated services
This relationship is based on human interaction.
This type of relationship mixes a more sophisti-
standing of the challenges faced by overweight
The customer can communicate with a real customer
cated form of customer self-service with automated
adults, and thereby learn to better manage customer
representative to get help during the sales process or
processes. For example, personal online profiles give
expectations.
after the purchase is complete. This may happen on-
customers access to customized services. Automated
site at the point of sale, through call centers, by e-mail,
services can recognize individual customers and their
Co-creation
or through other means.
characteristics, and oΩer information related to orders
More companies are going beyond the traditional
or transactions. At their best, automated services can
customer-vendor relationship to co-create value with
Dedicated personal assistance
simulate a personal relationship (e.g. oΩering book or
customers. Amazon.com invites customers to write
This relationship involves dedicating a customer
movie recommendations).
reviews and thus create value for other book lovers.
Some companies engage customers to assist with the
representative specifically to an individual client. It
represents the deepest and most intimate type of
Communities
design of new and innovative products. Others, such
relationship and normally develops over a long period
Increasingly, companies are utilizing user communities
as YouTube.com, solicit customers to create content
of time. In private banking services, for example, dedi-
to become more involved with customers/prospects
for public consumption.
cated bankers serve high net worth individuals. Similar
and to facilitate connections between community
relationships can be found in other businesses in the
members. Many companies maintain online com-
form of key account managers who maintain personal
munities that allow users to exchange knowledge and
relationships with important customers.
29
R$
5
Revenue StreAMS
The Revenue Streams Building Block represents
the cash a company generates from each Customer
Segment (costs must be subtracted from revenues to
create earnings)
If customers comprise the heart of a business model, Revenue
Streams are its arteries. A company must ask itself, For what value
is each Customer Segment truly willing to pay? Successfully
answering that question allows the firm to generate one or more
Revenue Streams from each Customer Segment. Each Revenue
Stream may have diΩerent pricing mechanisms, such as fixed list
prices, bargaining, auctioning, market dependent, volume dependent, or yield management.
A business model can involve two diΩerent types of Revenue Streams:
1. Transaction revenues resulting from one-time customer payments
2. Recurring revenues resulting from ongoing payments to either
deliver a Value Proposition to customers or provide post-purchase
customer support
For what value are our customers really willing to pay?
For what do they currently pay? How are they currently
paying? How would they prefer to pay? How much does
each Revenue Stream contribute to overall revenues?
Subscription fees
of ownership. Zipcar.com provides a good illustration.
This Revenue Stream is generated by selling continu-
The com …
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