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Reinventing your bussiness model

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Gustavo Lopez

on 28 August 2014

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Transcript of Reinventing your bussiness model

Reinventing Your
Business Model

Business Model: A Definition
A business model, from our point of view, consists of four interlocking elements that, taken together, create and deliver value.
The most important to get right, by far, is the first.
How Great Models Are Built
WHEN A NEW BUSINESS MODEL NEEDED
1.- The opportunity to address through disruptive innovation.

2.- The opportunity to capitalize on a completely new technology.

3.- The opportunity to bring focus to solve a task.

4.- The need to protect themselves from disruptive innovators in the lower segments.

5.- The need to respond to a changing basis of competition.
The Elements of a Successful Business Model
Starbucks
The February 26, 2008 is a historic date in the 40 year history of the coffee chain.

That day closed down 7,100 Starbucks in the United States.
A drastic and risky as it marked the beginning of the reinvention of Starbucks. And Howard Schultz confirmed as the genius who was able to make a radical change to the strategy of the company changing its core values.
Kodak reinvents itself to adapt to the digital age
Kodak was successful by creating rolls of film, but in 1975 his research engineers invented the first digital camera in the world, a fact that ironically risked his success.
The Idea in Brief:
1. Articulate what makes your existing model successful. For example, what customer problem does it solve? How does it make money for your firm?

2. Watch for signals that your model needs changing, such as tough new competitors on the horizon.

3.Decide whether reinventing your model is worth the effort. The answer’s yes only if the new model changes the industry or market.
Creating a customer value proposition.
"It’s not possible to invent or reinvent a business model without first identifying a clear customer value proposition"
One way to generate a precise customer value proposition is to think about the four most common barriers keeping people from getting particular jobs done:
insufficient wealth
access
skill
time.
Customer value proposition (CVP).
A successful company is one that has found a way to create value for customers.
Profit formula
The profit formula is the blueprint that defines how the company creates value for itself while providing value to the customer. It consists of the following:
• Revenue model: price x volume
• Cost structure: direct costs, indirect costs, economies of scale. Cost structure will be predominantly driven by the cost of the key resources required by the business model.
• Margin model: given the expected volume and cost structure, the contribution needed from each transaction to achieve desired
profits.
• Resource velocity: how fast we need to turn over inventory, fixed assets, and other assets—and, overall, how well we need to utilize resources—to support our expected volume and achieve our anticipated profits.

Customer Value Proposition (CVP)
Target customer
Offering
, which satisfies the problem or fulfills the need.
This is defined not only by what is sold but also by how it’s sold.
Job to be done
to solve an important problem or fulfill an important need for the target customer.
PROFIT FORMULA

Revenue model
How much money can be made: price x volume. Volume can be thought of in terms of market size, purchase frequency, ancillary sales, etc.


Cost structure
How costs are allocated: includes cost of key assets, direct costs, indirect costs, economies of scale.


Margin model
How much each transaction should net to achieve desired profit levels.


Resource velocity.
How quickly resources need to be used to support target volume. Includes lead times, throughput, inventory turns, asset utilization, and so on.
KEY RESOURCES
needed to deliver the customer value proposition profitably. Might include:
■People
■Technology, products
■Equipment
■Information
■Channels
■Partnerships, alliances
■Brand
KEY PROCESSES,
as well as rules, metrics, and norms, that make the profitable delivery of the customer value proposition repeat-able and scalable. Might include:


Processes
: design, product development, sourcing, manufacturing, marketing, hiring and training.


Rules and metrics
: margin requirements for investment, credit terms, lead times, supplier terms.


Norms
: opportunity size needed for investment, approach to customers and channels.
How Dow Corning got out of its own way?
When business model innovation is clearly called for, success lies not only in getting the model right but also in making sure the incumbent business doesn’t in some way prevent the new model from creating value or thriving.

Dow Corning had sold thousands of silicone based products and provided technical services to an array of industries.

Many years after, a strategic review uncovered a critical insight: its low end product segment was commoditizing.

Many customers no longer needed technical services, the needed basic products at low prices. This shift created an opportunity to growth, but to exploit that opportunity Dow Corning had to figure out a way to serve those customers with a lower priced product.
The secret sauce: patience. Successful new businesses typically revise their business models four times or so on the road to profit- ability.

While a well- considered business- model-innovation process can often shorten this cycle, successful incumbents must tolerate initial failure and grasp the need for course correction. In effect, companies have to focus on learning and adjusting as much as on executing.

We recommend companies with new business models be patient for growth (to allow the market opportunity to unfold) but impatient for profit (as an early validation that the model works).


A profitable business is the best early indication of a viable model.
Identifying new competencies
Business model innovations have reshaped entire industries and redistributed billions of dollars of value.

Retail discounters such as Wal- Mart and Target, which entered the market with pioneering business models, now account for 75% of the total valuation of the retail sec- tor. Low-cost U.S. airlines grew from a blip on the radar screen to 55% of the market value of all carriers.
Fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation.Stories of business model innovation from well-established companies like Apple
Our research suggests two problems.
Road map Ours consists of three simple steps.
* The first is a lack of definition: Very little formal study has been done into the dynamics and processes of business model development.

* Second, few companies understand their existing business model well enough.
* The first is to realize that success starts by not thinking about business models at all. It starts with thinking about the opportunity to satisfy a real customer who needs a job done.

* The second step is to construct a blueprint laying out how your company will fulfill that need at a profit. In our model, that plan has four elements.

* The third is to compare that model to your existing model to see how much you’d have to change it to capture the opportunity.
Why is it so difficult to pull off the new growth that business model innovation can bring
Ratan Tata knew the only way to get families off their scooters and into cars would be to break the wealth barrier by drastically decreasing the price of the car.

“What if I can change the game and make a car for one lakh?” Tata wondered, envisioning a price point of around US$2,500, less than half the price of the cheapest car available.

For Hilti, moving to a contract management program required shifting assets from custom- ers’ balance sheets to its own and generating revenue through a lease/subscription model.
IDENTIFYING KEY RESOURCES AND PROCESSES
Having articulated the value proposition for both the customer and the business, companies must then consider the key resources and processes needed to deliver that value.

Focusing first on the value proposition and the profit formula makes clear how those resources and processes need to interrelate.

Oftentimes, it’s not the individual resources and processes that make the difference but their relationship to one another. Companies will almost always need to integrate their key resources and processes in a unique way to get a job done perfectly for a set of customers. When they do, they almost always create enduring competitive advantage.

Rules, norms, and metrics are often the last element to emerge in a developing business model. They may not be fully envisioned until the new product or service has been road tested. Nor should they be. Business models need to have the flexibility to change in their early years.
Affordable
What is a Customer Value Proposition
Quality Product
Consumer focus
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