What is the Spot IM Business Model

Digital business models

Traditional industry concepts are being displaced by new business models.


Since the turn of the millennium, the use of digital technologies and social networks has led to seemingly sudden, dramatic changes in industry after industry. The initiative usually comes from companies from outside the industry. Sometimes from startups à la Uber and sometimes from companies such as Amazon that have grown up in a different industry. The risk of such upheavals in one's own industry can only be foreseen to a very limited extent with classic strategic concepts.

These classic concepts focus on competitive forces such as relative strategic competencies, market shares and opportunities for differentiation. However, these forces are not the trigger for the current technology-driven transformations.

Competitors from outside the industry use digital technologies. In doing so, they are implementing new business models previously unknown in an industry. It is easier for them to do this because they are not “trapped” in traditional approaches, cultures, dependencies and framework conditions that are customary in the industry. Startups in particular have the freedom to see things differently and to approach them differently.

Innovators from outside the industry have a competitive advantage. Because they can not only develop and implement new approaches more easily; the established competitors often find it difficult to imitate new business models.

In the transformation phase, understanding business models therefore becomes an important sub-task of strategic management. As is so often the case, Peter Drucker recognized this decades before most others. He spoke of "The Theory of the Business".

1. What is a business model?

Business models are made up of three parts:

  • Value proposition (customer value proposition),
  • Earnings mechanics (profit formula) and the
  • Key resources and processes.

Almost all authors agree: business models must include at least these three parts. There are big differences in the type of support for the analysis and design of new business models.

Johnson, Christensen and Kagermann see five triggers for business model innovation:

    1. The current business model excludes a group of potential customers.
    2. New technologies enable new business models.
    3. The current business model does not solve certain customer problems or does not solve them satisfactorily.
    4. Competitors destroy existing markets with cheap offers.
    5. A market segment disappears.

Fig. 1: Johnson, Christensen and Kagermann: Five triggers for business model innovations.

2. Johnson, Christensen, Kagermann

The starting point of a business model is the well thought-out redefinition of the value proposition. The remaining parts are based on this:

  • Profit making model
  • Revenue Model - How Much Revenue Can The Business Make?
  • Cost structure - what are the costs?
  • Margins - What are the profit margins resulting from income and costs?
  • Resource build-up speed - How quickly do the resources need to be available?
  • Core resources
  • Which resources (personnel, technology, systems, etc.) are necessary in order to be able to fulfill the value proposition?
  • Core processes
  • Which processes, rules, standards and key figures are necessary to ensure consistent performance?

3. Boston Consulting Group

The Boston Consulting Group, on the other hand, divides a business model into two parts:

  • Value proposition; consisting of target segments, offered products and services as well as the earnings model.
  • Operating model; consisting of value chain, cost structure and organization.

In a further step, BCG derives nine starting points from this to improve the business model:

  • Redefining the value proposition
  • Change from selling a product to offering a service,
  • Change from selling a product to creating an experience and
  • Shift from selling a product to delivering the result.
  • Supporting the value proposition through the business processes
  • Building skills,
  • Cooperation with external partner companies and
  • Redesign of the customer relationship.
  • Recomposition of the business model
  • Redesign of differentiation,
  • Reshaping the cost structure and
  • Redesign of the billing model.

4. BMI Lab

The BMI Lab, a spin-off from the University of St. Gallen, developed the "Sankt Gallen Model" with the elements who, what, how and value:

Fig. 2: Gassmann / Frankenberger / Csik: developing business models, 7.

  • Who are the customers?
  • Which customer segments are addressed in which way and through which sales channels?
  • Who are the opinion leaders behind our customers and how will they change in the next few years?
  • What is the value proposition?
  • What benefits are created for customers and how are these benefits communicated?
  • Which problems and needs of the customers are solved or satisfied and what is the value of this for them?
  • How is the benefit created (value chain)?
  • Which key resources, competencies and key activities are required?
  • Who are the necessary partners, suppliers, etc.?
  • Value (which earnings model is being pursued)?
  • What are the largest cost blocks and key cost drivers?
  • What are the main sources of income and how is the income generated? What are customers willing to pay for?

55 cards with possible business model ideas serve as concrete tools for a brainstorming / discussion workshop on business model innovation. This illustrates that a specific product or service can be offered in the form of different business models. Established companies often see only one quasi “compelling” business model for each product or service. By comparing several possible business models, potential effects and necessary changes to your own market presence can be derived.

5. Canvas

The most widespread today is probably the concept of Alexander Osterwalder and his team. In contrast to the Sankt Gallen model, the concept does not propose complete business models, but rather structures the model components and offers a tried and tested team work process for business process innovation.

Osterwalder describes his representation of the business model as a canvas and differentiates between the actual business model and the value proposition model. When setting up the canvas business model, he is guided by the definition of the St. Gallen model of the BMI Lab.

5.1. Value proposition canvas

A value proposition consists of three components that are tailored to specific customer profiles. Therefore, customer profiles must first be drawn up that contain statements on the following three topics:

  • “Jobs” - tasks that customers have to fulfill in their work, privately and in their free time. This also includes emotional and social “jobs”. The job of a hotelier today includes, for example, providing sports equipment such as e-bikes.
  • "Pains" - Pain, that is, negative aspects that occur when fulfilling the job (direct and indirect disadvantages, page 198 difficulties, undesirable costs, missing functions, etc.). The investment in e-bikes has to be financed and replaced with current models at short intervals, which causes costs, so "pains".
  • "Gains" - uses and advantages that customers directly or indirectly expect from products or services. Hotels want to offer their guests the latest e-bike models without having to bear high investments and investment risks.

As a rule, companies know what benefits their own products and services bring to customers. It does not take into account which problems remain unsolved and which expectations remain unfulfilled. This offers companies from outside the industry with an unbiased perspective opportunities. With the help of new technology, they can develop products and services that meet previously neglected customer expectations.

Osterwalder suggests defining key figures in order to be able to measure “pains” and “gains” (eg waiting times that represent “pains” for customers).

In B2B business, it is not only about the companies that are directly supplied, but also about the “pain” and “gains” of the persons concerned in the customer companies and the customers of their own customers.

In the next step, appropriate value propositions are formulated for the customer profiles:

  • What products and services can be offered to customers?
  • Service providers such as Greenstorm or Kaloveo provide hotels with e-bikes.
  • Painkiller: How can customers' pains be avoided?
  • The e-bikes are not sold, but rented out or made available in exchange for benefits in kind (Greenstorm receives hotel vouchers).
  • Beneficiary: How and by what means can benefits be generated for customers?
  • The hotels have the latest e-bike models every season without the previously expected “pains”.

The value proposition developed (shown in a square on the left side of the canvas) must match the customer profile (shown in a circle on the right side of the canvas). Even the best value proposition only creates value if the customer is willing to pay for that value.

The essential step is to find new benefit promises that have not yet been offered, are being considered or are available on the market and that match “pains” and “gains” that have not yet been considered.

The next step is to insert the value proposition into the business model canvas.

Fig 3: Value Proposition Canvas, https://assets.strategyzer.com/assets/resources/the-value-proposition-canvas.pdf (accessed on January 3, 2019).

5.2. Business model canvas

"A business model describes the basic principle according to which an organization creates, communicates and records values." 1

Osterwalder divides its business model canvas into nine fields, which are divided into three groups:

Fig 4: https://de.slideshare.net/stefanfrederich/business-model-canvas-de?from_action=save (accessed on January 3, 2019).

For each of the new fields, the current situation is first described and then an innovative alternative solution is developed. The customer segments and value propositions are taken from the Value Proposition Canvas.

  • Distribution: Internet download or sales outlets, directly or through retailers.
  • Customer relationship: in person, directly via apps or via the Internet.
  • Income or source of income: results from the value proposition. One-time sales proceeds or recurring rents, membership license or usage fees through to free offers, if the income is generated through advertising revenues.
  • Key activities / tasks: processes, tasks to generate the value proposition.
  • Key resources / means and processes: physical, financial, intellectual or human resources / equipment.
  • Parner / Partnerships: Outsourcing of resources and processes.
  • Effort or cost structure: results from tasks, resources and costs for partners.

The canvas is also suitable for anticipating potential entry strategies for new competitors.

5.3. The development of the canvas business model

The two canvases are copied or drawn on pin boards as large as possible. The individual fields are then gradually worked out in the team with colored cards or sticky notes, whereby the colors of the cards can be used to identify things that belong together (segments, value proposition, sales channels, etc.). All fields should be filled equally. Otherwise, this is an indicator of deficiencies in the business model. Catalogs of questions, which Osterwalder makes available as a download on its homepage, serve as an aid. By removing and adding the sticky notes, various options can be analyzed and discussed, but interactions can also be recognized until the best set is selected. In the end, different business model “stories” (strategies) can be formulated in order to be able to analyze whether one's own “story” (strategy) is better than that of the competitors.

6. Assessment of business models

Of course, not every new business model is automatically successful. Joan Magretta names two critical tests that a business model must pass:

Does the business model provide benefits that are understandable for the customer and for which the customer is willing to pay? New business models turn industry practices upside down, combine different products, competitors and complementors to create a new system of value propositions for customers. If customers don't adopt this novel approach, the business model will be unsuccessful.

A business model accepted by the customer is only successful if the return exceeds the effort.

7. Criticism

On the one hand, very generally formulated concepts, such as that of Johnson, Christensen and Kagermann, have less concrete benefits for direct management work. For this reason, for example, Drucker's original concept of the “Theory of the Business” did not really make it into management practice. On the other hand, strongly guided procedures, such as that of Osterwalder or the BMI, lead to less creative and independent strategic decisions. We know the effect from playing LEGO: In the end, the self-built model houses all look a bit similar.

A phase of strategic management, which is particularly in demand in terms of creativity, cannot be mastered stubbornly according to a recipe. It also takes ideas and creative drive when selecting, combining and adapting management concepts to specific entrepreneurial challenges.


Recommended reading

Drucker, The Theory of the Business, Harvard Business Review September-October 1994, 95 ff.

Gassmann / Frankenberger / Csik: Developing business models, 2nd edition Munich 2017, 320 pages.

Johnson / Christensen / Kagermann: Reinventing Your Business Model, Harvard Business Review December 2008, 59 ff.

Lindgardt / Hendren: Using Business Model Innovation to Reinvent the Core, https://www.bcg.com/de-at/publications/2014/growth-innovation-using-business-model-innovation-reinvent-core.aspx (access on January 3, 2019).

Magretta: Why Business Models Matter; Harvard Business Review MAY 2002.

Osterwalder / Pigneur: Business Model Generation, Frankfurt 2011, 285 pages.

Osterwalder, et al: Value Proposition Design, Frankfurt 2015, 316 pages.

https://www.bcg.com/de-at/capabilities/strategy/business-model-innovation.aspx.

https://bmilab.com/

https://strategyzer.com/


The article was published in CFO aktuell (issue 5/2019). More information at: www.cfoaktuell.at

Keywords:Industry concepts, business, canvas, digitization, business models, strategy, strategic management, transformation