Advanced Marketing

Ale B
Deusto Business School
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 UNIT 1- FUNDAMENTALS OF MARKETING
Some key concepts

Marketing: The process by which companies create value for customers and build strong
customer relationships in order to capture value form customers in return.

Marketing myopia: The mistake of paying more attention to the specific products a company
offers than to the benefits and experiences produced by these products.

The marketing process:

•Understand the
2 •Construct an
4 •Capture value
marketplace and intergrated from customers to
•Design a marketing
•Build profitable create profits and
customer needs customer-driven relationships
program that customer equity
and wants marketing and create
delivers superior
strategy value customer delight
1 3 5

Customer relationship management: The overall process of building and maintaining

profitable customer relationships by delivering superior customer value and satisfaction.

Customer-managed relationships: marketing relationships in which customers, empowered by

today’s new digital technologies, interact with companies and with each other to shape their
relationships with brands

Market Growth- The Boston Consulting group approach: A company classifies all its SBUs
according to the growth share matrix:

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Market growth rate provides a measure of market attractiveness while relative market share
serves as a measure of company strength in the market. We may, according to the matrix,
differentiate 4 SBUs:

- Stars: they are high-growth, high-share businesses or products. They need heavy
investments to finance their rapid growth. Their growth will slow down and they will
turn into cash cows.
- Cash cows: they are long-growth, high-share businesses or products. These established
and successful SBUs need less investment to hold their market share. Thus, they
produce a lot of cash that the company uses to pay bills and support other SBUs that
need investment
- Question marks: They are low-share business units in high-growth markets to think
hard about which question marks it should try to build into stars and whish should be
phased out.
- Dogs: dogs are low. Growth, low share businesses and products. They may generate
enough cash to maintain themselves but do not promise to be large sources of money.

Once it has classified its SBUs, the company must determine what role each will play in the
future. It can pursue one of four strategies:

1 2 3 4

•Invest more in the •Invest just enough •Harvest the SBU, •Divest the SBU by
business unit to to hold the SBU´s milking it short- selling it or phasing
build its share share at the current term cash flow it out and using the
level regardless of the resources
long-term effect elsewhere

As time passes, SBUs change their positions in the growth-share matrix. Most SBUs start out as
question marks, move into the star category, if they success become cash cows and the finally
die off or turn into dogs towards the end of their life cycle.

Developing strategies for growth and downsizing: Marketing has the main responsibility for
achieving profitable growth for the company. Marketing needs to identify, evaluate, and select
market opportunities and establish strategies for capturing them. One useful device for
identifying growth opportunities is the product7 market expansion grid: a portfolio- planning
tool for identifying company growth opportunities through market penetration, market
development, product development, or diversification.

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 Existing products Diversification

Existing markets Market Product

penetration development

New markets Market Diversificatio

development n

Company growth by increasing sales of current products to current market segments

Market penetration without changing the product

Product development Company growth by offering modified or new products to current market segments
Company growth by identifying and developing new market segments for current
Market development company products
Company growth through starting up or aquiring business outside the company's current
Diversification products and markets

Companies must not only develop strategies for growing their business portfolios but also
strategies for downsizing them. In difficult economic times, many firms prune out weaker, less-
profitable products and markets to focus their more limited resources on the strongest ones.

Marketing Strategy and the Marketing Mix:

Customer value
Goal: create value and relationships

Marketing strategy Segmentation Targeting Differentiation Positioning

Itergrated marketing mix Product Promotion Price Product

To find the best marketing Marketing Marketing Marketing

Marketing contol
strategy and mix: analysis planning implementation

Marketing
Watchs and adapts to: intermediaries
Competitors Competitors Publics

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The goal is to create value for customers and build profitable customer relationships.

Next comes marketing strategy: the marketing logic by which the company hopes to create
customer value and achieve profitable customer relationships.

Guided by the marketing strategy, the company designs an integrated marketing mix made up
of factors under its control- product, price, place and promotion.

To find the best marketing strategy and mix, the company engages in marketing analysis,
planning, implementation and control.

Through these activities, the company watches and adapts to the actors and forces in the
marketing environment.

Requirements for effective segmentation: Clearly, there are many ways to segment a market,
but not all segmentations are effective. To be useful, market segments must be:

The size, purchasing power, and profiles of segments can be measured.

Measurable
The markets segments can be effectively reached and served.
Accessible
The market segments are large or profitable enough to serve.
Subsantial
The segments are conceptually distinguishable and respond differently to different
Differentiable marketing mix elements and programs.

Actionable Effective programs can be designed to attracting and serving the segments.

Selecting target market segments: After evaluating different segments, the company must
decide which and how to many segments it will target. A target market consists of a set of
buyers who share common needs or characteristics that the company decides to serve.

Differentiated Micromarketing
Undifferentiated Concentrated
(segmented) (local or
(mass) marketing (niche) marketing
marketing individual)

Targeting broadly Targeting narrowly

Undifferentiated marketing: Using an undifferentiated marketing (or mass marketing) strategy,

a firm might decide to ignore market segment differences and target the whole market with
one offer. Such strategy focuses on what is common in the needs of consumers rather than on
what is different.

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Differentiated marketing: Using a differentiated marketing (or segment marketing) strategy, a
firm decides to target several market segments and designs separate offers for each. By
offering product and marketing variations to segments, companies hope for higher sales and a
stronger position within each market segment. It creates more total sales than
undifferentiated marketing.

Nevertheless, differentiated marketing also increases the costs of doing business. A firm
usually finds it more expensive to develop and produce, let’s say 10 units of 10 different
products than 100 units of a single product. Added to that, developing separate marketing
plans for separate segments requires extra marketing research.

Thus, the company must weigh increased sales against increased costs when deciding on a
differentiated marketing strategy

Concentrated marketing: When using a concentrated marketing (or niche marketing) strategy,
instead of going after a small share of a large market, a firm goes after a large share of one or a
few smaller segments or niches.

Through concentrated marketing, the firm achieves a strong market position because of its
greater knowledge of consumer needs in the niches it serves and the special reputation it
acquires. It can market more effectively and also more efficiently.

Concentrated marketing can be highly profitable. At the same time, it involves higher-than-
normal risks. Companies that rely on one or a few segments for all their business will suffer
greatly if the segment turns sour.

Micromarketing: Micromarketing is tailoring products and marketing programs to the needs

and wants of specific individuals and local customer segments; it includes local marketing and
individual marketing. Rather than seeing a customer in every individual, micromarketers see
the individual in every customer. Micromarketing includes local marketing and individual
marketing.

- Local marketing: involves tailoring brands and promotions to the needs and wants of
local customer groups- cities, neighborhoods, and even specific stores.
- Individual marketing: In the extreme, micromarketing becomes individual marketing-
tailoring products and marketing programs to the needs and preferences of individual
customers.
Mass customization is the process by which firms interact one-to-one with masses of
customers to design products and services tailor-made to individual needs. Individual
marketing has made relationships with customers core important than ever.

** IN THIS UNIT TAKE INTO ACCOUNT THE “MARKETING KEY TERMS” AND “MARKETING
GLOSSARY” DOCUMENTS PROVIDED IN ALUD

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 UNIT 2- THE BUSINESS MODEL CANVAS
What is a business model? A business model describes the rationale of how an organization
creates, delivers, and captures value. We believe a business model can best be described
through nine basic building blocks that show the logic of how a company intends to make
money. The nine blocks cover the four main areas of a business: customers, offer,
infrastructure, and financial viability.

These 9 Building blocks are:

1. CS- Customer Segments •An organization serves one or several customer segments

•It seeks to solve customer problems and satisfy customer needs with value
2. VP- Value Propositions propositions

•Value propositions are delivered to customers through communication,

3. CH- Channels distribution and sales channels

•Customer relationships are established and mantained with each customer

4. CR- Customer Relationships segment.

•Revenue streams result from value propositions successfully offered to

5. RS- Revenue Streams customers

•Key resources are the assets required to offer and deliver the previously
6. KR- Key Resources desribed elements...

7. KA- Key Activities •...by performing a number of key activities

•Some activities are outsourced and some resources are aquired outside the
8. KP- Key Partnerships enterprise

9. CS- Cost Structure •The business model elements result in the cost structure

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 1- Customer segments

The customer segments building block defines the different groups of people or organizations
an enterprise aims to reach and serve. Customers comprise the heart of any business model.

In order to serve customers better, companies may group them into distinct segments with
common needs, common behaviors, or other attributes. 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.

There are different types of customer segments:

Multi-Sided
Mass Market Niche Market Segmented Diversified
Platforms
•Business models •Business models •Some business •An organization •Some
focused on mass targeting niche models with a diversified organizations
markets don’t markets cater to distinguish customer serve two or
distinguish specific, between market business model more
between diferent specialized segments with serves two interdependent
Customer Customer slightly diferent unrelated Customer
Segments. The Segments. The needs and Customer Segments (E.g.:
Value Value problems. Segments with facebook,
Propositions, Propositions, very diferent serving both
Distribution Distribution needs and customers and
Channels, and Channels, and problems. advertisers)
Customer Customer
Relationships all Relationships are
focus on one all tailored to the
large group of specific
customers with requirements of
broadly similar a niche market.
needs and
problems.

2- Value Propositions

The Value Propositions Building Block describes the bundle of products and services that
create value for a specific Customer Segment, it is the reason why customers turn to one
company over another, and it solves a customer problem or satisfies a customer need.

To find out what our value propositions are, we may ask ourselves questions such as: 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 offering to each Customer Segment?

A Value Proposition creates value for a Customer Segment through a distinct mix of elements
catering to that segment’s needs. Values may be quantitative (e.g. price, speed of service) or
qualitative (e.g. design, customer experience).

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 Newness Performance Customization
•Thes products satisfy an •Improving product or service •Tailoring products and services
entirely new set of needs that performance has traditionally to the specific needs of
customers previously didn’t been a common way to create individual customers or
perceive because there was no value Customer Segments creates
similar offering value

"Getting the job done" Design Brand/Status

•Value can be created simply by •Design is an important but •Customers may find value in
helping a customer get certain difficult element to measure. A the simple act of using and
jobs done product may stand out because displaying a specific brand
of superior design (fashion and
consumer electronics)

Price Cost Reduction Risk Reduction

•Offering similar value at a •Helping customers reduce •Customers value reducing risks
lower price is a common way costs is an important way to they incur in when purchasing
to satisfy the needs of price- create value. products or services.
sensitive Customer Segments.

Accessibility Convenience/ Usability

•Making products and services •Making things more convenient
available to customers who or easier to use can create
previously lacked acess to subsantial value.
them.

3- Channels

The Channels Building Block describes how a company communicates with and reaches its
Customer Segments to deliver a Value Proposition. Channels are customer touch points that
play an important role in the customer experience and serve several functions.

Communication, distribution, and sales Channels comprise a company's interface with

customers. Channels have five distinct phases, each of which can cover some or all of these
phases.

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On the other hand, we can distinguish between direct Channels and indirect ones, as well as
between owned Channels and partner Channels. Finding the right mix of Channels to satisfy
how customers want to be reached is crucial in bringing a Value Proposition to market.

An organization can choose between reaching its customers through its own Channels,
through partner Channels, or through a mix of both.

- Owned Channels: can be direct, such as an in-house sales force

or a Web site, or they can be indirect, such as retail stores
owned or operated by the organization.
- Partner Channels: are indirect and span a whole range of
options, such as wholesale distribution, retail, or partner-owned
Web sites.
- Partner Channels: lead to lower margins, but they allow an
organization to expand its reach and benefit from partner
strengths.
- Owned Channels and particularly direct ones have higher
margins, but can be costly to put in place and to operate.

4- Customer Relationships

The Customer Relationships Building Block describes the types of relationships a company
establishes with specific 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. These relationships may be
driven by the following motivations: Customer acquisition, customer retention or boosting
sales (upselling)

We can distinguish between several categories of Customer Relationships, which may co-exist
in a company’s relationship with a particular Customer Segment:

Personal It is based on human interaction. The customer can communicate with a real customer representative to get
help during the sales process or after the purchase is complete.
Assistance

Dedicated Personal This relationship involves dedicating a customer representative specifically to an individual client. It represents
the deepest and most intimate type of relationship and normally develops over a long period of time (private
Assistance banking)

Self- Service In this type of relationship, a company maintains no direct relationship with customers. It provides all the
necessary means for customers to help themselves.

Automated This type of relationship mixes a more sophisticated form of customer self-service with automated processes.
They can recognize individual customers and their characteristics, and offer information related to orders or
Services transactions. At their best, automated services can simulate a personal relationship.

Communities Many companies maintain online communities that allow users to exchange knowledge and solve each other’s
problems. They can also help companies better understand their customers

Co-creation Some companies engage customers to assist with the design of new and innovative products, create content
for public consumption (yourtube)...

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 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)

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 different pricing
mechanisms:

On the other hand, there are several ways to generate Revenue Streams:

Lending/
Asset Sale Usage Fee Subscription Fees Licensing Bookerage Fees Advertising
Renting/ Leasing

•It is the most •This Revenue •This Revenue •Revenue •This Revenue •This Revenue •This Revenue
widely Stream is Stream is Stream is Stream is Stream Stream results
understood generated by generated by created by generated by derives from from fees for
revenue the use of a selling temporarily giving intermediatio advertising a
stream. It particular continuous granting customers n services particular
derives from service. The access to a someone the permission to performed on product,
selling more a service (Gym) exclusive right use protected behalf of two service, or
ownership service is to use a intellectual or more brand.
rights to a used, the particular property in parties (real
physical more the asset for a exchange for estate agents)
product customer fixed period in licensing fees.
pays. (e.g.: return for a
hotels) fee

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 6- Key Resources

The Key Resources Building Block describes the most important assets required to make a
business model work.

These resources allow an enterprise to create and offer a Value Proposition, reach markets,
maintain relationships with Customer Segments, and earn revenues. Key resources can be
owned or leased by the company or acquired from key partners. They can also be categorized
as:

•This category includes physical assets such as manufacturing facilities, buildings, vehicles,
machines, systems, point-of-sales systems, and distribution networks.
Physical

•Intellectual resources such as brands, proprietary knowledge, patents and copyrights, partnerships,
and customer databases are increasingly important components of a strong business model.
Intellectual resources are difficult to develop but when successfully created may offer substantial
Intellectual value.

•Every enterprise requires human resources, but people are particularly prominent in certain
business models. For example, human resources are crucial in knowledge-intensive and creative
Human industries.

•Some business models call for financial resources and/or financial guarantees, such as cash, lines
of credit, or a stock option pool for hiring key employees.
Financial

7- Key Activities

The Key Activities Building Block describes the most important things a company must do to
make its business model work; these activities are the most important actions a company must
take to operate successfully.

Key Activities can be categorized as follows:

- Production: These activities relate to designing, making, and delivering a product in

substantial quantities and/or of superior quality. Production activity dominates the
business models of manufacturing firms.
- Problem solving: Key Activities of this type relate to coming up with new solutions to
individual customer problems. Their business models call for activities such as
knowledge management and continuous training. (E.g.: Hospitals, consultancies)
- Platform/network: Business models designed with a platform as a Key Resource are
dominated by platform or network related Key Activities. Key Activities in this category
relate to platform management, service provisioning, and platform promotion.

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 8- Key Partnerships

The Key Partnerships Building Block describes the network of suppliers and partners that make
the business model work. Companies forge partnerships for many reasons such as optimizing
their business model or reducing risk.

We can distinguish between four different types of partnerships:

1. Strategic alliances between non-competitors

2. Coopetition: strategic partnerships between competitors
3. Joint ventures to develop new businesses
4. Buyer-supplier relationships to assure reliable supplies

On the other hand, it can be useful to distinguish between three motivations for creating
partnerships:

Optimization and Reduction of risk and Acquisition of particular

economy of scale uncertainty resources and activities
The most basic form of Partnerships can help Few companies own all the
partnership or buyer- reduce risk in a competitive resources or perform all the
supplier relationship is environment characterized activities described by their
designed to optimize the by uncertainty. It is not business models. Rather,
allocation of resources and unusual for competitors to they extend their own
activities. It is illogical for a form a strategic alliance in capabilities by relying on
company to own all one area while competing other firms to furnish
resources or perform every in another particular resources or
activity by itself. perform certain activities.
Optimization and economy Such partnerships can be
of scale partnerships are motivated by needs to
usually formed to reduce acquire knowledge,
costs, and often involve licenses, or access to
outsourcing or sharing customers
infrastructure.

9- Cost Structure

This building block describes the most important costs incurred while operating under a
particular business model. Creating and delivering value, maintaining Customer Relationships,
and generating revenue all incur costs. Some business models are more cost-driven than
others.

Naturally enough, costs should be minimized in every business model. But low Cost Structures
are more important to some business models than to others. Therefore it can be useful to
distinguish between two broad classes of business model Cost Structures: cost-driven and
value-driven (many business models fall in between these two extremes):

- Cost-driven: These business models focus on minimizing costs wherever possible. This
approach aims at creating and maintaining the slimmest possible Cost Structure, using
low price Value Propositions, maximum automation, and extensive outsourcing
models.

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 - Value-driven: Some companies are less concerned with the cost implications of a
particular business model design, and instead focus on value creation. Premium Value
Propositions and a high degree of personalized service usually characterize value-
driven business models.

Cost Structures can have the following characteristics:

Costs that remain They vary Cost advantages Cost advantages

Fixed Costs

Variable Costs

Economies of scale

Economies of scope
the same despite proportionally with that a business that a business
the volume of goods the volume of goods enjoys as its output enjoys due to a
or services produced or services expands, due to larger scope of
produced. different factors operations. (E.g.:In a
that cause average large enterprise, the
cost per unit to fall same marketing
as output rises. activities or
Distribution
Channels may
support multiple
products)

The nine business model Building Blocks form the basis for a handy tool, which we call the
Business Model Canvas.

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 UNIT 3- PATTERNS
This section describes business models with similar characteristics, similar arrangements of
business model Building Blocks, or similar behaviors. We call these similarities business model
patterns. A single business model can incorporate several of these patterns.

1- Un-bundling business models

The concept of the “unbundled” corporation holds that there are three fundamentally
different types of businesses:

- Customer Relationship businesses

- Product innovation businesses
- Infrastructure businesses.

Each type has different economic, competitive, and

cultural imperatives. The three types may co-exist
within a single corporation, but ideally they are
“unbundled” into separate entities in order to
avoid conflicts or undesirable trade-offs.

Good examples of un-bundled businesses are telco companies, which outsource their network
operations in order to focus on obtaining and retaining profitable customers.

Depending on the type of business the company decides to focus on, the canvas business
model would have a different highlight, making the rest of it evolve around it.

2- Long-Tail

Long tail business models are about selling less of more: They focus on offering a large number
of niche products, each of which sells relatively infrequently. These business models require
low inventory costs and strong platforms to
make niche content readily available to
interested buyers.

It is believed that three different factors have

triggered the appearance of this phenomenon:

1. Democratization of tools of production:

Falling technology costs gave individuals access
to tools that were prohibitively expensive just a
few years ago.

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2. Democratization of distribution: The Internet has made digital content distribution a
commodity, and dramatically lowered inventory, communications, and transaction costs,
opening up new markets for niche products.

3. Falling search costs to connect supply with demand: The real challenge of selling niche
content is finding interested potential buyers. Powerful search and recommendation engines,
user ratings, and communities of interest have made this much easier.

Important facts to take into account regarding the canvas business model:

The value proposition of a Long Tail

business model is characterized by The key resource is the platform;
offering a wide scope of “non-hit” Niche content providers key activities include platform
items that may co-exist with “hit” (professional and/or user-generated) development and maintenance and
products. Long Tail business models are the key partners in this pattern niche content acquisition and
may also facilitate and build on user- production.
generated content

This model is based on aggregating

Long Tail business models usually
The main costs incurred cover small revenues from a large number
rely on the Internet as a customer
platform development and of items. revenue streams vary; they
relationship and/or transaction
maintenance may come from advertising, product
channel
sales, or subscriptions.

3- Multi-Sided Platforms

Multi-sided platforms bring together two or more distinct but interdependent groups of
customers. Such platforms are of value to one group of customers only if the other groups of
customers are also present. The platform creates value by facilitating interactions between the
different groups. A multi-sided platform grows in value to the extent that it attracts more
users, a phenomenon known as the network effect.

Important facts to take into account regarding the canvas business model:

Business models with a multi-sided The value proposition usually creates

platform pattern have a distinct structure. value in three main areas: First, attracting The key resource required for this
They have two or more customer user groups (i.e. Customer Segments); business model pattern is the platform.
segments, each of which has its own Value Second, matchmaking between Customer The three Key Activities are usually
Proposition and associated Revenue Segments; Third, reducing costs by platform management, service
Stream. Moreover, one Customer Segment channeling transactions through the provisioning, and platform promotion.
cannot exist without the others. platform.

Each Customer Segment produces a

different revenue stream. One or more
segments may enjoy free offers or reduced
The main costs incurred under this pattern prices subsidized by revenues from other
relate to maintaining and developing the Customer Segments. Choosing which
platform. segment to subsidize can be a crucial
pricing decision that determines the
success of a multi-sided platform business
model.

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 4- FREE as a business model

In the free business model at least one substantial Customer Segment is able to continuously
benefit from a free-of-charge offer. Different patterns make the free offer possible. Non-
paying customers are financed by another part of the business model or by another Customer
Segment.

There are three different patterns that make FREE a viable business model option. Each has
different underlying economics, but all share a common trait: at least one Customer Segment
continuously benefits from the free-of-charge offer. The three patterns are (1) free offer based
on multi-sided platforms (advertising-based), (2) free basic services with optional premium
services (the so-called “freemium” model), (3) and the “bait & hook” model whereby a free or
inexpensive initial offer lures customers into repeat purchases.

Advertising: a multi-sided platform model

•Advertising is a well-established revenue source that enables free offers. In business model terms,
FREE based on advertising is a particular form of the multi-sided platform pattern. One side of the
platform is designed to attract users with free content, products, or services. Another side of the
platform generates revenue by selling space to advertisers. (E.g.: Facebook)

Freemium: get the basics for free, pay for the rest

•It stands for business models, mainly Web-based, that blend free basic services with paid premium
services. The freemium model is characterized by a large user base benefi ting from a free, no-
strings-attached offer. Most of these users never become paying customers; only a small portion,
usually less than 10 percent of all users, subscribe to the paid premium services. This small base of
paying users subsidizes the free users. This is possible because of the low marginal cost of serving
additional free user.

Bait & Hook

•“Bait & hook” refers to a business model pattern characterized by an attractive, inexpensive, or
free initial offer that encourages continuing future purchases of related products or services. This
pattern is also known as the “loss leader” or “razor & blades” model. “Loss leader” refers to a
subsidized, even money-losing initial offer with the intention of generating profi ts from
subsequent purchases. “

Inside the Freemium model we can also find two variables:

- Open Source: Freemium with a twist
 Business models in the enterprise software industry are usually
characterized by two traits: First, the high fixed cost of supporting an
army of expert software developers who build the product; Second, a
revenue model based on selling multiple per-user licenses and regular
upgrades of the software.
- The insurance Model: Freemium Upside down
 In the freemium model a small base of customers paying for a premium
service subsidizes a large base of non-paying customers. The insurance
model is actually the opposite—it’s the freemium model turned on its
head. In the insurance model, a large base of customers pays small
regular fees to protect themselves from unlikely— but financially
devastating—events. In short, a large base of paying customers
subsidizes a small group of people with actual claims—but any one of

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 the paying customers could at any time become part of the beneficiary
group.

Important facts to take into account regarding the canvas business model:

Advertising

With the right product or service

and high traffic, the platform Free products or services generate
Main costs relate to developing
becomes interesting to high platform traffi c and increase
and maintaining the platform;
advertisers, which in turn allows attractiveness to advertisers.
traffi cgeneration and retention
charging fees to subsidize free (Customer segments and revenue
costs may also arise.
products and services. (Customer streams)
segments and revenue streams)

Freemium

The freemium model is characterized

by a large base of free service users
An important metric to follow is the
subsidized by a small base of paying Customer relationship must be
rate at which free accounts convert
users. Users enjoy a free basic automated and low cost in order to
to premium accounts (Revenue
service and can pay for a premium handle large numbers of free users.
Streams)
service that offers additional
benefits. (Customer segments)

The cost structure of this pattern is

The platform is the most important tripartite: usually with substantial fi
asset in the freemium pattern, xed costs, very low marginal costs for
because it allows free basic services services to free accounts, and
to be offered at low marginal cost. (separate) costs for premium
accounts

Bait & Hook

This pattern is characterized

Cheap or free “bait” lures
Customers are attracted by by a tight link or “lock-in”
customers—and is closely
the instant gratifi cation of a between the initial product
linked to a (disposable) follow-
cheap or free initial product or and the follow-up products or
up item or service. (Value
service. services. (Customer
Proposition)
Relationship)

Important cost structure

elements include
Key Activities: Focuses on Key Resources: Bait & hook
subsidization of the initial
delivery of follow-up products patterns usually require a
product and the costs of
or services strong brand.
producing follow-up products
or services.

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 5- Open Business Models

Open business models can be used by companies to create and capture value by systematically
collaborating with outside partners. This may happen from the “outside-in” by exploiting
external ideas within the firm, or from the “inside-out” by providing external parties with ideas
or assets lying idle within the firm.

This business model refers to opening up a

company’s research process to outside parties. In
a world characterized by distributed knowledge,
organizations can create more value and better
exploit their own research by integrating outside
knowledge, intellectual property, and products
into their innovation processes.

In addition, products, technologies, knowledge, and intellectual property lying still inside a
company can be monetized by making them available to outside parties through licensing,
joint ventures, or spin-offs.

We can distinguish between "outside-in" innovation and “inside-out” innovation.

- “Outside-in” innovation occurs when an organization brings external ideas,

technology, or intellectual property into its development and commercialization
processes.
- “Inside-out” innovation occurs when organizations license or sell their intellectual
property or technologies, particularly unused assets.

Important facts to take into account regarding the canvas business model:
Outside-In

Inside-Out

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 Outside-In Patterns

Established companies with strong Building on external knowledge

Taking advantage of outside
brands, strong Distribution requires dedicated activities that
innovation requires specific
Channels, and strong Customer connect external entities with
resources to build gateways to
Relationships are well suited to an internal business processes and R&D
external networks.
outside-in open business model. groups

It costs money to acquire innovation

External organizations, sometimes
from outside sources. But by
from completely different industries,
building on externally-created
may be able to offer valuable
knowledge and advanced research
insights, knowledge, patents, or
programs, a company can shorten
ready-made products to internal
time-to-market and increase its
R&D groups.
internal R&D productivity.

Inside- Out Patterns

Organizations with substantial internal

R&D operations typically possess much
unutilized knowledge, technology, and
Value Propositions: Some R&D outputs
intellectual property. Due to sharp focus By enabling others to exploit unused
that are unusable internally—for strategic
on core businesses, some of these internal ideas, a company adds “easy”
or operational reasons—may be of high
otherwise valuable intellectual assets sit additional revenue streams.
value to organizations in other industries.
idle. Such businesses are good candidates
for an "insideout" open business model.
(Key activities)

*TAKE A LOOK AT THE “PATTERNS OVERVIEW” DOCUMENT

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 UNIT 4- STRATEG
This next section is about re-interpreting strategy through the lens of the Business Model
Canvas. It will help you constructively question established business models and strategically
examine the environment in which your own business model functions.

The following pages explore four strategic areas: the Business Model Environment, Evaluating
Business Models, a Business Model Perspective on Blue Ocean Strategies, and how to manage
Multiple Business Models within an enterprise.

1. Business model environment: context, design drivers, and constraints

Business models are designed and executed in specific environments. Developing a good
understanding of your organization’s environment helps you conceive stronger, more
competitive business models.

Continuous environmental scanning is more important than ever because of the growing
complexity of the economic, greater uncertainty and severe market disruptions.
Understanding changes in the environment helps you adapt your model more effectively to
shifting external forces. This environment should in no way limit your creativity or predefine
your business model. It should, however, influence your design choices and help you make
more informed decisions.

We suggest roughly mapping four main areas of your environment, each of these four areas is
backed by a large body of specific analytical tools. A good understanding of the environment
will allow you to better evaluate the different directions in which your business model might
evolve.

3
2 1

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 1.1- Market Forces

Identifies key issues driving What are the crucial issues

Market Market Issues and transforming r market

from customer and offer
affecting the customer
landscape? Where is the market
heading?
perspectives
Forces
Identifies the major marketi What are the most important
Market segments, describes their customer segments? Where is
the biggest growth potential?
attractiveness, and seeks to
Segments spot new segments Which segments are declinig?

Outlines market needs and What do customers need?

Needs and analyzes how well they are Where are the biggest
unsatisfied customer needs?
served
Demands Where is demand declining or
increasing?

Describes elements related What binds customers to a

Switching to customers switching company and its offers? Is it easy
for customers to find and
business to competitors
Costs purchase similar offers?

Identifies elements related What are customers really

Revenue to revenue attractiveness willing to pay for? Where can
the largest margins be achieved?
and pricing powe
Atractiveness

1.2- Industry Forces

Identifies incumbent Who are our competitors? Who are

Industry Competitors competitors and their the dominant players in our particular
sector? Describe their offers,
(incumbents) relative strengths advantages and disadvantages. How

Forces much influence do they exert on our

customer segments?

Identifies new, insurgent Who are the entrants in our market?

New entratants players and determines How are they different? Which
barriers must they overcome? What
(insurgents) wether they compete with a are their value propositions? Which
business model different customer segments are they focused
from yours on?

Describes potential Which products and services could

Substitute substitutes for your offers- replace ours? How much do they cost
compared to ours? How easy is it for
products and including those from other the customer to switch to these
markets and industries substitutes?
services
Describes the key value Who are the key players in our
Suppliers and chain incumbents in your industry value chain? To what extent
does our business model depend on
other value chain market and spots new, other players?
emerging players
actors
Specifies which actors may Which stakeholders might influence
Stakehorlders influence your organization our business model? How influential
are they?
and business model

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 1.3- Key Trends

Identifies technology What are the major technology

Technology
Key Trends
trends that could
threaten your business
trends both inside and outside
your market? Which
technologies represent

Trends model- or enale it to

evolve or improve
important opportunities or
disruptive threats?

Describes regulations Which regulatory trends

Regulatory and regulatory trends
influence your market? What
rules may affect your business
trends that influence your model?
business model

Identifies major Describe key spcietal trends.

Societal and societal trends that
Which shifts in cultural or
societal values affect your
cultural trends may influence your business model? Which trends
might influence buyer behavior?
business model

Outlines major What are the key demographic

Socioeconomic socioeconomic trends
trends? How would you
characterize income and wealth
trends relevant to your distribution in your market? How
high are disposable incomes?
business model

1.4- Macro-Economic Forces

Is the economy in a boom or bust

Macro- Global Market Outlines current overall
conditions from a
phase? Describe general market
sentiment.
Economic Conditions macroeconomic
perspective
Forces
Describes current What is the state of the capital
Capital capital market
markets? How easy is it to obtain
funding in your particular
Markets conditions as they market?
relate to your capital
needs

Highlights current Describe the current status of

Comodities prices and price trends
markets for commodities and
other resources essential to your
and other for resources required business. How easy is it to obtain
the resources needed to execute
for your business model
resources your business model

Describes the economic How good is the (public)

Economic infraestructure of the
infrastructure in your market?
How good are public services for
infraestructure market in which your organizations? How would you
rate the quality of life?
business operates

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A competitive business model that makes sense in today’s environment might be outdated or
even obsolete tomorrow, therefore, it must evolve in light if a changing environment. Of
course we can’t be certain about the future, because of the complexities, uncertainties, and
potential disruptions inherent in the evolving business environment. We can, however,
develop a number of hypotheses about the future to serve as guidelines for designing
tomorrow’s business models. Assumptions about how market forces, industry forces, key
trends, and macroeconomic forces unfold give us the “design space” to develop potential
business model options or prototypes for the future.

2. Evaluating business models

Regularly assessing a business model is an important management activity that allows an

organization to evaluate the health of its market position and adapt accordingly. This checkup
may become the basis for incremental business model improvements, or it might trigger a
serious intervention in the form of a business model innovation initiative.

In the previous chapter on the business models environment, we evaluated the influence of
external forces. In this chapter, we adopt the point of view of an existing business model and
analyze external forces from the inside out.

2.1- Detailed SWOT assessment of each building block

Assessing your business model’s overall integrity is crucial, but looking at its components in
detail can also reveal interesting paths to innovation and renewal. An effective way to do this
is to combine classic strengths, weaknesses, opportunities, and threats (SWOT) analysis with
the Business Model Canvas.

SWOT analysis provides four perspectives

from which to assess the elements of a
business model, while the Business Model
Canvas provides the focus necessary for a
structured discussion.

SWOT asks four big, simple questions. The

first two—what are your organization’s
strength and weaknesses?—assess your
organization internally. The second two—
what opportunities does your organization have and what potential threats does it face?—
assess your organization’s position within its environment. It is useful to ask these four
questions with respect to both the overall business model and each of its nine Building Blocks.
This type of SWOT analysis provides a good basis for further discussions, decision-making, and
ultimately innovation around business models.

24
Throughout the following pages we provide a series of question which may be helpful to
analyze the four areas mentioned before within the nine building blocks of the Canvas
Business Model.

2.2- Assessment

25
  For specific questions addressing opportunities and threats check book

3- Business model perspective on blue ocean strategy

Blue Ocean Strategy is a potent method for questioning Value Propositions and business
models and exploring new Customer Segments. The Business Model Canvas complements Blue
Ocean by providing a visual “big picture” that helps us understand how changing one part of a
business model impacts other components.

These four key questions challenge an industry’s strategic logic and established business
model:

1- Which of the factors that the industry takes for granted should be eliminated?
2- Which factors should be reduced well below the industry standard?
3- Which factors should be raised well above the industry standard?
4- Which factors should be created that the industry has never offered?

In addition to value innovation we propose exploring non-customer groups to create Blue

Oceans and tap untouched markets. In the Business Model Canvas the right-hand side
represents value creation and the left-hand side represents costs.

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3.1- How do we blend Blue Ocean Strategy with the Business Model Canvas?

1 2 3

1- The Business Model Canvas consists of a right-hand value and customer-focused side,
and a left-hand cost and infrastructure side. Changing elements on the right-hand side
has implications for the left-hand side. For example, if we add to or eliminate parts of
the Value Proposition, Channels, or Customer Relationship Building Blocks, this will
have immediate implications for Resources, Activities, Partnerships, and Costs.

2- Blue Ocean Strategy is about simultaneously increasing value while reducing costs.
This is achieved by identifying which elements of the Value Proposition can be
eliminated, reduced, raised, or newly created. The first goal is to lower costs by
reducing or eliminating less valuable features or services. The second goal is to
enhance or create high-value features or services that do not significantly increase the
cost base.

3- Blending Blue Ocean Strategy and the Business Model Canvas lets you systematically
analyze a business model innovation in its entirety. You can ask the Four Actions
Framework questions (eliminate, create, reduce, raise) about each business model
Building Block and immediately recognize implications for the other parts of the
business model.

The combination of Blue Ocean Strategy tools and the Business Model Canvas provide a solid
foundation upon which to question your business model from value creation, customer, and

27
 Cost Structure perspectives. We propose that three different perspectives provide ideal
starting points from which to start questioning your business model using the Four Actions
Framework. Changes to each starting point then allow you to analyze impacts on other areas
of the Business Model Canvas.

Identify the highest cost Begin the process of Ask yourself the Four Actions
infrastructure elements and transforming your Value Framework questions about
evaluate what happens if you Proposition by asking the Four each business model Building
eliminate or reduce them. What Actions Framework questions. Block on the customer side of
value elements disappear, and the Canvas: Channels,
what would you have to create Simultaneously, consider the Relationships, and Revenue
to compensate for their impact on the cost side and
Streams.
evaluate what elements you
absence?
need to (or could) change on Analyze what happens to the
Then, identify infrastructure the value side, such as cost side if you eliminate,
investments you may want to Channels, Relationships, reduce, raise, or create value
make and analyze how much Revenue Streams, and side elements.
value they create. Customer Segments.
• Which new Customer
• Which activities, resources, • What less-valued features or Segments could you focus on,
and partnerships have the services could be eliminated or and which segments could you
highest costs? reduced? possibly reduce or eliminate?

• What happens if you reduce • What features or services • What jobs do new Customer
or eliminate some of these cost could be enhanced or newly Segments really want to have
factors? created to produce a valuable done?
new customer experience?
• How could you replace, using • How do these customers
less costly elements, the value • What are the cost implications prefer to be reached and what
lost by reducing or eliminating of your changes to the Value kind of relationship do they
expensive resources, activities, Proposition? expect?
or partnerships?
• How will changes to the Value • What are the cost implications
• What value would be created Proposition affect the customer of serving new Customer
by planned new investments? side of the model? Segments?

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 4- Managing multiple business models

Visionaries, game changers, and challengers are generating innovative business models around
the world. An entrepreneur’s challenge is to design and successfully implement a new business
model. Established organizations, though, face an equally daunting task: how to implement
and manage new models while maintaining existing ones.

Business thinkers have a word for groups that successfully meet this challenge: ambidextrous
organizations. Implementing a new business model in a longstanding enterprise can be
extraordinarily difficult because the new model may challenge or even compete with
established models. The new model might require a different organizational culture, or it
might target prospective customers formerly ignored by the enterprise. This begs a question:
How do we implement innovative business models within long-established organizations?

Scholars are divided on the issue:

- Many suggest spinning off new business model initiatives into separate entities.
- Others propose a less drastic approach and argue that innovative new business models
can thrive within established organizations, either as-is or in separate business units.

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