Business Model and Business Model Canvas Part One

Reasons for a Business Model

• Prove you are serious • Establish Milestones

• Understand Competition • Know Customers
• State Assumptions

• Document Revenue Model • Attract Investors

• Reduce Risk
• Attract Employees

Module Objectives

“There is not a single Business Model . . . There are a lot of opportunities and options, we just have to
discover them all”

Tim O’Reilly

• Learn 9 Elements of Business Model Canvas • Understand “painting” the Canvas

• Apply Business Model Canvas to Senior Design Project • Identify “starting points” for Venture Capital
Funding
• Initiate “hands-on” experience - TEAMWORK

Definition: Business Model

Business Model: Describes the rationale of how
an organization creates, delivers, and captures value

Innovative Business Models make the most money Additional detail in Appendix

Business Model is Critical Thinking

• Blueprint . . . . you are serious • Interesting communication

• Compelling story: • Who you are
• Why you are in Business
• What you do, how you do it & where you operate • How you will make money
• What Customers
• Judged by Quality &Appearance of Plan & product novelty
Business Model Canvas

Business Model - 9 Building Blocks

Business Model - 9 Building Blocks

Customer Segmentation Building Block

Defines a group of people, or organizations, an enterprise aims to reach and serve

• Customers are heart of Plan

• Group Customers into distinct

segments with common needs & behaviors

Separate segments if:

•Need a distinct product

•Utilize different Channels •Require special Relationships •Have different profitabilities •Pay for unique
aspects

Types of Customer Segments

Mass Market

Don’t distinguish Segments

Diversified

Serves unrelated
Niche Market Segments

Specific Segments
Multi-Sided

Segmented Interdependent Distinguish between Segments

segments with different needs

Additional detail in Appendix

Value Proposition Building Block

Describes the bundle of products and services that create value for a specific Customer Segment

•Reason why Customers buy from one company over another

•Solves a Customer Problem, or satisfies a set of Needs

Value Proposition Elements

Design

Difficult to measure, but important in

Fashion & Consumer Performance

Electronics Common way to create value

Customization
Tailoring products &

PC sector relied on powerful machines, but has limits

services to specific Customers

Enables customized products & economy

of scale Additional detail in Appendix

More Value Proposition Elements

“Getting the Job

Done” Risk Reduction

Create value by helping Customer get jobs done

Price

Low-price has

Customers value risk reduction

implications for rest

Brand / Status

Customers value use and display of a brand

of Business Model

Cost Reduction

Important way to create value

Accessibility

Provide offering to Customers who lack access

Effective Value Proposition Characteristics

Is the Value Proposition . . .

Simple - Easily understood and communicated

Customer Specific - focused and consistent with their beliefs, knowledge, behavior and/or experiences

Credible Promise - Customers believe you can deliver better than competition

Relevant & Motivating - Addresses Needs, concerns, and outcomes of significant importance

Ownable - Unique relative to competitor’s position

Example: LEGO Factory

Ex: Lego Factory Value Proposition & Segments

LEGO Factory expands scope of off-the-shelf kit by giving fans tools to build, showcase, and sell their
own custom designed kits

Thousands of customer-designed kits complement standard blocks. LEGO Factory connects customers
who create customized designs with other customers, thus becoming a customer match maker

TEAMWORK Case Study

You become owner of a business in one of the following industries:

• Tourism and hospitality
• CCI (digital business, cultural and creative industries)
• Beauty industry

TEAMWORK: Value Propositions to what Segments?

Model . . . Offer Segment

Value Proposition 1 Value Proposition 2

Value Proposition N

Target Customer 1 Target Customer 2

Target Customer N

Hints:
1.Think broadly about Customers......there are more than one to consider
2.There is a unique Value Proposition for each Customer

Business Model Canvas TEAMWORK

Business Model and Business Model Canvas Part Two

Channels Building Block

Describes how a company communicates with & reaches its Customers to deliver a Value Proposition

• Customer Interface: Communication, Distribution, & Sales • Customer touch points, & important in
their experience

Channels provide:

• Product awareness
• Allow Customers to purchase • Provide post-purchase support

Channel Types and Phases

Channels have 5 distinct phases. Each Channel can cover some or all of these phases

Awareness Evaluation Purchase Delivery After Sales

Raise awareness about company & offerings

Assist Customers evaluate Value Proposition

Allow Customers to purchase products & services

Deliver Value Proposition to Customers

Provide post-purchase support

Customer Relationship Building Block

Describes the types of relationship a company establishes with specific Customer Segments

Must clarify desired relationship with each Customer Segment

Relationship Motivations: •Acquisition

•Retention
•Boost Sales (upselling)

Customer Relationship Categories

Personal Assistance •Direct access for help

Dedicated Personal Assistance

•Customer specific Representative •Intimate relationship
Self-Service •No direct Customer relationship •Provides self-help

Communities •User community

Automated Services •Sophisticated form of self-service

Co-Creation •Beyond traditional relationship to co-create value.

aides connections between members

Additional detail in Appendix

Revenue Streams Building Block

Represents cash a company generates from each Customer Segment (Revenue - Cost = Earnings)
• “Arteries” of the Business
• Must ask....”What is each Customer Segment willing to pay?”

• Each Stream has different pricing: List, bargaining, market dependent, volume dependent, etc

• Types of Revenue Streams: Transaction & Recurring

Ways to Generate Revenue Streams

Asset Sale •Physical product sale

Licensing •Grant to use IP •Common in media

Subscription Fee industry

Usage Fee •Service use fee

•Sell continuous access to service

Brokerage Fees •Intermediation services performed on

Lending / Renting / behalf of two or more Leasing parties

•Temporary grant of right to use asset for
fixed time Additional detail in Appendix

Pricing Mechanisms

Fixed “Menu” Pricing

Dynamic Pricing
List Price

Fixed prices for products, & services

Negotiation (Bargaining)
Price negotiated between parties & is dependent on negotiation skill

Product Feature Dependent

Price depends on number or quality

Yield Management

Price depends on inventory and time frame of purchase

Customer Segment Dependent

Price depends on type & characteristic of Segment

Real-time Markets

Price established based on supply and demand

Volume Dependent

Price as a function of quantity

Auctions
Price determined by competitive bidding

urces Building Block

portant assets required to make iness model work

• Enables production reach markets, & earn revenue

• Required resources are dependent on selected Business Model

• Resources may be physical, financial, intellectual, or human

• Resources may be owned, leased or acquired

Key Resources Catalog

Physical •Buildings, cars, machinery, systems, point-of-sales systems, and distribution

Human •Critical in knowledge

Intellectual •Brands, proprietary knowledge, patents copyrights, partnerships, and Customer data bases
•IP difficult to develop, but powerful

intensive & creative businesses

Financial •Cash, credit, stock

Additional detail in Appendix

Example: LEGO Factory

Ex: LEGO Relationships, Channels, Resources, & Revenue

Community of customers who are interested in niche content & want more than off-the-shelf kits

Web presence Agile Mfg.

Supply Chain User Groups

Web, Retail Stores, and

Small revenues from Customer User Groups designed kits. Valuable addition
to traditional high-volume kits.

TEAMWORK Case Study

You become owner of a business in one of the following industries:

• Tourism and hospitality
• CCI (digital business, cultural and creative industries)
• Beauty industry

TEAMWORK: Channels, Customer Relationships, Revenue Streams, and Resources required for success?
Model

Offer

Value Proposition 1 Value Proposition 2

Value Proposition N

Channel Channel 1 Channel 2 Channel N

Finance Revenue Stream 1 Revenue Stream 2 Revenue Stream N

Relationship Relationship 1 Relationship 2 Relationship N

Resources Resource 1 Resource 2 Resource N

Customer

Target Customer 1 Target Customer 2

Target Customer N

Hint:
For every Customer & Value Proposition pair, one at a time, define required Channel, Customer
Relationship, Revenue Stream & Resources required to succeed

Business Model Canvas TEAMWORK

Business Model and Business Model Canvas Part Three

Key Activities Building Block

Describes most important things a company must do to make its Business Model work

Required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and
earn Revenue

Key Activities Catalog

Production •Design, mfg., & deliver

product in quantity or superior Platform / Network

•Dominates mfg. Business sNetworks, matchmaking, serve as platforms

Problem Solving •Develop new solutions •Dominates knowledge management Business Models

Additional detail in Appendix

nerships Building Block

ppliers and partners that make the ess Model work

Types of partnerships:

1. Strategic alliances between non -competitors

2. Strategic alliance between competitors

3. Joint Ventures to develop new business

4. Buyer-Supplier to assure reliable supply

Partnership Motivations

Optimization & Economy of Scale

•Most basic form of partnership

•Often results in outsourcing

Acquisition of Particular Resources & Activities

Reduction of Risk & Uncertainty

• Competitors form strategic alliance in one area while competing in another

•Extend capabilities by relying on others to furnish part of the required resources / activities

Additional detail in Appendix

Cost Structure Building Block

Describes all costs incurred to operate a Business Model

• Create & deliver value, maintain Customer relationships, & generate revenue all incur cost

• Easily calculated after defining: Key Resources, Key Activities, & Key Partnerships

Cost vs. Value Driven Models

Cost Driven:
Low Cost Value Proposition, automation, & outsourcing

Fixed Cost

Same cost regardless of volume

Variable Cost

Cost vary in proportion with volume

Scale Economy

Cost / unit drops as volume increases

Scope Economy

Same mktg & dist. support many products

Value Driven:
Focused on value creation, not cost. Premium Value Propositions and personalized service

Example: LEGO Factory

Ex: LEGO Factory Key Activities, Partners, & Cost Structure

Provide & manage platform & logistics for producing, packaging & delivery of custom-made sets

Customers who build new designs & post them on-line thereby generating content & value

Utilizes production & logistics already incurred by traditional retail block model
Customers who build new designs & post them on-line thereby generating content & value.

Final LEGO Factory Business Model Canvas

Provide & manage Community of Thousands of LEGO Factory customers who
customer designed
expands scope of are interested in kits complement off-the-shelf kit by niche content &
standard blocks.
giving fans tools
delivery of custom to build, showcase off-the-shelf kits. connects customers and sell their own
who create
customers customized designs designed kits. with other
WEb presence, Web, Retail customers, thus Agile Mfg.,
Stores, and User becoming a
Supply Chain, Groups customer match User Groups
maker

Utilizes production & logistics Small revenues from Customer already in place by traditional
designed kits. Valuable addition
retail block model to traditional high-volume kits.

TEAMWORK Case Study

You become owner of a business in one of the following industries:

• Tourism and hospitality
• CCI (digital business, cultural and creative industries)
• Beauty industry
TEAMWORK: Key Activities, Key Partnerships, and Cost Structure required for success?

Model

Offer

Value Proposition 1 Value Proposition 2

Value Proposition N

Activity Activity 1 Activity 2 Activity N

Cost Cost 1 Cost 2 Cost N

Partnership Partnership 1 Partnership 2 Partnership N

Customer

Target Customer 1 Target Customer 2

Target Customer N

Hint:
For every Customer & Value Proposition pair, one at a time, define required Key Activities, Key
Partnerships, & Cost Structure required to succeed

Blue Ocean Strategy

Red Ocean •Compete in existing markets •Beat the Competition •Explore existing demand •Make
Value / Cost Trade-off
•Align with differentiation OR low cost Blue Ocean

•Compete in uncontested markets

•Make Competition irrelevant •Create & capture new demand •Break Value / Cost Trade-off •Align with
differentiation AND low cost

Measurement of Business Model Success

• Sales Revenue Growth • Profits

• Market Share Gain

• Competitive Reactions

Using the Business Model Canvas

Using the Business Model Canvas

Business Model Fatal Assumptions

• All we need is 5% market share
• No problem in attracting top talent • Competition will not notice us
• Customers will buy because of our cool technology • Customers will not mind switching suppliers
• Product is so cool it will sell itself • We can command premium pricing
• Our financial projections are conservative

Access Venture Capital

Farmington Hills
•SPARK •Beringea LLC •Arboretum Ventures Southfield
•Chrysalis •Wind Point Partners •EDF Ventures •Seneca Partners, Inc
•Seneca Partners Lansing
Battle Creek •Prima Civitas
•Homeland Security Resources Marriott Corp. Fund •Next Little Thing

Additional

National Venture Capital Association

www.nvca.org

Resources

Federal Govt. Programs Small Business Admin. www.sba.gov

Go Big Network www.gobignetwork.com

Sequoia Venture Capital www.sequoia.com

Small Business Research www.sbir.gov

Small Business Transfer www.sbtt.gov

Innovation

Technology

TEAMWORK Assignment

Objective: Complete Business Model Canvas for your business idea

Instructions:
•Follow LEGO Factory Model & appendices examples •Development Models for each section & Business
Model Canvas

Appendices

Types of Customer Segments

Mass Market

•Don’t distinguish Customer Segments

•Value Propositions, Distribution Channels, and Customer Relationships all focus on a large group
•Ex: Consumer Electronics
Diversified

•Serves two unrelated Customer Segments with different needs and problems. Ex: Amazon.com decided
to diversify retail business by selling cloud computing services; online storage space and on-demand
server use
•Totally different Value proposition utilizing powerful IT infrastructure

Niche Market

•Cater to specific Customer Segments

•Value Propositions, Distribution Channels and Customer Relationships are tailored
•Often found in supplier-buyer relationships. Ex: Car part producers dependent on OEM purchases

Segmented

•Distinguish between segments with different needs and priorities

•Has implications for Value Proposition, Distribution Channels, Customer Relationships, and Revenue
Streams
•Ex: Micro Precision Systems provides micro-mechanical design & mfg. solutions to watch and industrial
automation sectors

Multi-Sided Platforms

•Serve two or more interdependent Customer Segments. Ex: Credit card company needs a large
customer base of card holders and a large base of merchants who accept card
•Both segments are required to make the Business Model work

More Value Proposition Elements

“Getting the Job Done”

•Value created by helping Customer get jobs done. Ex: Roll-Royce Customers rely on them to
manufacture and service jet engines
•Arrangement allows Customers to focus on •Satisfy price-sensitive Segments running airline, not
engine service •Low-price Value Propositions have
•Pay Roll-Royce a fee for every hour flown important implications for rest of Business Model

•Ex: No frills airlines - Southwest, easyJet, and Ryanair designed entire business to
•Customers value simple act of using and enable low cost air travel.
displaying a brand •Ex: Nano car produced by Tata makes cars
•Ex: Wear a Rolex watch affordable to new segment of population
•Skateboarders wear “underground” brands
to show they are “in” Customer Cost Reduction

•Important way to create value

•Ex: Salesforce.com sells a hosted Customer Relationship Management (CRM) application that relieves
buyers from expense and trouble purchasing, installing, and managing CRM software

Risk Reduction •Customers value reduction of risk

•Ex: Used car buyer values one year warranty to cover repairs

•Service level guarantee reduces risk in outsourced IT services

Accessibility

•Make offering available to Customers who lacked access

•Can result from Business Model innovation, new technologies, or a combination of both
•Ex: Net Jet popularized concept of fractional private jet ownership

•Ex: Mutual Funds made it possible for those with modest wealth to build diversified investment
portfolios

Customer Relationship Categories

Self-Service
•No direct relationship with Customer •Provides necessary means for self-help
Communities Personal Assistance
•User communities involved with •Human interaction Customers / prospects and facilitate
connections between community members Representative for help during, or after, •Maintains online
communities so users can the sale
exchange knowledge and solve each other’s •Happens on-site, through call centers, by e-mail, or other
means
•Help companies understand Customers

Automated Services

•Sophisticated form of Customer self-service

•Online profiles give Customers access to customized services

•Automated service stimulate a personal relationship. Ex: Book and movie recommendation

Co-Creation

•Beyond traditional Customer -Vendor relationship to co-create value. Ex: Amazon invites Customers to
write reviews creating

•Ex: GlaxoSmithKline launched a Alli community for weight loss

Dedicated Personal Assistance

•Customer specific Customer Representative at company

•Deep and intimate relationship and develops over a long time. Ex: Private Banking, dedicated bankers
serve high net worth individuals
•Key Account Managers maintain personal relationships with important Customers

value for other readers

•Customers assist with new and innovative product design. Ex: YouTube solicits Customer’s content for
public consumption

Ways to Generate Revenue Streams

Asset Sale

•Widely understood and results from selling ownership of a physical product

•Ex: Amazon sells books, music, electronics and more on-line

Usage Fee Subscription Fee

•Generated by service use Selling continuous access to a service •More service is used, more
Customer pays eEx: Gym sells subscriptions to access
•Ex: Telecom charges by the minute •Ex: Nokia’s Comes With Music provides music library access

Lending / Renting / Leasing

•Temporary grant of exclusive right to use an asset for fixed time period

•Lender gets recurring revenue, and renters enjoy benefits without full cost of ownership
•Ex: Zipcar.com rents cars by the hour in large NA cities

Licensing

•Generated by giving Customers permission to use IP

•Right-holders generate revenue without product manuf. or commercialization

•Common in media industry

Brokerage Fees

•Intermediation services performed on behalf of two or more parties

•Ex: Credit card providers take a percentage of all transaction fees

•Ex: Brokers and real estate agents are paid in commissions

Key Resources Catalog

Physical

•Includes mfg. facilities, buildings, vehicles, machinery, systems, point-of-sales systems, and distribution
•Retailers rely heavily on physical resources.

Human
•Critical in knowledge intensive and creative businesses
•Novartis has an army of scientists developing next generation drugs

Financial •Cash, lines of credit, stock

Intellectual
•Brands, proprietary knowledge, patents and copyrights, partnerships, and Customer data bases
•IP difficult to develop, but powerful •Consumer goods companies, Nike and Sony, rely heavily on
Brands
•Microsoft and SAP rely heavily on IP developed over decades
•Qualcom (mobile device chips) earns substantial license fees

Key Activities Catalog

Production
•Designing, making, and delivering a product in substantial quantity and / or superior quality
•Dominates Business Models of mfg. firms

Problem Solving
•Developing new solutions for Customer problems
•Consultancies, hospitals and service organizations
•Business Models dominated by knowledge management and continuous training

Platform / Network
•Networks, matchmaking, software and brands can serve as platforms
•Ex: eBay’s Business Model requires continuous development to maintain the platform
•Ex: Microsoft’s Model requires managing interface between vendors -hardware and other software
suppliers

Partnership Motivations

Optimization & Economy of Scale •Most basic form of partnership •Illogical for a company to own all
resources or perform every activity
•Often results in outsourcing of an activity

Reduction of Risk & Uncertainty • Competitors often form a strategic alliance in one area while
competing in another
•Ex: Blue-ray was developed by leading consumer electronics, computer and media
mfgs.

Acquisition of Particular Resources & Activities

•Few companies own all the resources or perform all activities described in their Business Models
•Extend capabilities by relying on other firms to furnish part of the required resources / activities

•Ex: Mobile phone company licenses operating system vs. developing one

THANK YOU FOR THE ATTENTION!