Analysis - Part 2
During the case solving process, we often debate about what business model does the company have, what are its weak points and how could they be developed. But what does this mean exactly? How could this concept be grasped and used in practice? In this post we make an attempt at answering these questions.
When introducing the definition of business models the study of Osterwalder, Pigneur and Smith (2010) is the starting point. Accordingly, a business model is a conceptual tool that describes the rationales of an organisation – meaning: capturing value – and the connections between them.
The concept by Osterwalder answers questions like 1. What does the organisation offer (what is the product), 2. To whom does it offer (who are the consumers), 3. How does it satisfy the consumers demands (what kind of means are necessary) and 4. How profitable is it (what are the most important costs and income sources).
Hereunder we go through the most important parts of the so-called Business Model Canvas, made by the authors.
1. Value proposition
The value proposition offered by the organisation expresses the products and services offered to the different consumer segments. This equals to the definition of consumer value in the field of dual value creation by Chikán (2008). Based on these the value proposition (or consumer value) can be divided into three dimensions: 1. place-value, 2. time-value, and 3. use-value (the product is available for the customers in the adequate place, adequate time and for the adequate purpose).
2. Key partners
In this section the most important partners and suppliers are represented. It is worth to emphasize those who are significant from the aspect of creating value (in the case of a consulting company for example not the cleaning service, but the university serving as a recruitment base).
3. Key activities
Consumer value is created through the processes inside the company. The value-creating process can be distinguished into two parts: primary and secondary processes (vid. Michael Porter value chain concept). In this case those activities are worthy of noting which contribute to our competitive advantage and to creating consumer value.
4. Key resources
We consider the assets of the company as key resources when they contribute to keeping the competitive advantage (see also: resources based theory – articles by Barney, Wernerfeltm Grant). These resources can be physical, immaterial and financial depending on their traits. Knowing what are the rare, precious, hardly copyable and well integrated resources (vid: VRIO analysis) can help to make the make-or-buy type management decisions.
5. Customer segments
This part of the analytical framework defines the customers of the organisation. This requires of course a lot of background work starting from defining the principles to creating the target group. If the company creates value in both the business sector (B2B) and for customers (B2C) as well, then both of the categories should be shown.
The channel which makes it possible to reach customers in practice is the part of the value chain that is on the side of the customers. Simply put, this means those companies and their connected platforms where the customers buy the product.
7. Customer relationships
The different customer segments require different sales (and marketing) strategies. In this step, we can identify the steps to reaching and keeping certain customer groups. For this purpose, during the background work, a 4P analysis may be done.
8. Cost drivers
Through introducing the concept we arrived to creating stakeholder/property/owner value, and to its incurring costs. Here it is recommended to show the fix- and variable costs, whose ratios and aspects vary depending on the industries. It is recommended to know the cost structure when we make suggestions to improve the cost efficiency.
9. Revenue streams
Finally we list the resources of income; it could be a good idea to measure the relations (and the ratios) between the different channels. With this method we can gain information about the weight of the different income resources and also find out how the shortfall of one of the resources affects profitability.
This is all well and good, but how can we use this information while solving case studies? All of what’s written above are simplest to interpret as a part of an analytical process. Our solution shouldn’t be the step-by-step exposition of the framework, but some parts of it can appear in our interpretation, and can be inserted into our logical frame. It is a good idea to draw the framework (the Canvas) and make it one of the background slides. The concept by Osterwalder can be used to create the business model of a start-up or any new entrants as well.
Chikán, A. (2008): Vállalatgazdaságtan. Aula Kiadó, Budapest
Osterwalder, A. – Pigneur, Y. – Smith A. (2010): Business Model Generation. Available: http://www.businessmodelgeneration.com/