1. Building a Business Model and Strategy Resource
1.1. Difference between business model and strategy. Model is identifying your customers and focusing on the profits. Whereas, the strategy focuses on satisfying the customers. (pg.4)
1.2. Two professors from Harvard discuss decisions and trade offs in 4 groups: revenue sources, cost drivers, investment size, and critical success factors. pg. 3
1.3. Management consltant Joan Magretta views a business models as a value chain, which has 2 parts. Part 1: includes all the activities associated with makiing something:designing it, purchasing raw materials, manufacturing. Part 2: includes everything associated with seling something: fiinding and reaching customers, transacting a sale, distributing or delivering the servic. (p.4)
1.4. Some of today's powerful companies grew because of their elegant business models. (pg.6)
1.5. Dell example pg.7
1.6. Strategy is important when dealing with market competition (Animation: Show soldiers being strategic. Or, chess) Having differences is important. (Use the example of two clothing stores.) pg.9
1.6.1. 3 Types of Differentation: 1. variety-based-has narrowed items, such as Starbucks focus on coffee or drinks 2. needs-based-wants to provide (pg. 10)
1.6.1.1. 3. Access-based positioning-placing convenient stores in locations, such as as Dollar General.
1.7. "Simply being different, of course, will not keep you in business; something that is different must be perceived as valuable." Customers perceive value in different ways. (List the ways.) pg. 12
1.8. Guidelines for Survival:
1.8.1. 1. Look outside to identify threats and opportunities-Your business could be threatened by a competitor that can produce the same quality goods at a lower price. You need to be able to cope with this. pg. 13
1.8.2. 2. Look inside at resources, capabilities, and practices-"A strategy can succeed only if it has the backing of the right set of people and other resources." pg. 13
1.8.3. 3. Consider strategies for addressing threats and opportunities-Prioritize the threats and opportunties they find. pg. 14
1.8.4. 4. Build a good fit among strategy-supporting activities-Combining activities into a chain whose links are mutually supportining and effective in locking out imitators. pg. 14
1.8.5. 5. Create alignment-Alignment is that everyone working for your company understands the business strategy and their role in making the strategy work. pg. 15
1.8.6. 6. Be prepared to implement-You need to implement and don't get so concerned with the details and forget about the activities that are required to make it work.
1.9. A start-up business should e viewed as an experiment. If it fails, be prepared to change quickly. pg. 16
2. Competing Business Models Intro. Note for Students
2.1. A business model is considered the "logic of the firm."It's a set of choices relating to how a firm operates and the consequences of those choices. pg. 2
2.1.1. Choices fall into 3 categories:L policies, assets, and governance. Policies-any actions taken by the company across entire operation. Assets-tangible resources that the company chooses to deploy. Governance-decision-making rights for the company pg. 2
2.2. A firm's choices produces consequences, which is considered flexible or rigid. pg. 2
2.3. Strategy involves the choice of a particular logic for value creation and value capture. The business model is the result of strategy. Tactics are specific actions that occur within the constraints that the business model imposes. The analogy: strategy is designing and building the car, business model is the car itself, and tactics are driving the car. pg. 3
3. Competing Business Models -A
3.1. Business model consists of 1) set of choices and 2) set of consequences derived from those choices pg. 2
3.1.1. Explanation of polovies, assets pg. 2
3.2. A consequence is flexible if it is sensitive to the choices that generate it. A rigid consequence is one that does not change rapidly with the choices that generate it. pg. 2
3.3. Loop diagram is a great way to represent a business model (pg. 3)
3.3.1. To overcome difficulty, representations of business models consists of 1) choices, 2) consequences, and 3) theories (which show how choices and consequences are related.) pg. 3.
3.3.1.1. Sometimes they are accepted, but theories are controversial. If later the theories fail to hold up, there will be a break in the logic and a business model failure. pg. 3
3.3.2. A business model does not need to include every choice and consequence. Two ways to move from full detail to simplified are 1)aggregation and 2) decomposability
3.3.2.1. Aggregation-bunches together detailed choices and consequences into larger constructs. Instead of detailing every contract offered to every individual, we simply write 1 choice: high-powered incentives. pg. 3
3.3.2.1.1. Aggregation is about zooming out or looking at the real business model from a distance. How much to zoom out depends on the question the analyst is trying to address. pg. 4
3.3.2.2. Decomposability-Different groups of choices and consequences do not interact with one another thus they should be isolated or decomposed.
3.3.2.2.1. Also allows the study of individual units in multibusiness organizations.
3.3.2.3. Rynair example pg. 5
3.4. A value chain and activity map provide static represnetation that highlight the main choices a firm makes and therefore are helpful tools for representing business models. pg. 8
3.5. Business models dynamics often generate feedback loops. This happens when choices yield consequences and consequences enable choices.
3.5.1. Feedback loops can be of two types 1) virtuous and 2) vicious cycles.Because they are symmetrical, we need to study only one type of feedback loop; the same principles apply to both. We focus on virtuous cycles. pg. 9
3.5.1.1. Well-functioning virtuous cycles cannot easily be stopped.
3.5.1.2. Especially desirable when they affect the growth of consequences related to a firm's goals.
3.5.1.3. Include list for the method for constructing business model representations (pg. 11-12)
3.5.2. A value loop-an approach for simplifying through aggregation to represent the fundamental logic of value creation and value capture. It allows you to see the other elements in the business model, the choices and consequences, that reinforce the value loop (pg. 12)
3.5.2.1. Give examples of choices pg. 13-14
3.6. 4 related desirable features: alignment to goal, reinforcement, virtuousness, and robustness
3.6.1. Alignment to goal-Business choices delivering consequemces tat move the orgaization toward achieving its objectives. If an organization's goal is different from what the business model delivers, then alignment to the goal fails and the business model is just not appropriate. pg. 17
3.6.1.1. Example of goals: profit mamization, a better environment, or a pleasant place to work. Organizations often have multiple goals. Goals are considered consequences, not choices. pg. 17
3.6.1.1.1. Include example of Xerox COrporation not aligning to their goals pg. 17
3.6.2. Reinforcement-Choices that complement each other. Closely related to internal consistency. Example of Ryanair pg. 17
3.6.2.1. Example: high-powered incentives, a choice that results in the exerted effort of coworkers. Side effect of these incentives that they often result in coworkers' reduced willingness to cooperate and help each other. In organizations with business models that do not rely on cooperation, high-powered incentives are generally appropriate. Absence of reinforcement implies the presence of opportunities to improve the business model by discontinuing some choices and adding new ones. pg. 17
3.6.3. Virtuousness-The presence of virtuous cycles (positive feedback loops) that help a business model gain strength over time. Business models endowed with virtuous cycles that lead to better fulfillment of objectives often result in growth. Growth is a rigid consequence. pg. 18
3.6.3.1. Porter cautions managers about the growth trap...pg. 18
3.6.3.1.1. There is possibility that virtuousness could turn into viciousness because it is often a case that interaction with a competitor such as another low-cost competitor can challenge a business and disrupt the pathway of cause and effect that the incumbent has established.
3.6.4. Robustness
3.6.4.1. Ability of the business model to sustain its effectiveness over time.
3.6.4.1.1. Pankkaj Ghemawat identifies 4 generic threats to sustainability: imitation, hold up, slack, and substitution. pg. 19
3.7. Effectiveness of a business model is measured by the four areas we just discussed.
4. Competing Business Models -B
4.1. A business model is decomposable within when an analyst can focus on parts of the model and still draw correct conclusions about how the model works.
4.2. Decomposition between business models means that an analyst can focus on interactions between a reduced number of players and still draw correct conclusions about interactions. pg.1
4.3. Aggregation-bunches together detailed choices and consequences into larger constructs as if they are looked at from a distance and drawing corect conclusions about how the model works. Alows an analyst to study busines models without the need to describe every choice and every consequence in detail. pg. 2-3
4.3.1. Aggregation between busines models is the same idea but aplied acros the busines models of different players. The analyst aggregates between when subsets of players are grouped together. Aggregation betwen players means that subsets of players are treated as a single player.
4.4. Deciding how often to use decomposition and aggregation is an art. pg. 2
4.5. There are many possible combinations of aggregation and decomposability, but a promising combination is the use of light aggregation and heavy decomposability between business models with intermediate aggregation and decomposability at the business model level for the focal firm. pg. 4
4.6. A strategy is a contingent plan of action designed to achieve a particular goal. It entails designing business models and redesigning them as contingencies occur that allow the organization to reach its goals. Tactics are also plans of action. The difference between the two are that that the "action sets" available for tactics are constrained by the business model that is in place. Tactics are courses of action that take place within the bounds drawn by the firm's business model. pg. 4
4.6.1. Include example of Le Cirque du Soleil pg. 4
4.7. An organization's business model is the reflection of its realized strategy. Another difference is that while every organization has some business model because they make some choices and the choices have consequences, not every organization has a strategy. pg.9
4.8. Porter points out that strategy requires strong leadership because it often calls for substantial trade-offs. It is also hard to foresee all the effects that strategies have on tactics. Strategies often entail commitments are hard to reverse. On the otherhand, tactics are generally less consequential, easier to implement, and easier to understand. They often fall underneath middle management. pg. 10
5. Competing Business Models -C
5.1. The effectiveness of a business model depends to a large extent on the design of other players. pg. 1
5.2. 2 organizations interact when they affect one another. Interaction can be with competitors, suppliers, complementary firms, or distributors. Interaction could entail competition or cooperation; both may be to capture or create value.
5.2.1. Interaction is competivit if the working of firm A's business model deteriorates because of the existence of the interaction.
5.2.2. Interaction is cooperative if the working of firm A's business model improves because of the existence of the interaction.
5.2.3. Interaction is value capture if the issue at hand is the division of value between different players.
5.2.4. Interaction is for value creation if the issue at hand is the generation of value. pg. 1
5.3. Two concepts of interaction
5.3.1. Tactical Interaction-Organization affect each other by acting within the bounds set by their business models. Usually involves variables such as price, advertising, product, proliferation, or R&D intensity. pg. 2
5.3.2. Strategic Interaction-Organizations affecxt each other by modifying their business models. Involves changes in policies, assets, and governance structures to compete or cooperate.
5.4. Business models of 2 firms are interdependent when some consequences are common to both firm's models. They are interdependent when they are connected. pg. 6
5.4.1. The intensity of interdependence is endogenous because it depends on how players have decided to configure their business models. pg. 6
5.4.2. Interdependence could be positive or negative. Two business models may reinforce each other (cooperation) and help each another to "work better," or they may detract from each other (competition).
5.5. Tactical Interaction-The way organizations affect each other by actng within the bounds set by their business models. If the business model of the firm under consideration are not interdependent, then there can be no tactical interaction. pg. 7
5.5.1. Aggressiveness-The capacity of a firm to affect the working of other players' business models by using tactics. How much can a0 be affected by the actions of firm B if A stands still (continues business as usual)? pg. 7
5.5.2. Defensiveness- How well a firm can fend off or take advantage of moves of players with which it interacts given its business model. Defensiveness is greater the smaller the difference is.
5.5.3. Aggressiveness and defensiveness are asymmetric.
5.5.4. Aggressiveness and defensiveness depends on the specific players under consideration. A's business model may result in substantial agressiveness and defensiveness when in interaction with player B, but not when interacting with C. pg. 7
5.5.5. Depends on the firm under consideration. Two reasons: 1) breadth of tactical actions available depends on the business models. 2) COnfiguration of the firm's business models determines the intensity of business model interdependence.
5.5.6. Consistency captures the capacity of the business model to continue achieving its goals, taking into account the possible strategic interactions that may potentially take place.
5.6. Strategic Interaction-Concerned with the choice of polocies, assets, and governance structures. Two ways in which strategies affect outcomes: 1) strategies affect the degree of business model interdependence between any two players making the model endogenuous. 2) strategies determine the extent to which business models exhibit aggressiveness and defensiveness. It's important to note that the intensity of interdependence, aggressiveness, and defensiveness between players A and B are not chosen by A alone or B alone, but depends on the strategies followed by both A and B. pg. 8
5.6.1. How to reduce business model interdepence:
5.6.1.1. 1) Modify your own business model so that the organization moves to speaces where there are fewer points of contact between models. (Use example of Cirquw du Soleil)
5.6.1.2. 2) Add elements in your business model that help other players thrive so that no one player has a large effect on the score of the focal firm.
5.6.2. Of course, this can also be reversed to increase business model interdependence. This is desirable when the interactions are positive (complementary).
5.6.3. Strategic interaction corresponds to the intuitive notion of competition through business models: modifying my own business model to affect your choices, while at the same time reacting to changes in other players' business models. pg. 8
5.6.3.1. Include example from the videogame industry pg. 8-9
5.6.3.2. While easier for tactics, best-response functions for strategic interaction are often hard to figure out. Reason is, in the case of strarefies, the action spaces are high and the interactions between different choices are complex. As a consequnce, it is practically impossible to come up with your own payoff functions. The implication is that strategy search is only vaguely related to classic optimatization or game theory. Contrary to tactics, finding appropriate strategies is a much more creative process than one of calculation. Inspiration and imagination together with leadership are the main features that strategiest must possess. pg. 9
6. Competing Business Models -D
6.1. Not sure what notes I should have
7. Google, Microsoft, Apple
7.1. Not sure what notes I should have.
8. How to Design Winning...
8.1. 3 Characteristics pf a Good Business Model: pg. 4
8.1.1. 1)Aligned with company goals-CHoices made while designing the business model should deliver consequences that enable an organization to achieve its goals. Ex: Include Xerox example pg. 4
8.1.2. 2) Self- reinforcing-Choices should complement one another and must be consistent.
8.1.3. 3)Robust-Should be able to sustain its effectiveness over time by fending off 4 threats: imitation, holdup, slack, and sub-situation. pg. 4
8.2. Peter Drucker, says a business model should be the answer to these questions: Who is your customer, what does the customer value, and how do you deliver value at an appropriate cost? pg. 5
9. Innovating Across the Business Model
9.1. When someone hears the word innovation, they immediately think of new products, but great innovations could be business models. pg. 1
9.1.1. They do so by 1) serving unmet or unsatisfied customer groups, 2)providing new or different benefits, 3) delivering and/or extracting value in an unconventional fashion
9.1.1.1. Give examples of companies on pg. 1. They create wealth by pushing the boundaries of one or more dimensions of the company/industry business model in a sustainable and profitable way. The problem for many organizations is that they never even think about innovation in this context.
9.2. What are business model innovations?
9.2.1. It's about creating new businesses or bringing more strategic variety to a business you're already in. pg.5
9.2.2. Business model is a conceptual framework for identifying how a company creates, delievers, and extract value. pg. 5
9.2.2.1. 5 components are: 1) who you serve 2) what you provide 3)how you provide it 4)how you make money 5) how you differentiate and sustain advantage
9.3. 2 Objectives:
9.3.1. 1. Invent new business models that haven't been seen in the industry
9.3.2. 2. Drive growth by evolving the business you already have.
9.3.3. Where many businesses fail is trying to pursue one objective while omitting the other. pg. 8
9.3.4. Thinking holistically helps to avoid business model blind spots leaving room for your competitors.
9.3.4.1. Example of Walmart vs. Target pg. 10
9.4. You should scrutinize the business model to ask the why questions: pg. 12
9.5. How to stretch your business model?
9.5.1. Orthodoxies, discontinuities, core competencies and strategic assets, and customer insights. pg. 12-13
10. What is a Business Model?
10.1. A good business model answers Peter Drucker’s age-old questions, ‘Who is the customer? And what does the customer value?’ It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?” pg. 3
10.2. Magretta, like Drucker, is focused more on the assumptions than on the money, pointing out that the term business model first came into widespread use with the advent of the personal computer and the spreadsheet, which let various components be tested and, well, modeled. Before that, successful business models “were created more by accident than by design or foresight, and became clear only after the fact. pg. 3
10.2.1. Magretta: A business model, she says, has two parts: “Part one includes all the activities associated with making something: designing it, purchasing raw materials, manufacturing, and so on. Part two includes all the activities associated with selling something: finding and reaching customers, transacting a sale, distributing the product, or delivering the service. A new business model may turn on designing a new product for an unmet need or on a process innovation. That is it may be new in either end.” pg. 3