After identifying some main elements, components or building blocks with the use of a business model framework the output can be used in practice. How firms use this output is called the ‘Praxis’, the actual activity, according to the Strategy as practice theory
(Whittington, 2006). This section will discuss the process of business model development and will cover how the information from the business model frameworks can be used and
implemented in practice. To do this several concepts of different authors will be discussed (Teece, 2010; Eyring, Johnson & Nair, 2011; Blank, 2013). All these theories will cover the actual process of a business model, and how the identified elements, components or building blocks can be integrated in a business model, and to actual implementing it in practice.
2.4.1 Processes: Steps of implementing a Business Model
According to Teece (2010) a business model demonstrates how a company creates and delivers value to its customers. To accomplish this and get advantage of a business model, different elements have to be determined in a business model: technologies and features embedded in the product/service, the benefit of these products/services, segments targets, revenue streams and the design of mechanisms to capture value (Figure 11).
Figure 11. Elements of a Business Model (Teece, 2010)
With the use of this design, the business model will create value for customers, entice
payments and eventually convert these payments to profit. If the business model is simple but successful, this will not immediately lead to competitive advantage because imitation of competitors can be rather easy. However if the business model is differentiated and difficult to
Select technologies and features to be embedded in the product / service
Determine benefit to the customer from consuming/using the product/service Identify market segments to be targeted Confirm available revenue streams Design mechanisms to capture value
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imitate, and thereby effective, it can lead to competitive advantage and more likely to yield profit (Teece, 2010). To reach this competitive advantage a firm needs to achieve superior execution of particular activities within the company’s internal value chain, coordination among those activities and good management of the interface between the company and others in the network (Morris, Schindehutte & Allen, 2005). Thus, implementing a well- designed and differentiated business model can be a source for competitive advantage and eventually more profit.
Another business model theory proposed by Eyring, Johnson & Nair (2011) has it focus especially on multinationals who try to enter emerging markets. In these markets there are different needs and circumstances which means you have to do business in a different way. With the use of their domestic business models multinationals will fail to capture value and generate sufficient returns (Eyring, Johnson & Nair, 2011). To approach these different circumstances they propose a tool to construct a new business model which can be implemented in emerging markets (Figure 12).
Figure 12. Building a New Model (Eyring, Johnson & Nair, 2011)
This business model tool has four parts: the customer value proposition, a profit formula, key processes and key resources. To implement all these parts a firm has to make a decision regarding its strategy e.g. Will it focus on differentiation or on price? According to Eyring, Johnson & Nair (2011) developing new business models in emerging markets always begins with inventing a new customer value proposition. However, models designed to compete on differentiation have to follow the three remaining parts in a different way than models designed for competing on price. After devising a new customer value proposition,
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differentiation models have to establish their key resources, key processes and finally the profit formula. For price models it is the other way around, starting with determining the profit formula and then selecting the key processes and resources. By implementing this business model tool multinationals can enter emerging markets, gain sustainable competitive advantage and make profits (Eyring, Johnson & Nair, 2010).
2.4.2 Processes: Lean Start-up
Another approach for launching business models is the lean start up, a new process that recognizes that searching for a business model is entirely different from executing against that model (Blank, 2013). Or in other words, according to the lean approach start-ups (new firms) look for new business models and existing firms try to execute existing business models. Three key principles are at the root of the lean approach. Firstly, founders of new firms summarize their hypotheses in the Business Model Canvas of Osterwalder & Pigneur (2010). Secondly, to test their hypotheses lean start-ups make use of the customer development approach (Blank, 2013). With this approach they try to get ‘fast’ feedback on all elements of their business model. After the feedback is given they will use it to make changes in their model. Thirdly, the lean start-up make use of a concept called agile development. Instead of a process of long and slow product development, agile development eliminates wasted time and resources by developing the product iteratively and incrementally (Blank, 2013). Constant customer feedback is the foundation of business model development in the lean start-up theory. Blank (2013) describes a model to make use of this feedback and to implement it in a new firms business model (Figure 13).
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Figure 13. Listen to the Customer (Blank, 2013)
The lean approach helps new start-ups to counter threatening factors in their environment. Such as the high cost of getting the first customer, and the even higher cost of getting the product wrong and long technology development cycles. The lean approach counters these factors with helping start-ups launch products that customers really want, far more quickly and cheaply than traditional methods (Blank, 2013). The lean theory was first invented for start-ups but it has become clear in the business landscape that mature firms also can benefit from it. Improving existing business models is not enough anymore, mature firms also need to innovate in their business and especially inventing new business models (Blank, 2013). This all to survive in a changing and turbulent environment.
2.4.3 Processes: Business Model Canvas
One of the most famous frameworks, the Business Model Canvas from the Business Model Generation book (Osterwalder & Pigneur, 2010) identifies building blocks and their
relationships. After this identification process the information can be used to generate viable business model ideas. Osterwalder & Pigneur (2010) describe this business model design process in five phases: mobilize, understand, design, implement and manage. The process is displayed linear. However an important remark the authors give is that this is rarely the case, and that phases often intertwine. The first phase, mobilization, is the preparation for a
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such as: framing the project objectives, testing preliminary ideas, planning the project and assembling the team (Osterwalder & Pigneur, 2010, p. 250). To successfully manage these activities you need the appropriate people, experience and knowledge. Next to these essential activities and success factor there is also one danger in the mobilization phase. People can tend to overestimate the potential of business model ideas, which leads to a closed mind set and less exploration of other possible business model ideas. The second phase is the
understanding phase, which consists of developing a good understanding of the context in which the business model will involve (Osterwalder & Pigneur, 2010, p.252). In this understanding process, the firm needs to scan the environment, study potential customers, interview experts, explore past research and collect ideas and opinions. It is critical that the members of the project team finally have a deep understanding of potential target markets and look beyond the traditional boundaries (Osterwalder & Pigneur, 2010). Within this phase there are again some dangers the firm can encounter. They can ‘over-research’ and try to identify too much information. Next to this there is also the chance that there is a biased research because of pre commitment to a certain business idea. In the third phase, the design phase, the key objective is to generate new business models. The members of the project team need to brainstorm for different business models, define prototypes, test these models and finally selecting viable models. To succeed in these steps the project team has to co-create with people from across the firm, able to see beyond the status quo and take time to explore several business model ideas. To avoid dangers, project members need to watch out for watering down or suppressing bold ideas and falling in love with ideas too quickly
(Osterwalder & Pigneur, 2010). The fourth phase, the implementation of a business model idea is the actual start of bringing it in practice. The business model is executed and communicated by the firm. To successfully do this, the firm must have the ability and willingness to rapidly adapt the business model, and aligning the new model with the old models. If not, a danger of a weak and fading momentum can occur. The last and very important phase is the manage phase. To be successful firm the creation of new business models or innovating in existing ones is not a one-time exercise. The firm need to continuously review it to stay successful. Important activities regarding this success are scanning the environment, continuously assessing your business model, rejuvenating or rethinking your model, aligning business models throughout the enterprise and managing synergies or conflicts between models (Osterwalder & Pigneur, 2010, p.258). To manage these activities the firm needs to be proactive to market evolutions, at least one person should be responsible for long-term evolution of the model, and there must be governance of
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business models. An obvious danger that can occur is that a firm becomes a victim of its own success, and fails to adapt its business models. An overview of all five phases is given in Figure 14.
Figure 14. Five Phases of the Business Model Process (Osterwalder & Pigneur, 2010)
Another process described in the Business Model Generation book for producing innovative business model options is the ideation process. This process exists of five topics with each one key question to generate effective new business model ideas (Osterwalder & Pigneur, 2010, p.142). (1) Team Composition: is our team sufficiently diverse to generate fresh business model ideas?, (2) Immersion: Which elements must we study before generating business model ideas? (3) Expanding: What innovations can we imagine for each business model building block? (4) Criteria selection: What are the most important criteria for prioritizing our business model ideas? (5) Prototyping: What does the complete business model for each shortlisted idea look like?