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A model & simulation driven approachisee User Conference 2010 Making ConnectionsDr. Oliver Grasl, 5. October 2010
BUSINESS MODELS: STRUCTURE & DYNAMICS
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The business model conceptWhat business models are not aboutA business model construction kitBusiness model blueprints
Case Study: Dynamics of a professional service firm
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1 The business model concept2 What business models are not about3 A business model construction kit4 Business model blueprints
5 Case Study: Dynamics of a professional service firm
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Transformation
STANDING STILL IS NOT AN OPTION
Business Model
Organization
Technology
S
t
u
c
u
r
e
r
o
High market expectations
Intense competition
New value chains
Disruptive Technologies
Mergers Acquisitions
An enterprise
External drivers (such as market expectations, competition, new technologies)force enterprises to implement changes to their business models anoperations standing still is not an option.
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IMPORTANT STRATEGIC QUESTIONS
How do we shape strategic initiatives within our firm?
How do we position our firm towards our stakeholders?
How do we create value for our stakeholders?
How will we change our firm by implementing strategic initiatives?
How shall we monitor and assess the progress of our strategicinitiatives?
Mller-Stewens/Lechner 2005
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BUSINESS MODEL ENGINEERING FOCUSESON VALUE CREATION
How do we shape strategic initiatives within our firm?
How do we position our firm towards our stakeholders?
How do we create value for our stakeholders?
How will we change our firm by implementing strategic initiatives?
Business models address the question of value creation, or:"How do we make money in this business?"
How shall we monitor and assess the progress of our strategicinitiatives?
Mller-Stewens/Lechner 2005
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GENERAL DEFINITION OF BUSINESS MODEL
A firm's business model shows how it creates value for all the parties
within its value network (customers, shareholders, business partners)by defining its value logic and showing which products and servicesare exchanged between these parties.
Magretta 2002, Timmers 1998,Zott/Amit 2007
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WHY BUSINESS MODELS ARE IMPORTANT
In future business model innov tion will be the key to generatingnew wealth: Competition no longer takes place betweencompanies and products, but between business models. Hamel 2000
In future business model innov tion will be more importantfor business success than product innovation.
Kagermann/sterle 2006
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WHY IS BUSINESS MODEL ENGINEERINGHARD?
The business model concept is a fairly fuzzy concept thatis not used consistently.
It hard to evaluate business models quantitatively,because many assumptions are not made explicit.
Business is not static, but highly dynamic it is difficultto make quantitative predictions about dynamic systemsusing simple calculations.
The ownership of the business model and the value creationpolicies within an enterprise is often unclear nobody feelsresponsible for the big picture.
Grasl 2008
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WHY IS BUSINESS MODEL ENGINEERINGUSEFUL?
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1 The business model concept2 What business models are not about3 Business model construction kit4 Business model blueprints
5 Example: Exploratory model of a professional service firm
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BUSINESS MODELS ARECONCERNEDWITH VALUE CREATION
How do we create value for our stake holders?
Customers
Focal Firm
Suppliers
Business models are concerned withcreating value within a value network.
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BUSINESS MODELS ARE NOT CONCENEREDWITH VALUE APPROPRIATION
How do we position our firm towards our stake holders?
Value appropriation is the concern of a firms positioningstrategy.
Competitor
Competitor
Competitor
Competitor
Competitor
Focal Firm
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BUSINESS MODELS ARE NOT CONCERNEDWITH VALUE DELIVERY
How do we deliver value efficiently?
BusinessProcess
Focal Firm
Value delivery is the concern of a firms operations.
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1 The business model concept2 What business models are not about3 A business model construction kit4 Business model blueprints
5 Example: Exploratory model of a professional service firm
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THE VALUE CREATION CONCEPT
Valuecreated
Willingness-to-pay
Price
Cost
Opportunity Cost
Buyer's share
Firm's share
Supplier's share
Addressed by thefirms valueproposition
Addressed by thefirms business model
The concept of value creation is important because it distinguisheseffectiveness ("Are we creating the right products?") from efficiency("Are we creating the products in a cost effective way?").
Value = Benefits - Costs
Brandenburger/Stuart 1996
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DEFINITION OF BUSINESS MODEL
A firm's business model shows how it creates value for all the parties withinits value network by defining its value logic and showing which products andservices are exchanged via transactions between these parties.
Business Model Value Network
Transaction Model
Value Logic
Grasl 2009b
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BUSINESS MODELS ANDENTERPRISE ARCHITECTURE
Business Strategy
Value Realization Business Operations
Value Appropriation Product-Market Strategy
Value Creation Business Model
Business Processes
Applications Technology
Business models are situated within the strategy layer of an enterprise'sarchitecture.
Grasl 2009b
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BUSINESS MODEL: VALUE NETWORK
Supplier
Focal Firm
CapabilitiesPolicies
Assumptions
Customer
The value network shows which channels a firm provides to connectthe parties in the product and factor markets.
Channel
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BUSINESS MODEL: TRANSACTION MODEL
The transaction model shows which transactions are supported or enabledvia the channels of the value network, and which products and artifacts areexchanged during these transactions.
Channel
Transaction Resources
Cost Revenue
Transaction ProductsSupplier
Focal Firm
CapabilitiesPolicies
Assumptions
Customer
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BUSINESS MODEL: VALUE LOGIC
Sales cost
Value added
Customers
Revenue
Capabilities
Investments
Resources
Products
Cash
The value logic shows how resources and capabilities are used to supporttransactions, create products, attract customers and drive value creationin a self sustaining feedback loop. Grasl 2009b
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FULL BUSINESS DYNAMICS
Revenue
Sales Cost
Products
Investments
Market Size
Customers
Capabilities
Cash
Value
added
Markets served
OperationsResources
Operating Expenses
Debt
Operating Income
Prices
Competitors
Business dynamics =value dynamics!market dynamics!operational dynamics
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BUSINESS MODEL BUILDING BLOCKS
Resource Capability
Asset
Role
Artifact
Role
Channel
Core construct
Transaction
Core construct
Party
Role
Market
Core construct
Value
Core construct
Product
Role
Service
Good
Price
Transaction
costhannel cost
Cost
Needed toproduce
Needed toproduce
Needed toprovide
CreatesOperates in
+ Customer
+ Customer+ Provider
Provides
+ Supplier Supported by
Exchangedvia
Exchanged via
+ Transactionprice
+ Product price
0 *
1 *
1 *
1 *1 *
1 *
1
1 *
This model
illustrates
the core
constructs
relevant
to analyzing
and designing
business models
Grasl 2009b
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BUILDING BLOCKS EXPLAINED
Asset
Artefact
Party
Channel
Product
Value
Transaction
Generally, an artifact is something created by a human for a practical purpose. Specifically in thiscontext, an artefact is anything exchanged during a transaction besides the products themselves,examples being a proposal or a product description sheet.
The term "asset" is used as a generalization for resources and capabilities. An asset is a resource(e.g. physical property, intangible right) or capability that has economic value. Importantexamples are plant, equipment, land, patents, copyrights, and f inancial instruments such asmoney or bonds. A firm needs assets to enable its transactions, maintain channels and createits products.
A channel is a conduit by which a firm offers its products.These products are exchanged via a transaction.
Any legal entity engaged within the business model. Examples for other parties besides firmsare public authorities and public households.
A product is any good or service produced by a business. Businesses are characterized bythe fact that they produce goods or service beyond their own need and can therefore offerthem to other parties via a market.
Firms interact via boundary spanning transactions, which are supported or enabled by channels.A transactions takes place when a product is exchanged via a separable interface.
The value created by the firm. A general definition is "Benefits-Cost".In practice this is frequently measured by the Free Cash Flow or Gross Margin
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1 The business model concept2 What business models are not about3 A business model construction kit4 Business model blueprints
5 Example: Exploratory model of a professional service firm
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LEVELS OF DETAIL AND COMPLEXITY
View business at different levels of abstraction.
Generic Specific
Abstract
Detailed
Firm-specific value logic(Business unit level)
Firm-specific value logic(enterprise level)Industry-specificvalue logicGeneric value logic
Detailed simulation
model
Adapted from Winter 2003
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BUSINESS MODEL BLUEPRINT: INDUSTRY SPECIFIC
Consulting firm value network
A consulting firm is a firm in which professional skills form the basis of itsservices to customers. The services are characterized by a high degree ofcustomization and client contact.
Recruiting
Agency
Consulting
Partner
University
Business
Contact
Consulting firm Customer
Knowhow
Juniorconsultants
Leads
Profes-sional
services
Grasl 2008
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BUSINESS MODEL BLUEPRINT: INDUSTRY SPECIFIC
Consulting firm value logic blueprint
Cash
Customers
Know how
Talent
Recruiting
Knowledge
Management
Innovation
Marketing
Rode 2001
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BUSINESS MODEL BLUEPRINT:INDUSTRY SPECIFIC
Further Consulting firm constructs
Artefact ProposalsWhite Papers and Case StudiesConsulting Contracts
Asset
Product
ConsultantsPartnersFreelance consultants
Channel Sales ChannelMarketing ChannelRecruitment Channel
Consulting Projects
Sell projectsDeliver projectsHire and fire (freelance) consultants
Maintain business contactsMaintain customer
Transaction
Value Fee Cash FlowGross Margin
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BUSINESS MODEL BLUEPRINT: INDUSTRY SPECIFIC
eBusiness Full service provider value network
Supplier
>
Supplier 1
>
Supplier 2
>
Supplier 3
>
Full service Provider
>
Customer
>
Partial Service
>
PartialService
>
Partial Service
>
Product information
Full service delivery
Customer Relations
Sales>
>
>
>
The full-service provider aims to meet the complete needs of a targetcustomer segment in one domain by integrating the firm's own productsand services with those of selected third party providers.
Weil/Vitale 2001
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BUSINESS MODEL BLUEPRINT: INDUSTRY SPECIFIC
eBusiness full service provider value logic
Membership fees
Suppliers
Customers
Cash
Orders
Productprice
Full ServiceProvider
Product Portfolio
Market
Presence
Supplier Pro-duct Portfolio
Grasl 2009b
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BUSINESS MODEL BLUEPRINT:INDUSTRY SPECIFIC
Further eBusiness constructs
Artefact Oder SummariesInvoices
Asset IT infrastructureProduct management capability
Relationship management capabilityBrand management
Channel Marketing
OrderDelivery
Customer Relations
Supplier ManagementBulling
Product BooksCDsClothes
Search for productsOrder products
Fulfill orderSend invoice
Transaction
Value Gross margin
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1 The business model concept2 What business models are not about3 A business model construction kit4 Business model blueprints
5
Case Study: Dynamics of a professional service firm
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CONTEXT
Case study based on work carried out for a professionalservice firm focusing on IT consulting.1,100 employees worldwide70 employees in Germany subsidiary
Participants were the CEO, CFO and Head
of Business Development.
The company has a very stable history of financial successbut is dissatisfied with growth rates.Policy changes are hard to find and enforce in such conditions.
Grasl 2009a
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KEY KPI'S FOR PROFESSIONAL SERVICEFIRMS ("MAISTER KPI'S")
Maister 1997
Health factor
Standardization
Health factor
Innovation andSpecialization
Hygiene factor
Cost reduction
Hygiene factor
Sales and deliverymanagement
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WHAT THE PSFS PARTNERS DO
Partners are responsible for the following activities:
Generating repeat business through client maintenance
New customer acquisition
Project delivery
Recruitment and consultant development
Development of new consulting products
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VALUE LOGIC: FIRM SPECIFIC, CONCEPTUAL
Conceptual value logic of this professional service firm
At this professional service firm, the partners have to share their timebetween customer acquisition, project delivery and customer maintenance.
Repeat
Projects
Customer main-
tenance required
Partner Customer
maintenance effort
Customers First timeprojects
Projects
Contacts
NewProject
Acquisition
RepeatProject
Acquisition
Customermaintenance
Partners
Partner Con-
tacting Effort
Contacting
effort required
ContactMaintenance
Project effort
required
Project delivery
effort available
ProjectDelivery
Consultants
Recruitment
Consultants Pro-
ject delivery effort
Partners ProjectDelivery effort
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STRATEGIC QUESTION
How should partners spend their time?
Which organizational policies should be followed to ensurevalue and leverage are maximized?
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THREE SCENARIOS
Scenario 1 Base Case
Partners spend up to 50% of their time in project delivery
The other 50% go to customer development and innovation
No time for standardization
Scenario 2 Concentrateon thecustomer
Scenario 3
Innovate andstandardize
Project delivery is delegated to senior and junior consultantsPartners focus on customer development and innovation
Partners focus more on standardization and less on innovation
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SCENARIO 1BASE CASE
Scenario 1 Maister KPIs
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SCENARIO 2CONCENTRATE ON THE CUSTOMER
Scenario 2 Maister KPIs
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SCENARIO 3INNOVATE AND STANDARDIZE
Scenario 3 Maister KPIs
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GROSS MARGIN COMPARISON
Gross Margin Comparison
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RECOMMENDATIONSFROM SIMULATION STUDY
Shift partner effort stronger towards customer acquisitionand maintenance and away from project responsibilities.
Define concrete effort allocation policiesand monitor effort allocation.
Increase leverage by standardizing innovative consulting products.
Reconsider top-heavy partner structure
The real value of the model was in providinga testbed for policy experiments.
Monitor the effect of innovation on fee structure.
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SUMMARY
The question "How do we create value for all our stakeholders"is fundamental to any enterprise.
An enterprise's value-creation logic is capturedin its business model.
It is important to understand the policies governingthe value creation process and to manage them explicitly.
Using a model-driven, visual approach to business modelengineering is useful to create shared understanding
of relevant policies across departments and hierarchies.
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LITERATURE
Brandenburger, A. and H. Stuart (1996): Value based business strategy. Journal of Economics and Management Strategy 5, 5 25
Grasl, O. (2008): Business modelanalysis. In Systems Dynamics Society (Ed.), Proceedings of the 26thInternational Systems DynamicsConference. Athens, Greece
Grasl, O. (2009a): Key performance indicators in professional service firms a dynamic perspective. In Systems Dynamics Society (Ed.),Proceedings of the 27th. International Systems Dynamics Conference. Albuquerque, USA
Grasl, O. (2009b): Professional Service Firms: Business Model Analysis Method and Case Studies, 2009. University of St. Gallen
Hamel, G. (2000): Leading the revolution. Harvard Business School Press
Kagerman, H.; sterle, H. (2006): Geschftsmodelle 2010 Wie CEOs Unternehmen transformieren. Frankfurter Allgemeine Buch
Magretta, J. (2000): Why business models matter. Harvard Business Review 2002, 3336
Maister, D. (1997): Managing the Professional Service Firm (First Free Press Edition ed.). Free Press Paperbacks
Mller-Stewens, G and C. Lechner (2005): Strategisches Management Wie strategische Initiativen zum Wandel fhren. Schffer-Pschel
Rode, N. (2001): Wissensmarketing Strategische Entscheidungsoptionen fr Anbieter von Wissen. Gabler
Timmers, P. (1998): Electronic Commerce: Strategies and Models for Business-to-business Trading. J. Wiley
Weill, P. and M. Vitale (2001): Place to Space - Migrating to e-Business Models. HBS Press
Winter, R. (2003): Modelle, Techniken und Werkzeuge im Business Engineering. In H. sterle and R. Winter (Eds.),Business Engineering Auf dem Weg zum Unternehmen des Informationszeitalters (2nded.). Springer
Zott, C. and R. Amit: The fit between product market strategy and business model: implications for firm performance.Strategic Management Journal, 1 26
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Dr. Oliver GraslManaging DirectorPartner
E-Mail: oliver.grasl@transentis.comMobil: +49 (0)173 6 54 67 27
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transentis management
consulting GmbH
Kranzplatz 5 6D-65183 Wiesbadenwww.transentis.comTel.: +49 (0)611-90099-51
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