Refining the Business Model

Geoff Eagleson
 Roadmap for the session:

 Different formulations of the “Business Model”

– Margetta
– Johnson, Christensen & Kagermann

 Turnaround of the Victorian Workcover Authority

 A more general map of the “Business Model”

A Business Model describes how an organisation can
achieve its strategic objectives.

In particular:

 A business model identifies the three fundamental elements of a business:

– WHO the customer is (in Kawasaki’s words “defining your customer”);
– WHAT is to be provided (in Kawasaki’s words “defining the pain your customer feels”);
– HOW a profit will be generated (in Kawasaki’s words “creating a sales mechanism to ensure
that your revenues exceed your costs”).

 “Every viable organisation is based on a sound business model” (Magretta, 2002, p.91)
 Business Model Maps

What How Who

Who Lead-Edge General Market

What

How
Johnson et al. propose a more detailed structure
for a Business Model:

Customer Value Proposition

Target customer
Job to be done
Offering

Profit Formula
Revenue model
Cost structure
Key Resources Margin model
People Resource velocity
Technology
Equipment
Information
Partners, alliances
Brand
Key Processes
Processes
Rules and metrics
Norms

Source: Johnson, Christensen & Kagermann (2008) – Reading 1

 Questions from Johnson reading:

Describe the business model used by your organisation (explicitly or



implicitly) in terms of this framework.

Would it have been more useful to use a category of “Key Organisational



Capabilities” to replace the “Key Resources” and “Key Processes”?

Does anyone have more than one set of “customers”?


 Let’s see if we can describe the VWA turnaround in
terms of Business Models.
Before After

“Customer” VP
Government Enforce OH&S; manage Enforce OH&S; manage
compensation scheme compensation scheme
Workers Help injured workers Help injured workers
Employers Reasonable insurance costs Reasonable insurance costs

Profit Formula Invested premiums support Invested premiums support

underwriting loses underwriting loses

Key Resources Legislation Legislation

Structure
Transparent KPI

Key Processes Preparing reports Active management of Agents

 Some things become clear from this comparison:

 Rather than a “Customer Value Proposition”, it is worthwhile thinking about

“Stakeholders’ Value propositions”.

 There can be “Unit of Analysis” issue that can cloud the analysis. Are we talking
about VWA, its Rehabilitation and Compensation Division or the Agents?

 There is a need to articulate the high level “Nature of the Business”. In the case of
VWA this went from being
– “The regulators of the compensation scheme” to (at least for the Rehabilitation
and Compensation function)
– “The managers of a huge outsourcing contract”.

– The Business Model is clearer when “Core Capabilities” are shown as the
mediators between the Organizational and Positioning Strategies.
 9
Here is yet another take on the “Business Model” :

The business we are in

Stakeholders’ Value Propositions

Major stakeholders
Needs
Benefits offered

Core Capabilities
(Key Processes)

Key Resources Metrics

People Economic drivers

Technology Interactive metrics
Equipment
Information
Partners, alliances
Brand

Adapted from: Johnson, Christensen & Kagermann, HBR, 2008

Which description of the Business Model do I use?

They are all capturing the same information with differing degrees of specificity. It is a case
of ‘horses for courses’. What do you want to communicate to whom?

 For a high level view, use the “WHO, WHAT, HOW”

 Use a Business Model Map to expose the interdependencies and the logic.

 The Johnson et al. version ensures that the owner’s needs are explicitly discussed.

 Our alternative puts Capabilities at the centre and emphasizes the Interactive Metrics to
provide a ‘line-of-sight’ to the frontline.