Oliver Grasl-Business Model Dynamics

2010 transentis management consulting GmbH & Co. KG www.transentis.com 1 www.transentis.
com
A model & simulation driven approach
isee User Conference 2010 Making Connections
Dr. Oliver Grasl, 5. October 2010
BUSINESS MODELS: STRUCTURE & DYNAMICS
2010 transentis management consulting GmbH & Co. KG www.transentis.com 2 2010 transentis management consulting GmbH & Co. KG www.transentis.com 2
The business model concept
What business models are not about
A business model construction kit
Business model blueprints
Case Study: Dynamics of a professional service firm
1 The business model concept
2 What business models are not about
3 A business model construction kit
4 Business model blueprints
5 Case Study: Dynamics of a professional service firm
2010 transentis management consulting GmbH & Co. KG www.transentis.com 4
Transformation
STANDING STILL IS NOT AN OPTION
Business Model
Organization
Technology
S
t
r
u
c
t
u
r
e
s

P
r
o
c
e
s
s
e
s

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 an
operations standing still is not an option.
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 strategic
initiatives?
Mller-Stewens/Lechner 2005
BUSINESS MODEL ENGINEERING FOCUSES
ON 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 strategic
initiatives?
Mller-Stewens/Lechner 2005
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 services
are exchanged between these parties.
Magretta 2002, Timmers 1998,
Zott/Amit 2007
WHY BUSINESS MODELS ARE IMPORTANT
In future business model innovation will be the key to generating
new wealth: Competition no longer takes place between
companies and products, but between business models.
Hamel 2000
In future business model innovation will be more important
for business success than product innovation.
Kagermann/
sterle 2006
WHY IS BUSINESS MODEL ENGINEERING
HARD?
The business model concept is a fairly fuzzy concept that
is 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 difficult
to make quantitative predictions about dynamic systems
using simple calculations.
The ownership of the business model and the value creation
policies within an enterprise is often unclear nobody feels
responsible for the big picture.
Grasl 2008
WHY IS BUSINESS MODEL ENGINEERING
USEFUL?
Clarlfylng Lhe value proposluon and re-deslgnlng Lhe buslness model
Lo supporL lL.
Assesslng Lhe vlablllLy of a new buslness ldea by maklng
all assumpuons expllclL and explorlng poLenual rlsks and
opporLunlues.
Maklng Lhe buslness model LransparenL Lo all sLakeholders,
ln a quallLauve and quanuLauve way.
verlfy exlsung pollcles, and ndlng new pollcles, LhaL wlll lmprove
value creauon and Lhus Lhe overall success of Lhe buslness.
Creaung a learnlng envlronmenL for Lhose ln Lhe rm LhaL have Lo
puL new or changed buslness pollcles lnLo eecL.
3 Business model construction kit
5 Example: Exploratory model of a professional service firm
BUSINESS MODELS ARE CONCERNED
WITH VALUE CREATION
How do we create value for our stake holders?
Customers
Focal Firm
Suppliers
Business models are concerned with
creating value within a value network.
BUSINESS MODELS ARE NOT CONCENERED
WITH VALUE APPROPRIATION
How do we position our firm towards our stake holders?
Value appropriation is the concern of a firms positioning
strategy.
Competitor
Competitor
Competitor
Competitor
Competitor
Focal Firm
BUSINESS MODELS ARE NOT CONCERNED
WITH VALUE DELIVERY
How do we deliver value efficiently?
Business
Process
Focal Firm
Value delivery is the concern of a firms operations.
THE VALUE CREATION CONCEPT
Value
created
Willingness-to-pay
Price
Cost
Opportunity Cost
Buyer's share
Firm's share
Supplier's share
Addressed by the
firms value
proposition
Addressed by the
firms business model
The concept of value creation is important because it distinguishes
effectiveness ("Are we creating the right products?") from efficiency
("Are we creating the products in a cost effective way?").
Value = Benefits - Costs
Brandenburger/Stuart 1996
DEFINITION OF BUSINESS MODEL
A firm's business model shows how it creates value for all the parties within
its value network by defining its value logic and showing which products and
services are exchanged via transactions between these parties.
Business Model Value Network
Transaction Model
Value Logic
Grasl 2009b
BUSINESS MODELS AND
ENTERPRISE 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's
architecture.
Grasl 2009b
BUSINESS MODEL: VALUE NETWORK
Supplier
Focal Firm
Capabilities
Policies
Assumptions
Customer
The value network shows which channels a firm provides to connect
the parties in the product and factor markets.
Channel
Grasl 2009b
BUSINESS MODEL: TRANSACTION MODEL
The transaction model shows which transactions are supported or enabled
via the channels of the value network, and which products and artifacts are
exchanged during these transactions.
Channel
Transaction
Resources
Cost Revenue
Transaction
Products Supplier
Focal Firm
Capabilities
Policies
Assumptions
Customer
Grasl 2009b
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 support
transactions, create products, attract customers and drive value creation
in a self sustaining feedback loop.
Grasl 2009b
FULL BUSINESS DYNAMICS
Revenue
Sales Cost
Products
Investments
Market Size
Customers
Capabilities
Cash
Value
added
Markets served
Operations Resources
Operating Expenses
Debt
Operating Income
Prices
Competitors
Business dynamics =
value dynamics ! market dynamics ! operational dynamics
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
cost
Channel cost
Cost
Needed to
produce
Needed to
produce
Needed to
provide
Creates Operates in
+ Customer
+ Customer
+ Provider
Provides
+ Supplier
Supported by
Exchanged
via
Exchanged via
+ Transaction
price
+ 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
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 this
context, 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. Important
examples are plant, equipment, land, patents, copyrights, and financial instruments such as
money or bonds. A firm needs assets to enable its transactions, maintain channels and create
its 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 firms
are public authorities and public households.
A product is any good or service produced by a business. Businesses are characterized by
the fact that they produce goods or service beyond their own need and can therefore offer
them 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
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-specific
value logic
Generic value logic
Detailed simulation
model
Adapted from Winter 2003
BUSINESS MODEL BLUEPRINT: INDUSTRY SPECIFIC
Consulting firm value network
A consulting firm is a firm in which professional skills form the basis of its
services to customers. The services are characterized by a high degree of
customization and client contact.
Recruiting
Agency
Consulting
Partner
University
Business
Contact
Consulting firm Customer
Know
how
Junior
consultants
Leads
Profes-
sional
services
Grasl 2008
Consulting firm value logic blueprint
Cash
Customers
Know how
Talent
Recruiting
Knowledge
Management
Innovation
Marketing
Rode 2001
BUSINESS MODEL BLUEPRINT:
INDUSTRY SPECIFIC
Further Consulting firm constructs
Artefact Proposals
White Papers and Case Studies
Consulting Contracts
Asset
Product
Consultants
Partners
Freelance consultants
Channel Sales Channel
Marketing Channel
Recruitment Channel
Consulting Projects
Sell projects
Deliver projects
Hire and fire (freelance) consultants
Maintain business contacts
Maintain customer
Transaction
Value Fee Cash Flow
Gross Margin
eBusiness Full service provider value network
Supplier
<< Party >>
Supplier 1
<< Party >>
Supplier 2
<< Party >>
Supplier 3
<< Party >>
Full service Provider
<< Party >>
Customer
<< Party >>
Partial Service
<< Channel >>
Partial
Service
<< Channel >>
Partial Service
<< Channel >>
Product information
Full service delivery
Customer Relations
Sales
<< Channel >>
<< Channel >>
<< Channel >>
<< Channel >>
The full-service provider aims to meet the complete needs of a target
customer segment in one domain by integrating the firm's own products
and services with those of selected third party providers.
Weil/Vitale 2001
eBusiness full service provider value logic
Membership fees
Suppliers
Customers
Cash
Orders
Product
price
Full Service
Provider
Product Portfolio
Market
Presence
Supplier Pro-
duct Portfolio
Grasl 2009b
BUSINESS MODEL BLUEPRINT:
INDUSTRY SPECIFIC
Further eBusiness constructs
Artefact Oder Summaries
Invoices
Asset IT infrastructure
Product management capability
Relationship management capability
Brand management
Channel Marketing
Order
Delivery
Customer Relations
Supplier Management
Bulling
Product Books
CDs
Clothes
Search for products
Order products
Fulfill order
Send invoice
Transaction
Value Gross margin
5 Case Study: Dynamics of a professional service firm
CONTEXT
Case study based on work carried out for a professional
service firm focusing on IT consulting.
1,100 employees worldwide
70 employees in Germany subsidiary
Participants were the CEO, CFO and Head
of Business Development.
The company has a very stable history of financial success
but is dissatisfied with growth rates.
Policy changes are hard to find and enforce in such conditions.
Grasl 2009a
KEY KPI'S FOR PROFESSIONAL SERVICE
FIRMS ("MAISTER KPI'S")
Maister 1997
Health factor
Standardization
Health factor
Innovation and
Specialization
Hygiene factor
Cost reduction
Hygiene factor
Sales and delivery
management
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
VALUE LOGIC: FIRM SPECIFIC, CONCEPTUAL
Conceptual value logic of this professional service firm
At this professional service firm, the partners have to share their time
between customer acquisition, project delivery and customer maintenance.
Repeat
Projects
Customer main-
tenance required
Partner Customer
maintenance effort
Customers
First time
projects
Projects
Contacts
New
Project
Acquisition
Repeat
Project
Acquisition
Customer
maintenance
Partners
Partner Con-
tacting Effort
Contacting
effort required
Contact
Maintenance
Project effort
required
Project delivery
effort available
Project
Delivery
Consultants
Recruitment
Consultants Pro-
ject delivery effort
Partners Project
Delivery effort
STRATEGIC QUESTION
How should partners spend their time?
Which organizational policies should be followed to ensure
value and leverage are maximized?
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
Concentrate
on the
customer
Scenario 3
Innovate and
standardize
Project delivery is delegated to senior and junior consultants
Partners focus on customer development and innovation
Partners focus more on standardization and less on innovation
SCENARIO 1
BASE CASE
Scenario 1 Maister KPIs
SCENARIO 2
CONCENTRATE ON THE CUSTOMER
SCENARIO 3
INNOVATE AND STANDARDIZE
GROSS MARGIN COMPARISON
Gross Margin Comparison
RECOMMENDATIONS
FROM SIMULATION STUDY
Shift partner effort stronger towards customer acquisition
and maintenance and away from project responsibilities.
Define concrete effort allocation policies
and monitor effort allocation.
Increase leverage by standardizing innovative consulting products.
Reconsider top-heavy partner structure
The real value of the model was in providing
a testbed for policy experiments.
Monitor the effect of innovation on fee structure.
SUMMARY
The question "How do we create value for all our stakeholders"
is fundamental to any enterprise.
An enterprise's value-creation logic is captured
in its business model.
It is important to understand the policies governing
the value creation process and to manage them explicitly.
Using a model-driven, visual approach to business model
engineering is useful to create shared understanding
of relevant policies across departments and hierarchies.
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 26
th
International Systems Dynamics
Conference. Athens, Greece
Grasl, O. (2009a): Key performance indicators in professional service firms a dynamic perspective. In Systems Dynamics Society (Ed.),
Proceedings of the 27
th
. 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 (2
nd
ed.). Springer
Zott, C. and R. Amit: The fit between product market strategy and business model: implications for firm performance.
Strategic Management Journal, 1 26
Dr. Oliver Grasl
Managing Director
Partner
E-Mail: oliver.grasl@transentis.com
Mobil: +49 (0)173 6 54 67 27
2010 transentis management consulting GmbH & Co. KG www.transentis.com 48 www.transentis.com
transentis management
consulting GmbH
Kranzplatz 5 6
D-65183 Wiesbaden
www.transentis.com
Tel.: +49 (0)611-90099-51
Value creation in complex systems
New ways of creating value, transforming business
and aligning the organization.

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