Business Models

Question 1

What is a business model?

Answer 1

A business model describes the rationale of how an organization creates, delivers, and captures value. It is not a “thing” or a “framework”, it the logic and the reasoning of how a company intends to make money and sustain itself

Question 2

Is a product a business model?

Answer 2

No. It is the centre of the business model, but it is not a business model in and of itself - it can’t succeed without a great business model

Question 3

What does a business model demonstrate in terms of a company’s value and value provision?

Answer 3

It demonstrates how a company will create value for its customers, how it will deliver that value, and how it will capture that value. It shows their intents and their strategic decisions

Question 4

How do you create value?

Answer 4

You find an unmet need and come up with a solution to meet that need

Question 5

How do you deliver value?

Answer 5

You need to execute a plan to create value, and you cannot do it alone. You need the help of suppliers, distributors, creditors, etc. to make your plan a legitimate and realistic idea

Question 6

How do you capture value?

Answer 6

Monetizing your offerings (i.e. making money off of your product/service). You need to be able to generate more revenue than the costs that you incur

Question 7

Explain how different razor blade brands can have different business models. Give specific examples and explain

Answer 7

Gillette: virtually gives away the handle of the razor and barely covers its costs, but then makes lots of money because of its higher margins on its replaceable razorblades. Is also a sustained source of revenue because customers will keep coming back to buy more blades

Electric shaver: on the whole is more expensive than the two-stream-revenue business model, because they are only selling one product. However, customers would be willing to pay the higher margins because they don’t have to keep buying new razorblades. These companies make their money up front

Question 8

What are some examples of a two-stream-revenue model?

Answer 8

Video games and consoles/systems, printers and ink, Swiffer sweeper and the replaceable head, etc.

Question 9

What are three different business models in the water filtration system? Give specific examples, give their target markets, and explain

Answer 9

Q Water: Has a subscription model; restaurants agree to rent out the water filtration system on a monthly basis. Their customer segment is restaurants, because those customers might refuse tap water due to sanitation/health concerns (more of a problem in the past). Restaurants might charge for serving filtered water, they might not.

AquaOvo: Has a one-time sale model, and targets individuals and households. These customers would buy this product because it is an attractive product and they can show it off, and also because of health/quality concerns.

Event Water Solutions: Has a per-event model, where the price of the water filtration is negotiated before every event that they supply (depending on how it will be used, on what terms, and to what extent). They target large customer experiences, such as music festivals, big conferences, soccer tournaments, etc. People would use this product because they don’t want to have to be concerned with the waste or cleanup costs generated by selling plastic water bottles

Question 10

Explain how magazine publishers can have different business models. Give specific examples and explain

Answer 10

Consumer Reports: Has a subscription-based business model and very little ads. They are providing information that people are willing to pay more for. Most of their revenues will come from subscription costs and very little will come from ads.

Vogue: Has an advertising-based model. They earn a little bit of money from actually selling the magazines, but the majority of their revenue is from advertising. As a result, they need to make sure that their products are geared towards the target markets that their advertisements want to sell to

Question 11

Why are business models sometimes called “blueprints”?

Answer 11

They outline how an organization operates

Question 12

Explain the business model of movie theatres/cinemas

Answer 12

Movie theatres have a multi-stream revenue model. They earn revenue from ticket sales, refreshments, and advertisements. However, the ticket sales and advertisement revenue do not have high margins, and it is not where theatres make their money. Those revenues go towards their high infrastructure costs (building, staff, screening rights, etc.). Theatres make most of their money on refreshment stands

Question 13

What are some operational decisions that managers in movie theatres make to maximize their profits?

Answer 13

1. They make the food the front stage. You can’t get into the movie without going by it, and it is very bright and smells good in order to attract customers
2. Promotions/Upselling: staff show customers promotional deals and combos to get them to buy more (… Are you sure you wouldn’t like to upgrade that to the combo? Only $2 more…)
3. Staff quantity: there are lots of staff working behind the counter to keep lines moving quickly, so that customers are not dissuaded by the long lines (the “banker style” line). Customers can also buy their food ahead on an app
4. Customers can also now purchases their tickets at the refreshment line to simplify the process and encourage them to buy food

Question 14

Explain how business models are like stories. What features do they have?

Answer 14

They have:
Clear characters
Plausible motivations
Plot twists

Question 15

Explain how a successful business model has clear characters

Answer 15

A clear business model understands who the key characters are, and what they want. These characters include customers, suppliers, creditors, etc.

Question 16

Explain how a successful business model has plausible motivations

Answer 16

The characters in a business model need to make decisions that reflect their values and what they want. Their decisions need to be clear and comprehensible: why would they buy/supply this product?

Question 17

Explain how a successful business model has plot twists. Give an example of a plot twist

Answer 17

Plot twists can be very powerful, like with disrupting technologies. Eg. AirB&B

Question 18

What does a successful business model represent?

Answer 18

A better way than the existing alternative

Question 19

Give an example of a successful business model that caused a plot twist in the environment

Answer 19

Travellers check: the only way to pay for things abroad was cash and letters of credit, which was a hassle to have approved by foreign officials and foreign banks. There were two strong character groups: customers wanted to travel and spend money but couldn’t easily; business owners wanted tourists to come and spend money with them, but couldn’t easily. Someone invented traveller’s check. You would get one from the bank and the teller signed it, and then the traveller could deposit it either at foreign banks or foreign businesses. There was a plot twist because banks now had “float” money that they could use until the traveller cashed the check

Question 20

Why do business models fail in terms of their narrative?

Answer 20

1. Flawed logic (you need to understand the external environment)
2. Limited strategic choices (you need to understand the key characters in the market and deliver products that they want to buy)
3. Incorrect assumptions about the value chain

Question 21

Why do business models fail in terms of numbers?

Answer 21

Imperfect value creation and capture assumptions (they either overestimate how much people are willing to pay for it, or their revenue/cost is to low/high to make money)

Question 22

Why might companies with essentially the same product have different business models?

Answer 22

Business models are a reflection of how a company operates and what it values. Different companies will have different goals, different target markets, and different ideas for how to reach those customers. As a result, their business models might be different as well (I have no idea if this is right)

Question 23

How does a company’s business model affect how it operates?

Answer 23

A business model demonstrates what is possible for the business to do in terms of delivering and producing products, as well as how it meets its goals in terms of reaching customers. Looking at a business model tells a company what is possible for it to do in its operation in order to meet those goals and reach their customers according to their goals (I have no idea if this is right)

Question 24

What are the different building blocks that make up a business model?

Answer 24

Value proposition, customer relationships, customer segments, revenue streams, channels, key resources, cost structure, key partners, and key activities (double check)

Question 25

What are the two critical building blocks that you need to understand before you can build a correct business model?

Answer 25

Customer segments and value proposition

Question 26

What are the three ideas that a business model explains?

Answer 26

How the product creates value, delivers value, and captures value

Question 27

How do you create value?

Answer 27

You find an unmet need and come up with a solution to meet that need

Question 28

How do you deliver value?

Answer 28

You execute the plan to create value: you need suppliers, distributors, creditors, etc. You can’t complete the business model by yourself

Question 29

How do you capture value?

Answer 29

You monetize your product/service, so that you are able to generate more revenue than the costs you incur