EMC - Handout - Week 1 - AC - 2020-2021

Business Models
and Startups
Andre Calmon
Assistant Professor of Technology and Operations Management
Copyright © INSEAD 2020/2021. All rights reserved. These materials are prepared by INSEAD for academic usage only. These materials may not be reproduced, re-distributed or used in any way whatsoever without formal written authorization from INSEAD.
Outline of the Week
1) What is a Business Model and Business

Model Innovation?
2) Analysing a Business Model: Value

Creation Analysis
3) Managing an innovative business model:

Digital Platforms and Marketplaces
Traditional View of Innovation
New technology
New products - New markets
Image source: https://support.apple.com/en-au/HT201471 Image Source: http://www.crocs.com/p/crocs-classic/10001.html

A New Kind of Innovation
Disrupt the way products are made, sold, and serviced

through Business Model Innovation
Analyse and Create Superior Business Models that
disrupt industries, change lives and create
wealth!
Sources:
1. TechCrunch: https://techcrunch.com/2017/08/25/business-models-will-drive-the-future-of-autonomous-vehicles/
2. Wall Street Journal: https://www.wsj.com/articles/real-estate-firm-says-malls-need-a-new-business-model-1504640111
3. Harvard Business Review: https://hbr.org/2016/07/how-chinese-companies-disrupt-through-business-model-innovation
4. Financial Times: https://www.ft.com/content/381e27ee-c685-11e6-8f29-9445cac8966f
What is a business
model ?
There Are Many Definitions of a “Business Model”…
"'Business model' is one of those terms of

art that were central to the Internet
boom… all it really meant was how you
planned to make money."
Michael Lewis in “The New, New Thing”
Quote source: https://hbr.org/2015/01/what-is-a-business-model
From an operations point of view, a

business model is the logic of the firm,
the way it operates and how it creates
value for its stakeholders.
It is a set of processes, activities, and
incentives used to match supply and
demand.
A Few Famous Innovative Business Models
Toyota
Zara
Ford
Image sources:
1. Ford Model T: https://en.wikipedia.org/wiki/File:1910Ford-T.jpg
2. Toyota Model AA: https://www.autoevolution.com/news/jay-leno-drives-first-toyota-ever-the-1936-aa-video-50625.html
3. Zara store: http://www.lagazzettadelmezzogiorno.it/news/home/743355/Aperti-gli-store-Zara--protesta.html
When creating a new business, a

business model can be thought of
as a collection of assumptions and
hypotheses about how to match
supply and demand
Business Model Canvas
Canvas image source: https://hbr.org/2013/05/why-the-lean-start-up-changes-everything

From Service Provider to System Designer
"Do you want to be a dentist or a capitalist?"

James M. Stone (CEO and founder of Plymouth Rock Assurance)
Focus Splitting Decisions Marketplace/Platform
Servitisation Crowdsourcing Resequencing
What is a
startup ?
A startup is a temporary
organization that exists to
find a business model that
is scalable
Finding a Scalable Business Model Is Challenging
Requires experimentation and trial and

error
Requires a huge amount of risk

management
Requires persistence and grit
Analysing Business Models
First steps
Value Creation Analysis
Identify points of comparison:
• Alternative business models
• Next best option for customers
• Organization with closest Demand side analysis: Why will customers
operational systems purchase your product or service rather
• Other industries where the than other products or services? What are
business model works the risks for these customers?
02 04
01 03 05
Use Business Model Use the BMC to map the difference Profitability and risk analysis:
Canvas (BMC) to map between the business model and the • Will you be able to provision the promised
the business model points of comparison. You should do product in a profitable way? Is the business
this for each of the organizations model more profitable than alternatives?
identified in the previous step • How does the business model manage the
consumer's risks?
• What are other big risks for this business
model? How can you manage or mitigate these
risks?
Business Model Canvas
Source: https://assets.strategyzer.com/assets/resources/the-business-model-canvas.pdf
Source: https://hbr.org/2013/05/why-the-lean-start-up-changes-everything
Using the Business Model Canvas to Plan a Startup
C ustomer segment
For whom are we creating value?
Who are our most important customers?
Mass Market
Niche Market
Segmented
Diversified
Multi-sided Platform
V alue propositions
What value do we deliver to the customer?
Which one of our customer’s problems are we helping to solve?
Newness
Performance
Customisation
“Getting the Job Done”
Design
Brand/Status
Price
What bundles of products and services are we offering to each Cost Reduction
Customer Segment? Risk Reduction
Which customer needs are we satisfying? Accessibility
Convenience/Usability
Business Model Canvas: Demand Side
C ustomer relationships
What type of relationship does each of our Customer Segments
expect us to establish and maintain with them?
Personal assistance
Dedicated Personal Assistance
Self-Service
Automated Services
Communities
How costly are they? Co-creation
C hannels
Through which Channels do our Customer Segments
want to be reached?
Awareness?
Evaluation?
Purchase?
Delivery?
Which ones work best? After sales?
Which ones are most cost-efficient?
Business Model Canvas: Demand Side
R evenue streams
For what value are our customers really willing to pay?
For what do they currently pay?
How much does each Revenue Stream contribute to overall revenues?
Business Model Canvas: Supply Side
K ey resources
What Key Resources do our Value Propositions require?
Our Distribution Channels? Customer Relationships?
Physical
Intellectual (brand
patents, copyrights, data)
Human
Revenue Streams? Financial
K ey activities
What Key Activities do our Value Propositions require?
Our Distribution Channels?
Production
Problem Solving
Platform/Network
Customer Relationships? Revenue streams?
K ey partnerships
Who are our Key Partners?
Who are our key suppliers?
Motivations for Partnerships:
Optimisation and economy
Reduction of risk and uncertainty
Acquisition of particular resources
Which Key Resources are we acquiring from partners? and activities
Which Key Activities do partners perform?
C ost structure
What are the most important costs inherent in our business
model?
Which Key Resources are most expensive? Typical Elements:
Which Key Activities are most expensive? • Fixed Costs (salaries, rents,
utilities)
• Variable costs
Is your business more: • Economies of scale
• Cost Driven (leanest cost structure, low price value • Economies of scope
proposition, maximum automation, extensive
outsourcing)
• Value Driven (focused on value creation, premium value
proposition)
Origins of the Auto Industry
Image source: http://www.nydailynews.com/life-style/hop-model-t-drive-memory-lane-article-1.2812942
Image source: https://en.wikipedia.org/wiki/Henry_Ford#/media/File:Henry_ford_1919.jpg
Who
Is This Man ?
Value Creation Analysis of Ford’s Business Model
Identify points of comparison:
• Alternative business models
• Next best option for customers
• Organization with closest Demand side analysis: Why will customers
operational systems purchase your product or service rather
• Other industries where the than other products or services? What are
business model works the risks for these customers?
02 04
01 03 05
Use Business Model Use the BMC to map the difference Profitability and risk analysis:
Canvas (BMC) to map between the business model and the • Will you be able to provision the promised
the business model points of comparison. You should do product in a profitable way? Is the business
this for each of the organizations model more profitable than alternatives?
identified in the previous step • How does the business model manage the
consumer's risks?
• What are other big risks for this business
model? How can you manage or mitigate these
risks?
01 Step 1: Business Model Canvas
Canvas image source: https://assets.strategyzer.com/assets/resources/the-business-model-canvas.pdf

Step 1 : Model T's BMC
Cheap Marketing Mass-market
Raw material suppliers Car design
Manufacturing Urban and rural
3rd party dealers
Sourcing Easy to drive Network effects
Government
Distribution
"No frills" DIY and later service
assistance
Reliable
Fast
Raw material Easy to maintain Dealerships

Patents and
intellectual capital Modular with
Human capital standardised parts
Add-ons and
accessories
Cost driven:
Car sales
Raw material costs
Manufacturing costs (tools, salaries, training)
Spare parts & maintenance
Distribution costs
Economies of scale and scope

02 Step 2: Points of Comparison
"Artisanal" Utility vehicles

Carriage + horse
high end cars and trucks (B2B)
Image sources:
1. Benz & Cie.: http://emercedesbenz.com/May08/14_001142_Celebrating_100_Years_At_The_Mercedes_Benz_Manheim_Plant_Mercedes_Benz_Plant_In_Manheim_Waldorf.html
2. Horse and buggy: https://en.wikipedia.org/wiki/Horse-drawn_vehicle#/media/File:Horse_and_buggy_1910.jpg
3. DAC delivery truck: https://en.wikipedia.org/wiki/Detroit_Automobile_Company#/media/File:Detroit_Automobile_Company_Delivery_Truck_1900.jpg
03 Step 3: Mapping Differences

Model T is: More or less the same
Design and
manufacturing
More flexible
vs
breeding
More durable
More convenient (?)
More expensive (?)
Cheaper to maintain Both sell through

(?) dealers
Requires a learning You can raise horses
curve
Cleaner (?)
Ford model T might benefit from more

economies of scale and scope

04 Step 4: Demand Side Analysis
Why will customers purchase your

product or service rather than What are the risks for these
other products or services? customers?
• More flexibility • Maintenance costs

• More convenient? • Ease of refueling
• Cheaper? • Safety/learning
05 Step 5: Profitability and Risk Analysis
Will you be able to provision the promised product

in a profitable way? Is the business more profitable
than the alternatives?
"Any customer can have a car painted Assembly Line Production Vertical Integration
any color that he wants so long as it vs Artisanal Production
is black"
Image sources:
1. Ford Model T: https://www.britannica.com/technology/Model-T
2. Ford Model T production line: https://squiretothegiants.wordpress.com/tag/model-t/
3. Newspaper header: http://www.autonews.com/article/20140106/OEM01/140109924/remembering-henry-fords-$5-day-for-line-workers
05 Step 5: Profitability and Risk Analysis
How does the business model

manage the consumer's risks?
Focus on cities
Reduce cost
Platform product – mass

customisation and ease of
maintenance
Image sources:
1. Ford Model T chassis: https://squiretothegiants.wordpress.com/tag/model-t/
2. Prices: http://oldcarandtruckpictures.com/ModelTFord/
3. Easter fashion parade in NYC: http://www.boweryboyshistory.com/2013/03/easters-fashion-parade-1913-images-of.html
05 Step 5: Other Risks
Continuous
Employee retention experimentation and
scientific management
Image sources:
1. Newspaper header: http://www.thetruthaboutcars.com/2014/10/henry-ford-paid-workers-5-day-wouldnt-quit-afford-model-ts/
2. Assembly line: https://commons.wikimedia.org/wiki/File:Ford_assembly_line_-_1913.jpg
3. Henry Ford short bio: https://en.wikipedia.org/wiki/Henry_Ford
Wrap-up: Value Creation Analysis

Platform
Business
Models
Disintermediation
The innovation
• Cut out sales channel – Sell direct or
through alternate channel
• Increase revenues and reduce risk

exposure to other’s actions
Works best when:

• Channel profits and incentive misalignment are high
• Services provided by channel are small
• Search and Distribution
• Physical Inventories, Delivery
• Customisation…
• Products can be sold online
Marketplaces/Intermediaries
Increase incidence of supply-demand

matches (due to risk pooling)
Search costs, liquidity, etc.
Create Trust in Transactions

Insurance, background check, escrow, etc.
Price Regulation
Haggling, prices adjust to match supply with demand
Lower Transaction Costs & Manage

Congestion
Share transaction costs across many players
The Marketplace that Started It All
Sellers Buyers
Product A Product A
50% 50%
Product B Product B
50% 50%
Sellers Buyers
Product A Product A
50% 50%
Product B Product B
50% 50%
…
Role #1: Increase Incidence of Supply-Demand Matches
(due to risk pooling)
Fraction of buyers/sellers matched

90
Fraction Matched (%)

80
70
60
50
0 10 20 30 40 50
Size of Market
Marketplaces/Intermediaries

Create trust in transactions

Price regulation
Lower transaction costs & manage

congestion
Role # 2: Create Trust in Transactions
• Rating system for suppliers

• Third party verification
• Escrow system
• Offer transaction insurance
Image source: https://www.alibaba.com/

Role # 3: Price Discovery
• Allows C2C haggling

• Posted price versus auctions
Photo by Stewart Butterfield: https://www.flickr.com/photos/stewart/2475416558

Role # 4: Lower Transaction Costs & Manage Congestion
• Reduce transaction costs

• Reduce barrier of entry
• Offer fulfillment outsourcing
• Congestion
Recap

Create trust in transactions

Price regulation
Lower transaction costs & manage

congestion
Wrap-up
• Creating new business models is a great way to

innovate, and innovative business models can be
disruptive
• A start-up is a temporary organization in search of a

business model that is profitable and scalable
• Evaluating a business model is about analysing value,

costs, and risks. Value Creation Analysis is a useful
exercise
• The Business Model Canvas is a useful tool to sketch out

a business model
Source: https://en.wikipedia.org/wiki/File:1910Ford-T.jpg
Wrap-up
• Digital technology has facilitated the

creation of innovative platform and
marketplace based business models
• A successful platform must

— Create liquidity
— Create trust
— Facilitate price discovery
— Lower transaction costs and manage congestion
Wrap-up
• Technology changes rapidly… but the

fundamentals of economics and business stay
the same
Be a system
designer!
Business Models
and Startups
Andre Calmon
Assistant Professor of Technology and Operations Management
INSEAD has taken steps to try and identify owner of copyright of the images and video content that appear in this teaching content. Where the owner cannot be identified, we have credited the source of such content. If you are the owner
of any such content, please contact us at [email protected].

EMC - Handout - Week 1 - AC - 2020-2021

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

EMC - Handout - Week 1 - AC - 2020-2021

Uploaded by

Copyright:

Available Formats

Business Models

1) What is a Business Model and Business

2) Analysing a Business Model: Value

3) Managing an innovative business model:

New products - New markets

Image source: https://support.apple.com/en-au/HT201471 Image Source: http://www.crocs.com/p/crocs-classic/10001.html

Disrupt the way products are made, sold, and serviced

"'Business model' is one of those terms of

Quote source: https://hbr.org/2015/01/what-is-a-business-model

From an operations point of view, a

When creating a new business, a

Business Model Canvas

Canvas image source: https://hbr.org/2013/05/why-the-lean-start-up-changes-everything

"Do you want to be a dentist or a capitalist?"

Focus Splitting Decisions Marketplace/Platform

Servitisation Crowdsourcing Resequencing

Requires experimentation and trial and

Requires a huge amount of risk

Requires persistence and grit

Image source: http://www.nydailynews.com/life-style/hop-model-t-drive-memory-lane-article-1.2812942

Canvas image source: https://assets.strategyzer.com/assets/resources/the-business-model-canvas.pdf

Raw material Easy to maintain Dealerships

Canvas image source: https://assets.strategyzer.com/assets/resources/the-business-model-canvas.pdf

"Artisanal" Utility vehicles

Canvas image source: https://assets.strategyzer.com/assets/resources/the-business-model-canvas.pdf

More convenient (?)

More expensive (?)

Cheaper to maintain Both sell through

Ford model T might benefit from more

Canvas image source: https://assets.strategyzer.com/assets/resources/the-business-model-canvas.pdf

Why will customers purchase your

• More flexibility • Maintenance costs

Will you be able to provision the promised product

How does the business model

Platform product – mass

Canvas image source: https://assets.strategyzer.com/assets/resources/the-business-model-canvas.pdf

• Increase revenues and reduce risk

Works best when:

Increase incidence of supply-demand

Create Trust in Transactions

Lower Transaction Costs & Manage

Fraction of buyers/sellers matched

Fraction Matched (%)

Increase incidence of supply-demand

Create trust in transactions

Lower transaction costs & manage

• Rating system for suppliers

Image source: https://www.alibaba.com/

• Allows C2C haggling

Photo by Stewart Butterfield: https://www.flickr.com/photos/stewart/2475416558

• Reduce transaction costs

Increase incidence of supply-demand

Create trust in transactions

Lower transaction costs & manage

• Creating new business models is a great way to

• A start-up is a temporary organization in search of a

• Evaluating a business model is about analysing value,

• The Business Model Canvas is a useful tool to sketch out

• Digital technology has facilitated the

• A successful platform must

• Technology changes rapidly… but the

You might also like