Business Models Flashcards

Foundations of Strategy, Competitive Advantage, and Strategic Fit

• Definition and Nature of Strategy

  • Strategy implies making explicit choices about the future under conditions of inherent uncertainty.

  • Strategy is fundamentally about choosing what not to do as much as choosing what to do.

• Contrasting Approaches to Strategic Choice

  • Lack of Choice (Non-Strategy): Eckhard Pfeiffer (CEO of Compaq, 1998) stated, "We want to do it all and we want to do it now." This represents an absence of strategic trade-offs, aiming to cover all bases without clear prioritization.

  • Deliberate Choice (Explicit Strategy): Mark Hurd (CEO of HP, September 2005) stated, "Our game plan is to be an infrastructure technology company using our R&D resources to compete against Dell and leaving IBM to focus on business processing." This articulates clear boundaries, target competitors, resource allocation focus, and markets to avoid.

• Four Pillars of a Successful Strategy

  • Clear, Consistent, Long-Term Goals: Single-minded direction maintained across an extended time horizon.

  • Profound Understanding of the Competitive Environment: Deep appreciation of industry dynamics, market forces, competitor behavior, and external constraints.

  • Objective Appraisal of Resources: Realistic evaluation of internal strengths, operational capabilities, and critical weaknesses.

  • Effective Implementation: Execution capability, organizational alignment, and leadership needed to put strategy into action.

• The Concept of Strategic Fit

  • Strategic fit is the alignment between an organization's internal capabilities and its external market environment.

  • The Firm (Internal Environment):

    • Goals and Values: Clear, consistent, long-term direction.

    • Resources and Capabilities: Objective appraisal of distinctive assets, good-enough capabilities, and areas requiring improvement.

    • Structure and Systems: Effective implementation and execution mechanisms.

  • The Industry Environment (External Environment):

    • Competitors, Customers, and Suppliers.

    • Profound understanding of the competitive landscape looking forward.

    • Objective awareness of Key Success Factors ($\text{KSFs}$).

  • Strategic Bridge: Strategy acts as the central link matching internal strengths and weaknesses against external threats and opportunities.

• Competitive Advantage and Financial Value Creation

  • Return on Invested Capital ($\text{ROIC}$) / Return on Capital Employed ($\text{ROCE}$): Serves as the primary financial proxy for economic value generated by a firm's strategy relative to its capital base.

  • Competitive Advantage ($\text{CA}$): Exists when a business earns a persistently higher rate of profit (e.g., $\text{ROCE}$) than the average of its industry competitors.

  • Competitive Advantage Period ($\text{CAP}$): The time horizon during which a firm can earn returns on capital in excess of its cost of capital.

• Theoretical Decay in Excess Returns

  • Market competition acts to erode excess financial returns over time.

  • Competitive forces (entry, imitation, substitution, bargaining power) continuously exert downward pressure on Competitive Advantage.

  • The cumulative value created by a strategy corresponds to the area under the excess return curve over the duration of the Competitive Advantage Period ($\text{CAP}$).

Comparative Analysis of Strategic Success: Historical Case Debriefs

• Case Overview: Madonna, General Giap, and the Williams Sisters

  • An analysis of three diverse entities demonstrates that the core principles of strategy apply across entertainment, military conflict, and elite athletics.

• Clear, Consistent, Long-Term Goals

  • Madonna: Maintained a relentless, single-minded drive for global stardom. Personal life dimensions were subordinated to or integrated within her career objectives over multiple decades.

  • General Vo Nguyen Giap: Unified North Vietnamese military and political efforts around the singular goal of reuniting Vietnam under communist rule and expelling foreign forces. By contrast, US military efforts suffered from shifting and ambiguous objectives (supporting an ally vs. stabilizing Southeast Asia vs. engaging in a proxy war against the Soviet Union vs. an ideological struggle against global communism).

  • Richard Williams: Demonstrates long-term, goal-oriented planning in parenting and sports coaching. Rather than setting goals for existing children, he planned the birth and upbringing of Venus and Serena Williams specifically to fulfill a pre-determined goal of tennis dominance.

  • Synthesis: All three entities displayed single-minded commitment to a clearly recognized goal pursued steadfastly over a substantial portion of their lifetimes.

• Profound Understanding of the Competitive Environment

  • Madonna: Understood the mechanics of stardom and popular appeal, leveraging the principle that "sex sells" while actively managing gatekeepers across critical media distribution channels. Executed timely image reincarnations based on acute awareness of evolving social norms and cultural trends.

  • General Giap: Deeply understood battlefield conditions, local terrain, and the political vulnerability of US leadership, specifically their reliance on domestic public approval to sustain an overseas war.

  • Richard Williams: Analyzed the professional tennis environment to identify both the physical power requirements and mental resilience necessary to overcome traditional barriers and defeat world-ranked players.

  • Synthesis: All three designed strategies around a deep, insightful appreciation of the competitive arena in which they operated.

• Objective Appraisal of Resources and Capabilities

  • Madonna: Recognized her vocal and acting limitations; avoided being judged purely as a singer or actress. Built a strategy around her core strengths in image projection, self-promotion, and trend absorption, while surrounding herself with world-class dancers, musicians, choreographers, and technical teams to offset personal capability gaps.

  • General Giap: Neutralized severe deficiencies in military hardware, firepower, and technology by exploiting the loyalty, ideological commitment, and endurance of his troops through guerrilla tactics.

  • Richard Williams: Appraised the distinct physical characteristics, psychological profiles, and personal vulnerabilities of Venus and Serena independently, tailoring custom training regimens for each.

  • Synthesis: All three strategies exploited internal strengths while protecting areas of weakness.

• Effective Implementation and Leadership

  • Execution: Strategic plans are useless without disciplined execution.

  • Leadership Traits: Success was driven by decisive decision-making capacity, energetic implementation, and the ability to instill deep loyalty and commitment among team members and subordinates.

  • Organizational Design: All three established structures that enabled the efficient marshalling of resources and rapid adaptation to dynamic environmental changes.

Strategic Statements: Vision, Mission, Values, and Level of Ambition

• The Strategy Process and Core Statements

  • The strategy process begins with establishing three foundational statements: Vision, Mission, and Values.

  • Vision: A vivid, aspirational description of the future state of the organization—what it hopes to become. Functions as the organizational "North Star" to maintain long-term directional clarity.

  • Mission: Defines the core purpose and reason for existence (raison d'être) of the company.

  • Values: The fundamental guiding principles that direct employee decision-making and shape corporate culture.

• Examples of Corporate Visions

  • Sony (1950): "We will create products that become pervasive around the world.… We will be the first Japanese company to go into the U.S. market and distribute directly.… We will succeed with innovations that U.S. companies have failed at – such as the transistor radio.… Fifty years from now, our brand name will be as well known as any in the world…and will signify innovation and quality that rival the most innovative companies anywhere.… 'Made in Japan' will mean something fine, not something shoddy."

  • President John F. Kennedy (1961): "We will put a man on the moon before the end of the decade."

• Examples of Corporate Mission Statements

  • Google: "To organise the world's information and make it universally accessible and useful."

  • Microsoft: "To empower every person and every organization on the planet to achieve more."

  • Nike: "To experience the emotion of competition, winning, and crushing competitors."

  • Hewlett-Packard (HP): "To make technical contributions for the advancement and welfare of humanity."

  • McKinsey & Company: "To help our clients make distinctive, lasting, and substantial improvements in their performance and to build a great firm that is able to attract, develop, excite, and retain exceptional people."

• The Level of Ambition Framework

  • Definition: The translation of qualitative Vision and Mission statements into concrete, quantifiable metrics ($\text{KPIs}$) and explicit target values.

  • Purpose: Qualitative words are open to subjective interpretation; quantitative numbers create organizational alignment around an unambiguous target destination.

  • Methodology: Identify key measurable metrics across strategic dimensions that define the exact operational state when the Vision and Mission are achieved.

• Case Application: Poste Italiane (Italian Postal Provider)

  • Initial State: Historical lack of customer trust in domestic delivery, standard post office waiting times of 30\n ext{ minutes}, and low global productivity metrics.

  • Vision Statement: Deliver "A service level to be proud of".

  • Level of Ambition Metric: Customer Service Dimension $\rightarrow$ Measure peak-time customer service wait time, targeting a reduction from 30\n ext{ minutes} down to 10\n ext{ minutes}.

  • Organizational Alignment Actions:

    • Postmen improved package delivery accuracy to reduce unnecessary post office visits by recipients.

    • Front-office staff received targeted training and deployed improved operational technology to speed up service.

    • Executive management screened all capital investments based on their direct contribution to queue reduction.

    • Suppliers and external stakeholders were engaged to submit operational improvement proposals.

  • Results Achieved: Within 24\n ext{ months}, average customer queuing times dropped below 5\n ext{ minutes} (surpassing the target of 10\n ext{ minutes}), driving measurable gains in organizational profitability.

• Case Application: Additive Manufacturing (AM) Engineering Firm

  • Vision: "Become a leading global brand providing high performance solutions enabled by Additive Manufacturing."

  • Mission: "Putting Additive Manufacturing (AM) at the heart of everything we do."

  • Level of Ambition Metrics ($\text{From} \rightarrow \text{To}$):

    • Revenue via AM: $2\,\text{£M} \rightarrow 5\,\text{£B}$

    • Revenue $\text{CAGR}$: $0\% \rightarrow 35\%$

    • Market Share: $0\% \rightarrow 30\%$

    • Customer Cost Reduction: $- \rightarrow 20\%$

    • $\text{EBITDA}$ Margin: $5\% \rightarrow 30\%$

    • Intellectual Property ($\text{IP}$): $30 \rightarrow 100\text{ patents}$

    • Certified Employees in AM: $0\% \rightarrow 80\%$

    • Productivity Improvement: $0 \rightarrow +10\%$

    • AM Employee Turnover: $10\% \rightarrow 5\%$

Business Models and the Business Model Canvas

• Definition of a Business Model

  • A business model describes the underlying rationale of how an organization creates, delivers, and captures value.

• The 9 Building Blocks of the Business Model Canvas (Osterwalder, 2008)

  • 1. Customer Segments ($\text{CS}$): The distinct groups of people or organizations an enterprise aims to reach and serve. Categories include Mass Market, Niche Market, Segmented, Diversified, and Multi-sided Platforms.

  • 2. Value Propositions ($\text{VP}$): The bundle of products and services that create value for a specific Customer Segment by solving a problem or satisfying a need. Drivers include Newness, Performance, Customization, "Getting the Job Done", Design, Brand/Status, Price, Cost Reduction, Risk Reduction, Accessibility, and Convenience/Usability.

  • 3. Channels ($\text{CH}$): How a company communicates with and reaches its Customer Segments to deliver a Value Proposition. Operates across 5 channel phases: Awareness, Evaluation, Purchase, Delivery, and After-sales.

  • 4. Customer Relationships ($\text{CR}$): The types of relationships established and maintained with specific Customer Segments. Examples include Personal Assistance, Dedicated Personal Assistance, Self-Service, Automated Services, Communities, and Co-creation.

  • 5. Revenue Streams ($\text{R\$}$): The cash a company generates from each Customer Segment ($\text{Earnings} = \text{Revenues} - \text{Costs}$). Mechanisms include Asset Sale, Usage Fee, Subscription Fees, Lending/Renting/Leasing, Licensing, Brokerage Fees, and Advertising. Pricing mechanisms are Fixed (list price, feature dependent, segment dependent, volume dependent) or Dynamic (negotiation/bargaining, yield management, real-time market).

  • 6. Key Resources ($\text{KR}$): The most important assets required to make a business model work. Categories include Physical, Intellectual (brands, patents, copyrights, data), Human, and Financial.

  • 7. Key Activities ($\text{KA}$): The vital operational actions a company must perform to execute its business model successfully. Categories include Production, Problem Solving, and Platform/Network maintenance.

  • 8. Key Partnerships ($\text{KP}$): The network of suppliers, contractors, and allies that make the business model work. Motivations for partnership include Optimization and economy of scale, Reduction of risk and uncertainty, and Acquisition of particular resources and activities.

  • 9. Cost Structure ($\text{C\$}$): All costs incurred to operate the business model. Business models range from Cost-driven (focusing on leanest cost structure, low price value proposition, maximum automation, extensive outsourcing) to Value-driven (focused on premium value creation and bespoke service). Characteristics include Fixed costs (salaries, rents, utilities), Variable costs, Economies of scale, and Economies of scope.

• Practical Execution of the Canvas

  • Step 1: Plot the canvas template onto a large poster.

  • Step 2: Mount the poster on a shared wall space.

  • Step 3: Use sticky notes to sketch, iterate, and map out elements of the business model dynamically.

  • Ecosystem Integration Example (Apple iPod/iTunes): Combines Hardware Design, Apple Brand, Content Agreements, and iTunes Software ($\text{KR}$ / $\text{VP}$) with Record Companies and OEMs ($\text{KP}$), distributed via Retail Stores, Apple Stores, and apple.com ($\text{CH}$) to a Mass Market ($\text{CS}$), establishing high Switching Costs ($\text{CR}$) and capturing Large Hardware Revenues alongside Music Revenues ($\text{R\$}$).

Non-Competitive Strategies: Blue Ocean Thinking and No-Frills Models

• Break from Traditional Strategy

  • Conventional competitive strategy assumes a fixed trade-off between Differentiation (high cost/high value) and Low Cost (low value).

  • Non-competitive strategies seek to break this trade-off by restructuring market boundaries to offer high perceived value while simultaneously driving down costs.

• Red Ocean vs. Blue Ocean Strategy

• Blue Ocean Thinking Core Principles

  • Focuses on identifying and serving "non-users" who currently abstain from the market due to cost, complexity, or compromise.

  • Aims to minimize direct competition by defining unique Value Curves on a Strategy Canvas.

• Examples of Non-Competitive Strategy Approaches

  • [yellow tail]: Created wine designed for non-wine drinkers by simplifying selection, removing complex enological jargon, and offering a sweet, approachable product profile.

  • Nintendo Wii: Targeted non-gamers (families, seniors) by introducing motion-control physical activity, intentionally using lower-grade graphics processors to reduce console costs.

  • Southwest Airlines: Offered low-cost short-haul air travel tailored for commuters who previously traveled by car, bus, or train.

  • IKEA: Delivered functional, well-designed Scandinavian furniture at accessible prices by shifting assembly labor to the buyer (flat-packing) and operating warehouse stores.

  • Cirque du Soleil: Combined high-end theatrical storytelling and production value with circus acrobatic arts while eliminating animal acts, star performers, and multi-ring setups.

• Case Analysis: Formule 1 (Accor Hotels)

  • Formule 1 evaluated the budget hotel industry (1-star and 2-star hotels) to design a new value curve catering to travelers seeking low-cost, high-quality sleep.

• The Four Actions Framework Applied to Formule 1

  • Eliminate: Factors taken for granted by the industry that can be completely removed $\rightarrow$ Eliminated full-service eating facilities, architectural embellishments, and lounge/lobby appeal.

  • Reduce: Factors that can be reduced well below industry standards $\rightarrow$ Reduced room size, eliminated 24-hour receptionists (replaced by automated check-in kiosks), and stripped back superfluous room amenities.

  • Raise: Factors that should be raised well above industry standards $\rightarrow$ Raised bed quality (offering comfortable, high-grade mattresses), hygiene levels, and room soundproofing/silence.

  • Create: Factors to create that the industry has never offered $\rightarrow$ Created low-cost, automated, ultra-consistent roadside lodgings.

• Operational and Financial Outcomes of Formule 1

  • Cost per Room: $€15,000$ vs. $€41,000$ industry average.

  • Staff Costs: $20-23\%$ of sales vs. $25-35\%$ industry average.

  • Price to Customer: $€15$ per night vs. $€30$ industry average for standard 2-star hotels.

  • Performance Metrics: Delivered superior bed quality, hygiene, and silence relative to standard 2-star hotels at half the price.

  • Financial Performance: Achieved profit margins $> 2 \times$ the industry average and occupancy rates $> 3 \times$ the industry average.

Innovation Strategy: Dilemmas, Lifecycle, Diffusion, and Disruption

• Definition of Innovation

  • Innovation involves converting knowledge into a new product, process, or service and putting that new product, process, or service into actual commercial use.

• Four Strategic Innovation Dilemmas

  • Technology Push vs. Market Pull: Technology push relies on internal R&D capabilities to drive discoveries to market; Market pull relies on customer research and user demand to guide development. Strategists must adopt a situational approach blending both.

  • Open vs. Closed Innovation: Closed innovation keeps intellectual property inside firm boundaries; Open innovation leverages external networks, partnerships, and licensing. Balance depends on competitive rivalry, whether innovation is a one-shot effort, and system integration complexity.

  • Product vs. Process Innovation: Product innovation addresses customer offerings; Process innovation addresses manufacturing and delivery efficiency.

  • Technological vs. Business-Model Innovation: Business-model innovation alters the structural logic of value capture and can generate radical market change without requiring novel technology.

• Product and Process Innovation Lifecycle (Abernathy & Utterback, 1975)

  • Phase 1 (Fluid/Early Stage): High rate of product innovation as competitors experiment with different features and configurations. Process innovation remains low.

  • Dominant Design Establishment: The market reaches consensus on a standard product configuration (the Dominant Design), causing the rate of product innovation to peak and decline.

  • Phase 2 (Specific/Late Stage): Process innovation rises rapidly as firms shift focus toward cost reduction, operational scale, and production efficiency.

• Innovation Diffusion and the S-Curve

  • Tracks the adoption rate of an innovation over time.

  • Tipping Point: The threshold where slow initial adoption accelerates into rapid exponential market growth.

  • Tripping Point: The point where market saturation is reached, leading to adoption decay.

  • Supply-Side Factors Influencing Diffusion: Degree of performance improvement, Compatibility with existing infrastructure, System complexity, Ease of experimentation/trialability, and Relationship management.

  • Demand-Side Factors Influencing Diffusion: Market awareness, Network effects (where value increases as user base expands), and Customer innovativeness.

• Timing Strategies: First Mover vs. Fast Second

  • First Mover Advantages:

    • Riding the Experience curve faster than competitors.

    • Achieving economies of Scale early.

    • Pre-emption of scarce resources (raw materials, prime locations, key talent).

    • Building early Brand Reputation and mindshare.

    • Establishing high Buyer Switching Costs.

  • Fast Second Posture:

    • Allows firms to avoid early R&D free-rider risks and market education costs.

    • Requires high Capacity for profit capture and strong Complementary Assets (distribution networks, sales forces, manufacturing capacity).

    • Well-suited for fast-moving technological arenas.

• Sustaining vs. Disruptive Innovation (Christensen & Raynor, 2003)

  • Sustaining Innovation: Improves product performance along dimensions historically valued by mainstream, high-end customers. Fits established corporate business models and higher margin structures.

  • Disruptive Innovation: Introduces products that initially underperform incumbent technology along traditional performance dimensions. They are simpler, cheaper, and more convenient, initially appealing to low-end or non-consuming segments.

  • Trajectory of Disruption: Over time, the performance improvement trajectory of disruptive technology moves faster than the evolution of customer demands. The disruptive innovation enters mainstream markets, eventually displacing established incumbents.

• Incumbent Strategic Dilemmas in Innovation

  • Cannibalization: Incumbents are often reluctant to invest in disruptive innovations because doing so cannibalizes their existing, profitable base of success.

  • The "Good Enough" Threshold: Incumbents frequently overshoot mainstream market needs by over-engineering products for high-end buyers, opening a competitive gap for disruptive players offering products that are simply "good enough" at a lower cost.