business model Archives and Blog Posts - Page 2 of 5

Entrepreneurs with Denis Oakley

I HELP BOLD LEADERS TRANSFORM THEIR BUSINESSES AND THE INDUSTRIES THEY COMPETE IN

You are here: Home / Archives for business model

business model

By

What is Business Disruption?

Disruption is what happens when someone does something that means your business model no longer works as well as it used to. Let’s unpack that a bit. Your business model is how you make money. You offer a great value proposition to customers in return for cash. The most common forms of disruption mean that you get far less cash or nothing for the value you create. Customers in other words stop valuing what you offer. Sometimes it may be all your customers. Other times it may be key groups of customers. The result is that things don’t work the way they used to. You need to change.

Long Term Economic Growth

It’s been five centuries since we lived in a world that did not expect economic growth. That was what the world was like for millennia until the later middle ages and the renaissance. Any profits that a company made had to be made up from losses incurred by someone else. Around that time businessmen started finding ways to trust each other with larger sums of money and the result was the rise of credit. This led to the foundations of capitalism. Invest money, create value and everyone benefits. This carries on in an ever faster cycle. Madly self-destructive spinning some would say.

the business environment awaiting business disruption
The idyllic view of business – getting along in a sea of consumers with no disruption

Creative Destruction

Money, profit and credit create an impetus for change. This is the driving force of the idea of creative destruction.

Capitalism […] is by nature a form or method of economic change and not only never is but never can be stationary. […] The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.

[…] The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

[… Capitalism requires] the perennial gale of Creative Destruction

Joseph Schumpeter – Capitalism, Socialism & Democracy.

Deep Assumptions About Business

What seems to happen is that the ‘gale of creative destruction’ blows fitfully. Some areas of business see little innovation for decades. They start to imagine that the way that things have been for living, or institutional memory, are the ways that they will always be.

the gake of creative destruction causing business disruption to retail
A simplified view of creative disruption – showing a single gale hitting reatil. In reality there are hundreds

Here are some businesses where we have a deep set of assumptions about the way that things should be

  • Oil companies explore for and extract oil. They refine it and sell it through petrol stations
  • Governments collect tax using a specialised department
  • Banks create money
  • Children are best educated in schools and universities
  • Power is created and distributed from large power stations

Pressure To Change

In each of these cases, something very different was done a few centuries ago. In some of them, there is some pressure to start doing things differently but not much. A chief executive from 30 years ago could step up into his successor’s role and still understand the key levers needed to make the business a success.

In these cases, we are not looking at monopolies. A monopoly is where a company has market dominance and as a result can extract more cash from consumers that its value proposition ‘entitles’ it to.  Because it has no competition that gap between offer and value can get wider and wider – which is one reason why monopolies are so heavily regulated.

Non-monopolies, in an area of low innovation, can have some monopoly characteristics. Competition can become formalised. Corporate structures and offerings become less and less diverse. As a result, there is an increase in the cash (or rents) that the sector can extract from consumers. This doesn’t need oligopolistic structures. It just needs time and peace. A good example could be legal services where tens of thousands of legal practitioners have been shielded from competition by bar exams and requirements. It’s not an oligopoly but it is an industry that is able to extract higher rents than the value that it creates.

Examples of Lack of Competition

This surplus profit creates the opportunity for entrepreneurs to look at ways to disrupt a market. The absence of competition encourages competition.

What is often important is why there is no competition – or restricted competition.

  • In Malaysia, where I live, many newspapers were sheltered from disruption because of their usefulness as political tools.
  • Lawyers are sheltered because they provide so many lawmakers
  • Steel mills and manufacturers are sheltered because they employ so many voters
  • Petrol stations are sheltered because everyone has a car

In many of the above cases, there is a secondary value proposition which is not offered to the consumer.

  • The government buys adverts in the newspaper
  • Lawyers enact laws that protect lawyers
  • Governments bail out companies to win marginal seats

Keep Reading

By

How To Use The Business Model Canvas To Draw Your First Business Model?

This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.

In this section, what I will do is walk you through the process of creating your business model using the business model canvas. This is a great tool developed by Alexander Osterwalder at Strategyzer.com.

We’ll look at each of the 9 nine segments of the business model canvas in turn, and I will explain the thought process behind how I developed the business model canvas for Denis-Oakley.com, which specializes in supporting early-stage entrepreneurs.

Customer Segments

When I set up Denis-Oakley.com, I’d been working in an entrepreneurial role for about 15 years. I’d recently separated from my wife and had little more than a suitcase, a laptop, and enough to live on for a month.
The first question I asked was “Where can I add value?” That then begged the question “Who am I adding it for?” That in turn generated a third question “Well, what problem do they have which needs solving?”
I knew a few things about entrepreneurs having been one for many years.

Summarised, these were:

  • Most fail
  • Most don’t know what they are doing
  • And most know where they want to go

I also knew that my experience was in the early-stage startup scene. That is getting started and getting your first customers all the way through to running a team of 10 – 20 people and making sales of $2-3 million.

  • That helped me to define my target customers
  • Entrepreneurs 25 – 50
  • Sole founders or solopreneurs
  • English speaking
  • University educated
  • Working part-time or with a source of funding
  • US/UK/Australia based

The value proposition was a bit more difficult. It’s amazing how many entrepreneurs are clear on what they want to do and yet cannot clearly state their value proposition. Here a lot of the ideas behind lean startup are good as you iterate through various formulations to find the best match with your customer’s pain point.

So, I knew that I wanted to support entrepreneurs. There are a lot of free resources out there and a huge number of small business consultants. What was the best value proposition that fitted my skill set and which added value?

My value proposition focuses on clarity, speed, and risk. There is a lot of noise, and there are literally millions of things that an entrepreneur can be doing. Which should YOU be doing? You have a limited runway – either cash, time, or market opportunity – to get things to work. I have lots of experience and tools to help you accelerate faster. Finally, the value proposition was about risk.

I have seen so many failures. Bad ideas, bad execution, bad luck. Lots can go wrong, but much of this is avoidable. The third part of my value proposition was to make sure that their plane didn’t get damaged on the runway as it took off.

The value proposition is captured as

  • Simple strategies to get startups focused on the key things they need to achieve
  • Using tools and processes to accelerate the startup process saving money and time
  • Reduce the chance of failure through testing and careful resource allocation

Customer Relations

If you read all that, it’s difficult to see how I can do that without quite a lot of one-to-one interaction with customers. I’m selling customized advice and experience which delivers better results. It’s not an automated hands-off experience like Uber. So not a lot of thought needed to go into this part.

Channels

When it came to channels, this was a lot more difficult. In most cases, a startup consultant can go along to local startups, talk, make friends, and get hired. I was 10,000km away from potential clients. I needed to find effective ways of finding them apart from traditional networking. To work out which marketing channels I wanted to use, I used a list of 19 different traction channels and considered how easy it would be to reach my audience on each. To start with Upwork.com was great. It was an existing platform, and all I needed to do was turn up and bid.

The next channel was LinkedIn. Traditional networking lets you interact with 10-20 people a night. LinkedIn gave me a potential pool of millions. The final channel was content marketing. This was twofold. First entrepreneurs do read a lot, and I could write well about entrepreneurship. This would pull organic traffic. Secondly, as it’s a B2B sale, the authority that a good blog would generate would then help to convert prospects.

What Resources Do I Need?

I needed a little bit of money to get things set up. It’s not on the same scale as $4 billion chip foundry, and so it’s not that relevant. Consultancy is not capital intensive. What it does need is experience. So I’d got 10 years of engineering experience and another 15 years of startup experience with a good dose of consulting mixed in. That was a key resource. Without the deep knowledge of the subject and experience as a practitioner, it’s difficult to get going.

The other key resource was the size of my network. With a bunch of startups under my belt, I had over 2,500 connections on LinkedIn. That gives me access to about 400,00 2nd connections and 130 million third connections. That makes it easy to connect with people and research potential clients. Other networks – such as Quora help leverage that even more

What do I Need To Do On A Day-To-Day Basis?

One of the key tasks is leveraging that network and using my experience to generate sales. At a top level, that’s good enough. When it gets into the details it does get very complicated. There are 21 top-level process steps in my LinkedIn lead generation funnel, for instance. All of those will change over time as LinkedIn, and the business evolves – the top-level Lead Generation on LinkedIn probably won’t.

There is a lot of content generation. Initially, I had one idea – generate reports for clients and then repackage those reports for other clients and turn them into case studies. Now it more often works that We see a new tool and think – how does this work. We create content around that. Again – what is the top-level activity? Focus on that. Finally, the key value-creating activity from my customer’s point of view – spending time doing the consulting work that they pay me for.

As you create your business model canvas, one of the things that start to intrude is – How do I do this operationally? In this case, I have three activities – Lead Generation – Consulting – Content Creation. How do I get the internal flow right so that the business works smoothly? That’s something we will come back to later and is one of the valuable outcomes of the exercise.

Partnerships Are Critical.

To start with, I had no partnerships, and the business struggled. There was too much to do, and the flow didn’t work. So first, Leander came on board (we run a business model guru together). Secondly, there is a VA team to help operationalize everything.

In some cases, startups may have critical partnerships with open source software providers, or they may require a network of resellers. Partners are the third parties that you need to make the business model work.
In some cases, costs and revenue can become quite complicated. With two-sided models, you may have one customer segment paying nothing and another customer segment paying for something – Google’s Search/Adwords product is like that.

In my case, not a lot of thought went in. There are marketing and salary costs. The revenue is straight-up hourly rates or project-based fees.
Tips on How to Produce a Business Model Canvas
That should have given you a little bit of an insight as to how to produce a business model canvas. The next step is to do it yourself.

The way that I do it is as follows.

  • Go through each segment and brainstorm. If it seems vaguely reasonable throw it in.
  • Look at the big picture and understand whether you are selling B2B, B2C or B2B2C, or another variant.
  • Think of a similar company and see how your business model canvas varies from theirs.
  • Prune and edit it. Simplify everything.
  • Then stand up in front of the mirror and talk through it.
  • Iterate and improve again

Step 1 I normally try to keep each entry to two to three words. Lots of text is difficult to absorb. If you can use images that can be awesome. They have to be clear.

Step 5 normally creates the most value. It is relatively easy to put something down. Taking it off the paper and verbalizing it. Explaining it. Explaining it just to yourself before you try on a partner, client or investor makes the flaws stand out.

You can spot the weaknesses because your voice loses confidence or you elide over the point. It’s either a weakness or not important.
A useful step is to break each component on the business model canvas down into three bullets or sentences on a separate piece of paper. That’s repeatable and can start to then give you the outline of a task list or project plan (or Trello cards).

If You Want to Read More

I keep everything structured on my niftily titled business model innovation book page. Head there to browse, binge, read straight through, or cherry pick. Please do take a moment to comment below or upvote comments that you agree with

Subscribe to the New Book Chapters

As I write each new section you can have them sent to your email. The plan is to write something 2 – 3 times a week. It is easy to unsubscribe, but I hope you won’t as the goal is to delight and entertain as well as educate and train you through this business model innovation journey.

By

How to Survive Business Model Disruption

This is a short presentation that I did for a utility company on how to survive business model disruption and how to address it from within the confines of an existing business model.

I’ve included the slides and a video talk through of them (they may not be exactly the same version) as I practiced my delivery.

The big ideas on “How to Survive Business Model Disruption” are as follows:

  • Business Models have a finite life span
  • When disrupted the replacing business model is significantly more profitable than the existing one
  • Business model ≠ Company
  • changing the business model is limited by the innovatability of the people in the company and it architectural rigidity
  • Companies built on network effects are massively vulnerable to business model disruption

Business Models have a Finite Life Span

This should be fairy obvious but it isn’t. For many new innovations and business models it is clear that they are new and things are changing. Look at how taxis and streaming videos have been disrupted by Uber and Netflix bringing in new business models in the last few years.

Other business models have hung around for a while and so it seems like they are here to stay forever. Google and Facebook’s advertising based business models are examples. The business models of energy companies and utilities are others.

In all cases it is not a question of whether but of how long. Kodak famously had a business model that lasted over 100 years. It was a dominant player in both the film and camera industries from 1886 to 2005 and yet it lost 97.5% of its value in less than 5 years.

The question is how long a business model will last? There will be more thoughts on that in a later post.

New Business Models are More Valuable

Existing business models have a known value. You can look at the balance sheets and profit and loss statements and get a very clear idea about how valuable they are. For example pre 1990 you could sum the P&L statements of all taxi companies and get a sense of how valuable the industry was.

Now with Uber and Lyft IPOing you can see how the market values their business model and it is about 10X more valuable. Similarly when Rockefeller changed the oil production and distribution model, or when Google changed the search business models they created 100x the existing value.

Part of this is often to do with the fact that the economy has grown and modern business models enable more users and suppliers to be connected providing both a larger pie and a larger slice of it. However there is some observation bias here as we don’t tend to think too much about business models that disrupted and then failed. Napster, Spotify and the music industry could be a counter example

Business Model ≠ Company

The longer a company has been around without significant change in its business model the more likley that it is to consider the company synonymous with the business model. For example a water utility, say Severn Trent which used to supply me with water when I lived in the UK, can easily believe that the company exists to collect water, purify it, deliver it and then treat the sewage. That’s the business model that it has used to deliver its mission for 100 years.

Is it the only possible business model to deliver that vision? No. Many companies, IBM and HP, come to mind, have changed their business models multiple times over the last 70 years as they have sought to adapt to market disruption and changes in their business model.

Innovability and Architectural Rigidity

Lots of companies see the problems in the future and attempt to innovate out of them. Some of the companies that I know that spend most on innovation and trying to find new business models include mobile phone companies, fixed line telecom companies and utilities. They see a massive amount of change coming and need to find ways to survive their cre businesses being disrupted.

In many cases they do have innovative ideas. However they are let down by 2 factors.

First there aren’t enough change makers in the company (and if this is a problem for you do reach out as change making capacity can be significantly improved). So forcing change on people who don’t want to be changed is a tough call and normally dooms the business.

The second is that most managers are rewarded for competence and that means doing what we do cheaper and better. That increasingly makes structures and systems rigid and resistant to change. Kodak made the first digital camera in 1976 and had a 40% of the digital camera market as late as 2005 but couldn’t change what it was and how it did things in order to compete with the consumer electronic giants.

How to Survive Business Model Disruption
1991 Kodak Digital Camera with Nikon F3 Body

Vulnerability of Network Effects

The final thought was that many of the most valuable companies of the past 100 years have been built on network effects. So have many of the leading tech companies. This allows rapid growth and decreasing unit costs as they deliver more value.

What is critical is that surviving on network effects is very fragile. As users start to move away from the company the value disintegrates faster every day as Friendster discovered. The loss of every additional customer hurts more. That then can rapidly kill a company with a bloated cost base or which is not well configured to serve a reduced user layout. Business model disruption happens slowly then quickly, to riff off Hemingway’s phrase.

Does your company need think about how to survive business model disruption?

I’m happy to deliver this talk on how to survive business model disruption live, on site or at a webinar for your leadership team or employees to help start the change process and give people an understanding of why change is important and the costs of not changing.

Are you an Entrepreneur?

Are you copying a business model?

Are you creating a new one?

I can help you get it right

Review YOUR BUSINESS MODEL

By

Measure Business Model Performance with the BMC

Many people have come across the business model canvas and how it can be used for business model innovation or generation. In this article, I want to go beyond the basics and talk about how the business model canvas can be extended to help address a number of business issues by bringing clarity to them. The focus is on business model performance and ways to measure it.

Measuring business model performance

At the core of the business model canvas is the idea that all businesses are made up of 9 segments. These are

Put another way.

“We create this value proposition for these customers and we reach them through these marketing channel, and support them through these customer relationships to generate sales. To deliver this we need these key resources and key partners to undertake these key activities and they come with these costs.


So far so good. Pretty much any business can be sketched out in a few minutes using this template. Once done it allows some fascinating discussions as to how and why the business makes money (or does not) and what to do about it.


The rest of the article is going to move beyond this and look at ways that you can use the basic business model canvas to change your business quickly and effectively.


Performance measurement using the business model canvas


Once you have your business model canvas sketched out have the CEO and/or the management team go through and give each segment (or each item within a segment) a score out of 10. If you feel you are selling 100% of the time to your ideal customer, mark it as a 10. However, if customers have moved on and the value proposition no longer resonates with them then perhaps a score of 4 for the value proposition is appropriate. Finally, if you have revenues with margins much better than the competition, give it a good score. You get the idea.

Then use the Net Promoter Score, scoring mechanism. Everything that is a 9 or 10 is green. Everything, 7 or 8 is yellow. The rest are red. Colour it in.
Voila. You have a powerful visual health check of your business model.

Measure Business Model Performance with the BMC

Going back to the phrasing that we looked at earlier 

“We create this value proposition for these customers and we reach them through these marketing channel, and support them through these customer relationships to generate sales. To deliver this we need these key resources and key partners to undertake these key activities and they come with these costs”

Management thus has a very clear and easy way to consider the problems (or opportunities) that it is facing and a simple way to explain it to stakeholders.

This is based on manager’s subjective analysis, but can be linked to KPI’s and turned into a regular performance dashboard. This is similar to the balanced scorecard but focuses on the health of the business model and it’s ability to deliver profits. 

Measuring Threats to the business model

When working with clients I use a 60-page threat assessment workbook. This takes us through each of the 9 segments looking at key metrics and the issues that are impacting them. When a company is in a market that is being disrupted there are often many threats occurring at multiple different levels. It’s easy to fall prey to information overload. 

Measure Business Model Performance with the BMC
The 60 page workbook that we use to assess threats to your business model

In the process above I described how you can measure the corporate business model performance. Here we look at ‘measuring’ how threatened the business model is by market forces and disruption. Again each segment gets given a score and you can identify which parts of the business model are redlining, and which are stable for now.

The twist here is it’s not as simple as highlighting the problem areas. That’s because often many parts of the business model will work in harmony, or have epicentres driving, them as Alexander Osterwalder puts it in Business Model Generation. The marketing channels you chose are ineluctably linked to the audience you are targeting, for example. If the channels are working but the customer base is under threat, you need to be thinking about the marketing channels as well. Once you change customers, you’ll need new channels or at least significant change.


Again the business model canvas does not solve the problems that you are facing. What it does do is layout the threats in an intuitively understandable way. It’s easy to get and explain. That saves time and gets everyone thinking the same way. In turn that opens up the field for more imaginative solutions.

Looking for ways to change your Business Model Performance

A business model can look absolutely wonderful on a piece of paper or sketched out on a whiteboard. The reality is that there are lots of reasons why changing it is going to be as hard as steering an oal tanker with a paddle from a canoe.  Two of these issues are the innovative ability of the people within the company and the company’s architectural resistance to change. These can act as a big drag on your attempts to change the performance of your business model

I’m from an engineering background. Looking back at the railway industry over the last 30 years it seems that a lot of the innovative people are in the key partners and in the marketing parts of the business. The key engineering teams needed to deliver the trains on time are relatively stagnant.

Innovativeness Audits

Small businesses can quickly do innovativeness audits. Who are the most innovative people in the business? Which segments do they live in? Their numbers can be mapped onto the canvas. What this shows you is where the people willing and able to be changemakers and make change live. If there is no appetite for change in the people responsible for key segments, consider the value proposition for example, how can any business model change programme be successful? 

Rigidity Audits


The second issue is the structural rigidity of the business model itself. Most managers are hired for their competence in reducing cost and improving efficiency and effectiveness. Over tim this means that processes and systems become more specialised and less flexible. This lack of flexibility can make it very hard to change a business model. Imagine for example the impact that a power station has on the balance sheet of an electricity company. They need to write it off or sell it in order to change the business model. 


Again we can create a heat map of which parts of the business are easy to change, and which parts are rusted solid. Combining the people and the structural rigidity you then have a clear idea on how you can move forward, or at very least the problems that you are going to have to overcome in order to change your business model and get to where you want to be.

Are you an Entrepreneur?

Are you copying a business model?

Are you creating a new one?

I can help you get it right

Review YOUR BUSINESS MODEL

By

Business Model Depreciation

A business model is the way that a company or industry makes money and delivers value. At its simplest you can say “We do X for Y and get paid Z”. Most of the time we see business models as stable and permanent. Step back though and business models appear. grow, stabilise and eventually decline and disappear. A business model because it generates revenue can be considered as an asset and so this article is all about the idea of business model depreciation and why it is important.

Many managers are familiar with the idea of depreciation. When an asset is purchased it appears on the balance sheet. Over a period of time it’s value depreciates as it wears out due to use and age. A business needs to factor the cost of depreciation into its accounts and also needs to plan for the replacement of the asset in time.

Business model depreciation extends this concept from the realm of accounting to business strategy.

Business models depreciate. They don't last forever, instead they rot and fail over time

Photo by Joshua Hoehne on Unsplash

Business Models Don’t Last Forever

No business models last forever. In some cases it may seem that they do but that is often due to the short sightedness of our experience. So for example the modern electricity supply business model has been around since the 1920’s.

In the 1920’s there were lots of small scale power stations delivering electricity to the immediate surrounding area. With the invention of the steam turbine it became economical to run much larger power stations, and regulation in the UK supported the creation of the national grid which allowed power stations to be large, separated from the towns they served and connected by high voltage transmission cabling. That business model has existed for over 100 years and no one now can remember anything different.

The reality is a lot different. IBM, for example has run through half a dozen different business models. The original IBM made punch clocks, then moved to tabulating machines, then computers, then mainframes, then PCs, business systems and currently AI. In almost all of these cases the business model that drove the company and created its profits lasted just a few decades.

In other industries, for example in some segments of digital marketing, profitable business models can only exist for months. They are created by the emergence of new technology, and then closed as the technology evolves or fails. Where I live the triads had a very profitable business model pirating CD’s until people stopped buying CDs alltogether.

Business model depreciation is thus an attempt to capture this impermanence in business models. It says that at some point the main source of a company’s, or industry’s, profits will cease to exist. The industry will thus have to radically reinvent itself in order to survive.

Taxis: Horse Drawn and Petrol Driven

If we look back to the turn of the 20th century the majority of taxis in London were horse and cart style taxi cabs, often called hackney or hansom carriages. These were supplied by dealers in a similar way that modern car dealerships work.

One of these dealerships (Mann and Overton) saw that the motorcar was the way of the future and commissioned a car company (Austin) to create and internal combustion model for it to sell. In doing so Mann and Overton destroyed the horse and carriage supply business model and replaced it with a new one, driven by the internal combustion engine, that lasted for another 100 years until Uber and ride sharing then disrupted that business model driving Mann and Overton into bankruptcy.

If you have a successful business model, whether as a player in a concentrated industry, or highly fragmented one, your future revenues are limited.

Traditionally businesses have considered that R&D and new product design have been the way to solve this problem. One of my great uncles was awarded the legion d’honneur by the French government for his contribution to the development of the vacuum tube. Less than a decade later his life’s work had been abandoned as the vacuum tube was replaced by the transition and the age of the computer.

R&D and product development is often incremental. It’s delivered by managers whose role is to extract the most value from the market as it exists now and will evolve in the next few years.

It takes now account, futurists at some major companies excluded, of how the industry or sector can rapidly transform in the next few years.

Bankruptcy: Slow then Fast

One final point before we delve further into business model depreciation. Hemingway famously asked in the Sun also Rises:

“How did you go bankrupt?” 
Two ways. Gradually, then suddenly.”

Ernest Hemingway, The Sun Also Rises

Business models seem to often work for a very long time and then fail suddenly

Business Model Depreciation

This drawing shows user adoption of a new idea, adapted from Geoffrey Moore’s Crossing the Chasm. Many business models have a similar evolution. They start slowly with a few early adopters. Then they achieve mass market adoption and epentration. Then there can be a long plateau. This might be slowly growing as managers find was to make it more effective. It may be slowly shrinking as it gets battered by external forces.

As it comes to the end of it’s life we then see it slowly becoming weaker until it very rapidly collapses. The underlying economic or value logic no longer exists and like a rotten log when stepped on nothing remains to support it.

A few examples. Kodak, famously saw that the age of film was coming to the end, and was unable to do anything about it and was destroyed. Nokia and Blackberry had their business models destroyed in a couple of years by the new smartphone business model that Apple and Google created. Friendster and Yahoo saw their business models destroyed in months by Facebook’s timeline and Google’s adwords based business models respectively.

What Happens when an Old Business Model is Displaced?

When we look at things from a historical perspective the amount of value in the existing business model seems to be fairly irrelevant. In most case the incumbent business model had made its owners fortunes and continued to do so. For major industries there were significant assets on the balance sheet.

However when a new business model displaces the old one significant new value is unlocked, often so significant, that the previous model seems small and outdated. As we look back to telephony in the 1930’s or electricity generation in 1900 the value of those industries in today’s terms is insignificant. Business model innovation is incredibly powerful. Both at creating new industries and destroying or emasculating old ones. Who would now think that the steel industry once created one of the largest fortunes in the world?

What should managers do?

One of the key issues for management is that they are often able to see the new business model. They have the knowledge and the resources to exploit it. They do not act. Why not?

Simply put, adopting the new business model will require them to actively participate in the destruction of their existing markets and revenue streams. That’s an anathema to the modern MBA manager who has been schooled to grow revenue and cut costs. Managers focus on improving business model performance not changing it

It’s also a big challenge to justify this to shareholders. Are managers shirking their fiduciary duty to shareholders? Can they be sued for doing so?

This is the fundamental reason why putting a value on the business model and then depreciating it is so important.

Measuring Business Models

Using the model above we can say:

  • The business model generates profits of $10 billion/year
  • It has a life expectancy, in plateau phase, or 25 years
  • When it fails it will fail over a period of 5 years and we will see revenue collapse by 90% if we do nothing.
  • The business model that replaces it will likley generate profits of $50 billion/year after 15 years

So if we depreciate the existing business model and capture the depreciated share of profits then the business is in a powerful position to transition from one business model to another.

Issues with Business Model Depreciation

My expertise is not in financials and accounting. However, I’m quite sure that this does not fit comfortably into GAAP and financial statements

And yet it seems that managers as shareholders agents have a clear responsibility to ensure that shareholder value is not destroyed by running an existing business model into the ground, or failing to transition to a new model for fear of damaging existing revenues.

Using an approach like business model depreciation means that the business can reserve some of the value in preparation for this change.

Again there are big problems, because this is a paradigm shift in how we approach the business of running a company through multiple business model cycles.

If you have a cash pile should you invest it? But if the businesses you invest it isn reinforce rather than subvert the existing model you are no better off

Keeping a business model war chest in financially inefficient and means that you are leaving money on the table from the exploitation of the existing business model

The Value of Business Model Depreciation

These are challenges. And yet the clarity of having a clear conception of how long the existing business model has lasted, how long you expect it to last, and consideration to financing the transition from the old and the new is exceptionally powerful

Are you an Entrepreneur?

Are you copying a business model?

Are you creating a new one?

I can help you get it right

Review YOUR BUSINESS MODEL

By

Souq Business Model Canvas

Souq Business Model Canvas
Souq Business Model Canvas

Souq.com is a two-sided marketplace. It is focused on selling to consumers in the Middle East (UAE, Saudi Arabia, Kuwait, and Egypt) and also in the Indian subcontinent and further afield. Its sellers are predominantly SME’s in the Middle East, though it also trying to encourage large FMCG companies such as Nestle onto the platform. This article describes the Souq Business Model Canvas and how Souq makes money

Customers

Unlike the US and Europe, the Middle East has a very fragmented retail environment with SME’s making up a much larger proportion of the market. This is typified by the number of souk’s in the region – forming a much more vibrant and important party of life than the British high street.

Souk’s merchant base is formed of these thousands of SMEs and anecdotally this appears to be a difference to Amazon in the US where merchants have come from a new class of entrepreneurs.

Customers at Souk are predominantly in the upper and middle classes due to the low market penetration of e-commerce (about 2% in 2017 compared to 8% in the US ) and this is exacerbated by the high-income inequality in the region even though 50% of the population is under 25 and in the west would be considered an ideal target market.

Value Proposition

Souq’s value proposition is based around 4 key offerings. Firstly, it offers an easy and accessible way for hundreds of thousands of SME’s across the middle east to sell online without having to invest in a website. Equally, SMEs do not have to develop technical or marketing skills. This makes it simple and easy for merchants to list products in Souq’s offering of 500,000 SKUs. The result is that merchants can move smoothly from 19th-century sales techniques to 21st-century methods without disruption.

For customers, it provides a huge variety of choice. What differentiates it from other e-commerce sites are its payment options, its risk management and its brand status.

In the Middle East, as in much of Asia, credit and debit card penetration is much lower and less trusted. There is a fear that by paying online goods may not be delivered. Consequently, Souq has developed innovative forms of cash on delivery (COD) payment that minimises the risk to both merchant and customer.

As well as COD it also offers purchase financing through partnerships with several UAE banks. Both systems require customers to have a track record using the platform. In the case of COD, the more they spend the larger purchases they are able to make. In the case of financing, a better track record means great credit limits.

For customers, Souq offers a wide variety of consumer protection instruments that deliver far more than the regions ineffectively enforced consumer rights. This has the impact of making it far less risky to purchase and item, and easy to obtain redress if there is a problem. It also has schemes in place to reduce fake gods and fraudulent use of IP ensuring that consumers get the value that they pay for.

The final part of the value proposition is the strong band based on its first-mover advantage. As the largest e-commerce site in the region with a track record of almost a decade, the brand offers consumers reassurance that they are not taking a big risk by shopping online.

These value propositions are quite different from those of Western eCommerce sites. The reason is that there the battle to educate the consumer and change his behaviour has already been won. In the Middle East, it is still ongoing, and it is likely that it was this educational problem that was responsible for the low valuation when it was purchased by Amazon.

Marketing & Distribution Channels

Souq reaches its customers through its flagship website and accompanying mobile app (which now contributes 70% of sales). These are it’s distribution and marketing channels.

Souq also generates substantial traffic through a network of affiliate partners. One of the larger parts of its cost base is the need to have large direct sales teams to sign up the 75,000 SMEs who sell on the site.

The scale of Souq also means that reverse network effects start to apply for merchants as many categories are swamped with similar products meaning that new merchants enter into a red ocean and are unable to create value for themselves.

Customer Relations

Like Amazon, Souq’s business model focuses on a low-cost customer service model with all transactions and many customer service enquiries fully automated.

Revenue

In the Souq business model, it generates revenue in four ways. Customers buying items on the platform pay nothing to Souq directly. Merchants using the platform pay fees which subsidize the marketplace for consumers.

Souq charges merchants a commission on sales and a transaction fee for each sale. This brings in most of its revenue. It also has a significant amount of display advertising on the site that merchants can use to promote their wares.

Finally, it offers consumers prepaid cards we site. It charges a small commission; however, the expectation is that the breakage rate will be between 2% and 20% (Souq does not release the numbers)

Key Resources in the Souq Business Model

The core of Souq’s key resources is three interlinked systems. The first is the website itself. This allows the core value of Souq to be delivered – the buying and selling of products online. In response to market failures in the Middle East, it has also had to invest significantly in two other systems.

The first of these is the payment system that morphed into PayFort. This enables seamless payments across a region where there are no common banking systems or payment providers and large numbers of people are unbanked in the traditional sense

The second is the delivery system which was incredibly difficult as in many countries the postal system was non-existent or flawed. After trying several options Souq developed an in-house gig economy type courier service.

Both of these are key resources because they solve intractable problems that all competitors face and doing so efficiently provide a competitive advantage.

Key Activities

Souq’s key activities are improving and optimizing the platform and making sure that the cash to delivery process is as friction-free as possible. It also continues to have to invest heavily in educating the market to grow market share to the same level as the west.

Key Partners

Key partners in the Souq business model are Amazon which owns Souq and is presumably providing talent and technology. The other partners are the banks which provide financing, affiliates and couriers.

Costs

Souq’s business model is cost-driven using the same model as Amazon. The goal is to reduce unit costs as low as possible to maximize the contribution from each sale. This means a focus on improving the system and ensuring that they deliver more efficient outcomes as they scale

Souq Business Model Canvas
Souq Business Model Canvas
Souq Business Model Canvas