What is the difference between value chain and business model?

In creating and delivering value for a business it is necessary to outline the entire gamut of activities in terms of production and marketing. This is what value chain does and marvellously well too. But the question is then, how can a business capture value? This vexed question was addressed to, only by business model as described below:

Value Chain concept was introduced by Professor Michael Porter.  It is an analytical tool useful in identifying and evaluating specific activities through which a firm creates and delivers value. Professor Porter divided the activities into two types: primary activities that cover items such as in-bound logistics, operation, out-bound logistics, marketing & sales and finally sales support.

Support activities are activities including firm infra-structure, human resource management, technology development and procurement.  Limitation of scope is the glaring lacunae in value chain. In any case Porter did not intend value chain to be comprehensive one portraying entire gamut of activities of a business including that of capturing value.

A better model need to be found and that task fell on the shoulders of Swiss business theorist Alexander Osterwalder who pioneered business model canvas to explain all the essential activities of a business. He incorporated production, marketing and financial functions along with value proposition in sequential order.

He summed up his argument: “A business model describes the rationale of how an organization creates, delivers, and captures value”.

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

Why quirks make better business strategists?

Let me pose a question: Between a well-dressed person and fancy dressed guy who can fit as a great strategist?  I know you will say first one, but get this tip appearance is always misleading. Quirks do not appeal to you as does normative rule conscious and conventional person. But quirks are the guys who innovate upon everything including business strategy.

Quirks are rarely seen but commonly misunderstood for their eccentric behaviour, bizarre manners, weird looks and strange qualities. But the fact that they are like this because they are not afraid and are willing to take risk. Mark Zuckerberg says: “The biggest risk is not taking any risk”. In formulating business strategy the first and foremost factor is taking the right risk.

Second aspect of quirks is the quality of being exploratory nature that is necessary for any business strategist. Miyamoto Musashi, legendary samurai known for his art of strategy says succinctly: “It is difficult to understand the universe, if you only study one planet”. True to form, many specialists in corporate planning fail as strategists because they know only one planet.

Quirks not only behave in eccentric manner giving you feeling of apprehension, but ask you uncomfortable questions, say, about your business and where it is going. You are glued to facts & figures of your company to judge success or failure of your present business strategy as you believe the adage “seeing is believing”. Quirks on the other hand, are instinctive they get a different view of your strategy. Understand what Miyamoto Musashi says: “Perceive that which cannot be seen with your eye”.

Finally quirks are unique, they want to be different and act differently. Michael Porter comes to their defence and says: “Strategy is about setting yourself apart from the competition. It’s not a matter of being better at what you do – it’s a matter of being different at what you do.”

Need I say anything more?

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

Zappos: how strategy gets executed via business model

Started in 1999 by Tony Hsieh (pronounced Shay) for selling shoes online Zappos became profitable in 2002 and never turned back on the bottom line. In 2009 it hit 1.2 billion and became the No. 1 in online shoe retailer prompting Amazon to buy it out.

What made amazon to buy out this company? The answer lies on the connection between business strategy & business model. Business strategy deals with a vision & unique concept that must offer unique value proposition to the segmented customers.  Business model is the road map that executes this strategic concept with mileposts of evaluation & modification as and when necessary.

For Zappos, customer-centrism is the key value and objective. Acquiring customer alone does not suffice in an on-line environment. What a business needs is repeat orders from customers on regular basis. This can be summed up as customer retention. Therefore, the central focus is on customer service & selection that over awns pricing. Customer must be provided with delightful selection of items that offer value for money too.

Zappos business model lends expression to this strategy in all the nine building blocks incorporated under it. Due to space limitation, I explain only three of these building blocks:

1.        Key activities: Acquiring wide range of shoes from suppliers and list them under different segmentations such as women, men, girls, boys and kids matched with departments such as shoes, clothing, accessories, jewelleries etc. Selling the products and delivering on schedule to the maximum customer satisfaction

2.        Value proposition: Excellent customer focus with the ideal of “doing the right thing to succeed”. Provide largest selection of items on-line than any others in the market do. Bought items are shipped freight free on the following day from centralized store. 24/7 & 365 days service with guaranteed return policy that includes buyer return freight cost as well

3.        Customer relationship: There are three core values of Zappos that are seen in action in their customer relationship. These 3 core values are:

Deliver “wow” through service

Build open and honest relationships with communication

Be humble!

All three values combined shape customer relationship in providing grand selection of shoes & other items ready for shipping as a clear departure from others in the market who after customer choice is made come out with disappointing tags such as  “out of stock “ or “ sold out”. Moreover, the process of selection is guided by dedicated staffs who provide authentic delightful service experience in facilitating choice & selection of items giving value for money as well as everlasting satisfaction.  

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

 

Business model is much more than a revenue model

The funny thing is most of the CEOs of companies think that business model is just another name for revenue model and when prodded to explain go on to detail  their cost of production, sales proceeds and net income. Well this is ok if we are talking only about the revenue structure of the company.

Predictably, a revenue model projects a firm’s income and profit potential at a particular operational level. Simply put, it is monetizing the products and services a business offers detailing what income is earned, what profit is made and what earnings are retained and what return or dividends are paid out to investors and shareholders.

Business model is much more than this. Indeed it talks about how the cost structure runs and how revenue stream flows that too after having employed modes, partners, activities and channels in value creation, value delivery and value capture.

Modes include materials and physical resources acquired as input to the production process staffed by labour and management and focussed on specialization of product & services

Partners in a business is a catch word covering suppliers, patent holders providing and/or maintaining know-how and technology as well as all outside service providers in functional areas

Activities is another encompassing term covering procuring supplies, storing, utilizing in production, quality checking on production line, packaging and finally readying for despatch.

The last item channels once again is an all-inclusive term for acquisition & retention of customers, segmentation, sales promotion and finally distribution of products & services.

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

 business model, revenue model,

Fascinating business model of airbnb

As an accommodation booking agency, airbnb has a great track record. Started in 2007 it has even beaten combined market value of Hilton & Hyatt within 10 years of operation. What fascinates is the way they have worked up and sketched a winning business model. Here is bird’s eye-view:

Mission: Connecting travellers seeking authentic experience & affordable accommodation with hosts offering unique & inspiring spaces around the world. Strategy concept is to use peer to peer networking where two inter-related groups, travellers and space holders are matched-up and the portion of the transaction value is charged as service fee.

Here are the building blocks of their business model:

Key partners:  On the supply side it has individuals/hotels bringing available space to market. On the demand side individuals/corporates who need such accommodation

Key activities: Networking between guest & hosts; ensuring satisfied guests return with repeat bookings; encouraging hosts to provide value for money for spaces listed

Key resources: Networking data; list of spaces & events requested with details; list of homes & hotel rooms made available along with quoted pricing

Value proposition:            Community based two-sided on-line platform facilitating available spaces in homes & hotels are occupied giving value to owners and at the same time affording guests with authentic and enjoyable experience along with value for money to the renters who use such spaces

Customer relationship: Travellers feel at home in distinctive homes/hotel rooms; owners feel their spaces are occupied with reasonable economic return along with proper use of care by renters. Security, transparency in addition to privacy are guaranteed

Channels: On –line facilitation of spaces available and associated pricing to the wider market to ensure that proper choice can be made by both owners and travellers

Customer segments: Guests are classified by travel-type, demography, income bracket and user duration. Hosts are classified by type of owners, location, space details and price quotes

Cost structure:  All expenses incurred in getting guests to occupy including direct & indirect cost. In addition support cost such as safety & insurance cover along with compliance and legal expenses are included

Revenue stream: Guest pays around 9% of the total transaction whereas hosts pay about 3% of the transaction. Ostensible guests pay more because finding ready owners and type of accommodation suitable for guests are fairly complex job nowadays.

Cheers!

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist