Designing The Business Model: New Venture Thinking 2018/2019 - Lecture 5, October 24

Lecture 5:
Designing the business model
New Venture Thinking 2018/2019 – Lecture 5, October 24

Last week
■ Entrepreneurial decision making
■ Effectuation and causation

Today
■ What is a business model?
■ Designing a business model: The Lean Canvas
■ Testing assumptions

www.cass.city.ac.uk
What is a business model?
Business models are more than ‘just’ revenue models
‘...a revenue model complements a business model design,

just as a pricing strategy complements a product design’
(Zott and Amit, 2009)

Chesbrough and Rosenbloom, 2002: 536

Definition of business model:
‘…the content, structure, and governance of transactions

designed so as to create value through the exploitation of
business opportunities’

These are the
design elements
of a business
Definition of business model: model
‘…the content, structure, and governance of transactions

designed so as to create value through the exploitation of
business opportunities’

Design element: content
What activities are being performed?

Design element: content
What activities are being performed?
• R&D
• Production
• Packaging
• Distribution
• Customer support
• …

Design element: structure
How are activities linked? Are activities core or peripheral?
Production
Versus
Service

Design element: governance
Who performs the activities?

Business model design themes
■ Novelty
■ Lock-In
■ Complementarities
■ Efficiency

Design theme: novelty
‘...the adoption of new activities (content), and/or new ways

of linking the activities (structure), and/or new ways of
governing the activities (governance)’

Design theme: lock-in
Making it difficult to switch

Design theme: lock-in
Making it difficult to switch: The network effect

Design theme: complementarities
Bundling activities provides more value than running them

separately

Design theme: efficiency
Reducing transaction costs: Vertical integration

Design theme: efficiency
Reducing transaction costs: Outsourcing

Common business models
Bus Taxi
Simple BM:
Users pay Example??? Example???
Two sided BM:

Someone else
Example??? Example???
pays
Baden-Fuller and Mangematin, 2013: 420

Common business models
Bus Taxi
Simple BM:
Users pay
Two sided BM:

Someone else
pays
Baden-Fuller and Mangematin, 2013: 420

The business model canvas

Common business models and new ventures
How do startup entrepreneurs develop a business model?
Do they just pick one of the examples I just gave?

Entrepreneurs do NOT pick a standard model off the shelf
Reason 1: Reason 2:
Standard BMs give ‘The business models crafted

‘a description, or by entrepreneurs are
representation, of a reality prospective; they envisage a
that exists beyond [the future venture and the value
business model]: the firm’ creation logic that it will entail’
Doganova and Eyquem-Renault, 2009: 1560

Startup entrepreneurs do not plan their business model
Reason 1: Reason 2:
‘Everybody has a plan until ‘No one besides venture

they get punched in the capitalists and the late Soviet
mouth’ Union requires five year
plans’
- Mike Tyson
(Blank, 2013: 67)
In sum, the difference between new ventures and existing

companies is that:
‘Existing companies execute a business model, startups look

for one’
(Blank, 2013: 67)

Business model canvas vs. lean canvas
https://leanstack.com/why-lean-canvas/

The lean canvas: problem
■ No problem, no demand for your product
■ Address a problem for each customer segment

The lean canvas: customer segments
Who are our most important customers?
■ Mass market
■ Niche market
■ Segmented
■ Diversified
■ Multi-sided

The lean canvas: value proposition
What unique value do we deliver to our customers?
■ Newness
■ Performance
■ Customization
■ Price
■ Brand/status

The lean canvas: solution
■ Value proposition concerns value creation, solution has to

do with value delivery
■ How does your product or service solve the problem?
■ In early stages, only focus on core features!

The lean canvas: unfair advantage
How can we protect our company against competition?
■ Most difficult box to answer
■ Something that cannot be copied or bought?
■ Passion or commitment are not unfair advantages
■ Are you sure you can patent your idea or product?

The lean canvas: channels
How do we reach our customers?
■ Own channels
■ Partner channels
■ Combination

The lean canvas: revenue streams
How do we make our customers pay?
■ Asset sale
■ Usage fee
■ Subscription
■ Lending/renting/leasing
■ Licensing

The lean canvas: cost structure
What are the most important costs inherent in our business

model?
■ Fixed costs and variable costs
■ Cost structure is not equally important to all companies:
□ Value-driven
□ Cost-driven

The lean canvas: key metrics
How will you measure performance?
■ Acquisition
AARRR!!
■ Activation
Startup metrics for pirates
■ Retention (Dave McClure)
■ Referral
■ Revenue

The elements of the canvas are connected

The lean canvas will change over time
Source: https://www.youtube.com/watch?v=--APdD6vejI
The lean canvas will change over time

Lean canvas and assumptions
Initial business model designs contain many assumptions:
■ People believe that existing social networks fail
■ Network effects can be realized
■ Other organisations are interested in derivative currency
■ Et cetera, et cetera...

Do my target customers
experience the problem
I’m addressing?
https://leanstack.com/on-identifying-riskiest-assumptions/

Does the problem I

address represent a
monetizable pain?

Do I have, or can I build,

a path to my target
customers?

Assumptions
Gilbert and Eyring, 2010: 94

Assumptions
‘Fail to spot a deal-killer risk, and your venture is doomed.

Fail to hedge a path-dependent risk, and you dramatically
raise the odds that you’ll run out of funds before you ever
come to market – or will get there far too late’
(Gilbert and Eyring, 2010: 95)

Assumptions
Gilbert and Eyring, 2010: 94

Testing assumptions
Make assumptions explicit

Testing assumptions: Example
■ Business idea: online learning from experts
■ Struggle: difficult to recruit and engage experts
■ Assumption: people want to learn from experts
■ Testing assumption by sending survey to 1,000 people

Testing assumptions
Example

Today’s tutorial
■ Fill out the lean canvas for your entrepreneurial idea
■ Identify the main assumptions you have made
□ Are these path-dependent or deal-killer risks?


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Lecture 5:

Designing the business model

New Venture Thinking 2018/2019 – Lecture 5, October 24

■ Entrepreneurial decision making

■ Effectuation and causation

New Venture Thinking 2018/2019 – Lecture 5, October 24

■ What is a business model?

■ Designing a business model: The Lean Canvas

New Venture Thinking 2018/2019 – Lecture 5, October 24

Business models are more than ‘just’ revenue models

‘...a revenue model complements a business model design,

(Zott and Amit, 2009)

New Venture Thinking 2018/2019 – Lecture 5, October 24

Chesbrough and Rosenbloom, 2002: 536

New Venture Thinking 2018/2019 – Lecture 5, October 24

Definition of business model:

‘…the content, structure, and governance of transactions

(Zott and Amit, 2009)

New Venture Thinking 2018/2019 – Lecture 5, October 24

‘…the content, structure, and governance of transactions

(Zott and Amit, 2009)

New Venture Thinking 2018/2019 – Lecture 5, October 24

What activities are being performed?

New Venture Thinking 2018/2019 – Lecture 5, October 24

What activities are being performed?

New Venture Thinking 2018/2019 – Lecture 5, October 24

How are activities linked? Are activities core or peripheral?

New Venture Thinking 2018/2019 – Lecture 5, October 24

Who performs the activities?

New Venture Thinking 2018/2019 – Lecture 5, October 24

New Venture Thinking 2018/2019 – Lecture 5, October 24

‘...the adoption of new activities (content), and/or new ways

(Zott and Amit, 2009)

New Venture Thinking 2018/2019 – Lecture 5, October 24

Making it difficult to switch

New Venture Thinking 2018/2019 – Lecture 5, October 24

Making it difficult to switch: The network effect

New Venture Thinking 2018/2019 – Lecture 5, October 24

Bundling activities provides more value than running them

New Venture Thinking 2018/2019 – Lecture 5, October 24

Reducing transaction costs: Vertical integration

New Venture Thinking 2018/2019 – Lecture 5, October 24

Reducing transaction costs: Outsourcing

New Venture Thinking 2018/2019 – Lecture 5, October 24

Two sided BM:

Baden-Fuller and Mangematin, 2013: 420

New Venture Thinking 2018/2019 – Lecture 5, October 24

Two sided BM:

Baden-Fuller and Mangematin, 2013: 420

New Venture Thinking 2018/2019 – Lecture 5, October 24

New Venture Thinking 2018/2019 – Lecture 5, October 24

How do startup entrepreneurs develop a business model?

Do they just pick one of the examples I just gave?

New Venture Thinking 2018/2019 – Lecture 5, October 24

Entrepreneurs do NOT pick a standard model off the shelf

Standard BMs give ‘The business models crafted

Doganova and Eyquem-Renault, 2009: 1560

New Venture Thinking 2018/2019 – Lecture 5, October 24

Startup entrepreneurs do not plan their business model

‘Everybody has a plan until ‘No one besides venture

In sum, the difference between new ventures and existing

‘Existing companies execute a business model, startups look