Creating a business that does not fall apart due to its structural design

A business model's design has a structural design element to it. No matter how superb an architectural model, if it cannot be physically built, it's just pie in the sky. What is also demanded is quake-proof structure that will not collapse even if there is an earthquake. If you are not constructing your building in a weightless environment, you must also deal with the limitations of gravity.

In a business as well, there is the necessity to check whether a business model can be built into an actual business. Buildings are effected by the limitations of gravity; business has the limitation of revenues and expenses.

No matter how much capital there is, if red ink continues to flow forever, the company will collapse. If a company's structure is weak, it will fall apart with just a small recession or social change or competition with rival businesses. It is necessary to design your business model to stand up to environmental changes in business.

So business model design is, in this sense, the structural design of a business.

In order to confirm whether this structural design will go well or not, ultimately the standard for judgment is the bottom line resulting from revenues and expenses. You check whether the flow of profits and the cost structure are firmly supporting the building that is your business.

For example, recently convenience stores have started delivery services. With Seven Eleven's Seven Meal, if you make a purchase of 500 yen or more, you get free next day delivery. Meanwhile, with Lawson Kitchen, you have service like that found with food cooperatives: delivery once a week.

The cost structure for these two businesses are different. In the case of Seven Meal, although we are talking about the next day, delivery takes place together with an order. If the order is small, you will have high red ink coming from the delivery cost. So, they are making it so you can buy not just meals but products from all the other group companies like Ito Yokado, Sogo, Seibu, and the like, and have bought the mail order company Nissen. Assuming you would have red ink if someone just bought a box lunch, the expectation is that if you buy some other product together with the box lunch, the result as a whole would be in the black.

What you see when you write this up as a business model is that in order to cover high delivery costs, you need a certain order amount for this business or it will not work. This indispensable resource, the securing of a certain order amount, is a life and death matter.

Meanwhile, Lawson has delivery once a week, so it doesn't suffer as much cost burden as Seven Eleven. For that reason, the business risk is lower. As a "building," then, it has stability. However, when this is compared to Seven Eleven which delivers next day, the convenience for the user is hurt to some extent. The fact that convenience and business risk become trade offs is beyond one's control.

In terms of the business model, making delivery once a week lowers delivery costs (although for the present this only applies to Tokyo and seven other prefectures), which allows the realization of completely free delivery. Also, in order to cover for the inconvenience of weekly delivery, Lawson is putting efforts into such special moves as proposing recipes.

In this way, in the delivery business, there is the need to design the cost structure and flow of profits to fit the frequency of deliveries. So, and this is true not only for delivery businesses, the superstructure of the business models is supported by the substructure of cost structure and flow of profits.

The Goal is NOT a Business Model itself, but the Design of Customer Value

In a figuratively speaking of construction, an importance of the design is not the building by itself, but what kind of life and activity would be practiced there. The building is simply a box, and people who make action within that box is the protagonist; The design is, planning of the drama that happens there.

Similarly, if business model itself is to become the protagonist, it is getting the priorities wrong. By adopting that model, what drama will be created. Such design of the drama, the design of customer value, is the purpose of this business model construction. 

For instance, suppose you encountered machine failure and made a call to a customer center, received polite response, immediately received the repaired one. In order to enable these operations, variety of factors such as maintenance of customer center, not just management, reserving product design and the repair parts that are easy to repair, and expediting of the repair process have to be assembled with consistency. It is natural, but the customer center cannot promise a quick repair without permission. 

Taking this into account, the main pillar of the business model construction is again, value proposition for customer segmentations. All of the other components are present as to support the value. 

Key activities to produce the value, when it comes to a residence for instance, are kitchen where cooking takes place and a study. You entertain with food. There, key resources for creating a value, like ingredients and know-how of cooking, are required. If activity and resource are not enough, then it's possible that you will go out to buy them. This is the key partners of the business model. 

In addition, if you fail to deliver the precious value to the customers, it is meaningless. The channels for delivering the value and the customer relationships are the entrance and the drawing room where you welcome and entertain the customers.

Finally, as a foundation to support these structure, the revenue streams and the cost structure exist.

Similarly to the design of a residence, in which people spend their daily lives and there are indispensable elements to entertain the guests, these elements are essential to the design of a business model as well. 

The framework and the business model canvas introduced in "Business Model Generation" are representing the nine components listed earlier.

By using this framework, mix and match the components, and to create the design with a consistency and harmony. Like home designed in this way is easy to live, the well-designed business will move smoothly with undertaking projects. Business model design is a design process of customer value using the model.

Understanding the Overall Idea of a Business based on its Model

From its very name, we can infer that a business "model" does not refer to the business itself, but to a model that mimics the business. A business model and an actual business are naturally different, just like a miniature plastic model of Gundam is different from a life-sized Gundam.

Why then do we expressly make business models? The reason for this is that trying to understand a business in its full-size is too difficult. If it was Gundam that we were talking about, we could still look at the full picture if we tried, but if we were talking about a huge building, this would be impossible. Even if we looked at it from far away, this would still be a one-sided view which would not account for having gotten a grasp of the whole picture.

It is because of this that, if we really want to try and understand the full picture, we have to look at a scaled down version and not at the actual thing. If we have a model to look at, it does not matter how big the actual building is - we can look at it in its totality.

By looking at the full picture in this way, the flow of the management resources such as people, goods, capital and information, becomes easily visible. If we look only at the sales department we will not know about any problems that may be going on in the production process, in the same way that those in the production site cannot possibly be aware of any dissatisfaction that the customers may be experiencing. Solving management problems is a task that the whole company should be involved in, instead of breaking the problems down into smaller units for each department to deal with. A business model is essential in order to do this.

Understanding a business in its totality is not necessary only when setting up a new business. In the same way in which, once a building has been built, we tend to look only at the most visible parts that we see every day, once a business starts rolling we tend to lose sight of the whole picture. In those instances, we should look at it again as a model. This is why it makes sense to use business models even when dealing with existing businesses. 

A Mobile-Payment Innovation by Apple

An article stating that Apple is planning on expanding their mobile payment system was published on the Wall Street Journal. Five hundred and seventy-five million people are registered on the iTunes store. Services where such a large number of payments are made on a platform are very rare.

If the system expands to the point where it sells goods and not just digital contents such as music and electronic books, this will be a big innovation. There is a possibility that this system will completely replace credit cards. As a payment infrastructure, credit cards are predicted to become dumb pipes. 

Future tasks for Apple 

There are three items on the agenda of Apple’s mobile-payment system.

The first is the linkage between terminals and cash registers. With digital contents, the verification and receiving of the products can be done within the terminal. However, if goods were to be sold, communication with the cash register on the actual store where the goods are sold will be necessary. What kind of technique will Apple use? We predict that wireless technology such as Bluetooth will be used rather than communication using IC chips.

The second are the various barriers in the stores where such systems will be implemented. There will be physical barriers such as the process of having to implement the equipment, and emotional barriers that result from the fuss that comes with the contracting and payment processes. Apple may lower the implementation cost by using a structure where users can easily make the payment using iPads. Restaurants such as Sizeria are implementing systems where people can input orders using iPod touch. Apple may be also be able to find a solution where they replace the cash register itself. 

The third is the risk of being misused. As written in the article, it can be thought that the fingerprint authentication feature was implemented in the iPhone5 to help eliminate the trouble of inputting passwords every time and to prevent others from freely using the iPhone without the user’s consent. When the iPhone 5 first came out, many people stated that the fingerprint authentication feature was unnecessary, but if we think of it as a preparation for mobile payment, it makes sense. 

We cannot understand why these features exist unless we back track from the future that is “mobile payment”. Japanese manufacturers need to put less importance on user’s needs and do their designing while focusing on the future. 

What kind of effect does the low switching cost have?

Of course, such a movement by Apple is related to the popularization of mobile payment services such as Square, Coiney, Paypal Here, and Rakuten Smartpay that have been showing rapid growth from last year. Apple must be thinking about entering the market before such services become De facto Standards, but the company shouldn’t be in such a rush. This kind of payment service, unlike previous implementations of credit cards and electronic money, has low switching costs. Thus, we believe that Apple has firm conviction that even if they start late they can still turn things around.

Digital content platforms of contents such as electronic books had a customer-retention effect where once the customer begins purchasing contents on that platform, they will continue to do so. This payment-system still does not have such a structure. 

If Apple can start the service with a very convenient method, the market will begin to change drastically.

Accept the Uncertainty Surrounding Innovation

As I touched upon in the last entry, creating a business model requires a review of the business from three different perspectives. However, this alone is not enough. If you are going to wake the innovation, a stance that makes difference is required here. That is the attitude to accept the uncertainty. 

Within the context of high uncertainty, top management is expected to provide critical decision. It will be a separate matter if all information is complete and future is predictable, but in many cases, it is not that clear. 

For instance, let's consider a case where you have to determine whether to proceed with the business partnership with a company. Even if business synergies are born and tie-up looks good from an objective viewpoint, you cannot deny the possibility of failure depending on differences in corporate culture and how to proceed business after alliance. Predicting what will happen in the future 100% accurately is impossible. Making a decision in an unpredictable world is a management decision. 

Middle management on the other hand, operates in the predictable world based on past performance. The determination that "It is likely to extend the schedule with a probability of 20%, as this project's degree of difficulty is high" is backed by past experience. Therefore it's a highly reliable prediction and highly reproducible. 

What is required in middle management is the high probability of these reproducibility. It's meaningless if it blurs each time like "This time's yield rate of manufacturing site was 70% but next time it happened to be 90%". It has to be reproducible. 

However, management decision is not a decision that occurs over and over again. It's a one-time decision depending on social, economic and market trends on each occasion. There is no reproducibility as "Always succeed this way" in the result of that decision. Even if it's successful at one point, next success is not guaranteed. 

In other words, what is required in top management is an artistic thinking and a scientific thinking for middle management. There is an expression managers often use; "Management is a fusion of art and science." I think this accurately expresses the requirement of the management. 

In art, reproducibility which simply repeats the past is seen as the enemy, but in science, it is not evaluated at all without reproducibility. And innovation, in addition to science which desires for the high reproducibility, must have artistic thinking that creates something new. 

In the business model innovation, top management thinking which creates a decision in uncertainty is required.

The Three Perspectives Necessary for Constructing a Business Model

In order to spark innovation, not just for the product, but for the business model itself, it is necessary to look at the industry as a whole with what may be called the top management perspective. 

Top management must consider sales and marketing while simultaneously comprehending the production conditions. Additionally, the balance of the cost of these and the profits must also be considered. If it is not, then one cannot comprehend or control the enterprise as a whole's business model.

However, that alone is not enough. One must also understand the position of middle management. If one cannot picture exactly what kind of production is taking place and exactly how customers are being served, it is nearly impossible to construct a business model.

So, in other words, it will not do for middle management to be partially optimized, just as it will not do for top management not to understand the position. Middle management always tends to think only about production and if it is the production division or sales if it is the sales division. One cannot paint a complete picture of the business model this way. Also, business models constructed without first knowing the scene have very little chance of succeeding. 

In addition, it is necessary to have a customer's perspective which deeply understands the feelings of the ones using the product. A person trying to construct a business model must understand that they solve the problems of the customer and must be able to compensate.

In other words, in order to construct a business model, It is necessary that one understands the model from three different perspectives: from a top management perspective which looks over the company as a whole, from a middle management perspective which is aware of the scene, and from a customer perspective toward the products and services. At the intersection of these three perspective, a business model will emerge.

Conversely, one could also say that constructing a business model is the best way to understand these three perspectives.

All Careers are Coincidences

(Recording of a speech given at an MBA EXPO, November 30th, 2013)

As this talk is supposed to be about how great it is to do an MBA, let me start by saying that when I actually got to business school, my first thought was "Is this it?" Whoops.

People may tell you business school is hell, but actually working in business post graduation is worse by far. In school I was quite shocked at what I could get away with. Naturally the more you take on the more responsibilities you'll have to juggle, but I still feel like there is a lot less pressure there than actually being at a company.

At any rate, there was a time I did management work for an advertising firm and I remember putting in hundreds of hours of overtime during peak seasons. I recall thinking, "this is why people go insane." Compared to that, business school is like skipping through paradise.

Wanting to strike out on my own, I started my first business while still in school. About five hours away—ten hours round trip—from me was some Native American land. Due to historical circumstances the land had been specially set aside for them, and people of the Hopi and Navajo tribes now live there. I decided to invest in native jewelry and then sell it back to Japan. 

I was paying about half what I sold it for, and sometimes the business was so good I would make ¥500,000 in a month, keeping about half for myself. It was pretty lucrative for something I was just doing on the side, and it was certainly enough to keep the bills paid.

Apart from that, I found Thunderbird students to be really internationalized, so I figured I would start a translation service. I borrowed anyone interested and we would translate together in English, but there were also a lot of students who spoke Japanese so I was never short on man power. On good months I made ¥700,000 or so.

My operating costs were about 60%, with the last 40% left over for me. I really couldn't complain.

Naturally I was taking classes while doing all of that, but I still wanted to get involved in something larger. I began an internship in Silicon Valley not long after. 

I stayed there for about three months, from the end of 2003 to the start of 2004. This was around the time Friendster (a social networking service founded in California in March, 2002) was getting popular and people were really starting to get interested in social networking.

This was before mixi or GREE and the like existed at all. At the time a number of Japanese companies were rushing to America to find out what all the social networking hype was about. It seems those with the gift of foresight knew already by 2004 that social networking would be a hit on mobile devices.

And as everyone here knows, it was later that year that mixi and GREE were born, and two years after that they came to dominate the social networking scene.