Pillars

3 Pillars of a Business Model
Hi, we will look at now 3 Pillars of Business Model and what is the linkage between
business model and strategy, let us dive in. The 3 Pillars of Business model are
one,
Value Proposition. Two, Value Delivery and three, Value Appropriation. Firstly,
value
proposition. What is that important pervasive customer problem or need that the
business
is solving?
How is the business solution superior to the alternatives available in the market?
That is
the value proposition. Two, value delivery what are the capabilities the business
needs to
build in order to deliver a great customer experience? Who are the actors in the
company's value network to deliver this value?
Third, value appropriation. That is what are the various cost elements? What is the
profit
formula? What is the revenue model? How are the company going to make money? Let
us get into the details. One, value proposition. Value proposition is the unique
combination of products and services that the business offers to its customers in
comparison to its competitors.
It is that reason why the customers turn to one company over the other. Take an
example,
Flipkart, when it started, offered a differentiated value proposition. What was the
biggest
challenge in e-commerce in India? Credit card penetration was low. People did not
trust
online sites or websites or services.
So, Flipkart started by offering cash on delivery which was a game changer in
Indian
commerce. Nowhere in the world is cash on delivery done by e-commerce companies.
This addressed the trust issues that many Indian customers had with online payments
and
made online shopping accessible to broader segment of the population.
Let us take another example. You are familiar with Swiggy; Swiggy's value
proposition
lies in its ability to deliver food from restaurants to the customer's doorstep.
The
differentiator is wide variety of restaurant choices in and around your locality
very userfriendly app, rapid delivery time and predictable delivery times because
you can see the
order being picked up and varieties on the way to delivery.
The content used in this course, both text and video formats, are an intellectual
property
of the Indian Institute of Management Bangalore.
This offers significant value to customers who are seeking convenience and variety
in
their food choices. Let us look at the second pillar, which is value delivery.
Value
delivery involves all the steps and processes necessary for a business to
effectively
deliver its value proposition that we talked about earlier. It covers everything
from
production of the product or service to its delivery to the end customer.
Let us take an example. All of you are familiar with Maruti Suzuki. It excels in
value
delivery through its widespread network of dealerships service centers across
India. In
the remotest part of India, if your Marathi Suzuki car breaks down, you can get
support
and service. Their efficient supply chain and production process allow them to
deliver a
wide range of affordable reliable vehicles at good cost and great quality.
Their effective after sales service enhances the customer satisfaction and loyalty
that is
value delivery. Take another example; Reliance Jio, Jio's value delivery can be
seen in
the robust 4G networks coverage across the country. Even in the remotest part of
India
very affordable plans, user friendly app for payments and management.
Jio was able to quickly scale and provide consistent high speed internet
connectivity,
even in rural areas of India, delivering significant value to the customers. This
is
example of value delivery. Third pillar is value appropriation. Value appropriation
refers
to how a company captures value in monetary terms.
It includes revenue models, pricing strategies, cost structures and profit margin.
Let us
look at an example of Zomato you are familiar with. Zomato's value appropriation
can be
seen in its revenue model, which includes revenues from restaurant advertising,
online
food delivery, subscription services.
When its food delivery segments operates on a commission based model where it
charges restaurants a percentage of the order value, its Zomato Pro subscription
service
offers a direct revenue stream from customers. Zomato also charges delivery fee
from
customers in many instances. So, all these are examples of value appropriation.
Let us take another offline example; HDFC Credit Card, how do credit card companies
make money? Credit card companies make bulk of their money from three things. One,
The content used in this course, both text and video formats, are an intellectual
property
of the Indian Institute of Management Bangalore.
the interest that people pay when they roll over the credit card payments. The fees
they
charge to the cardholders and the transaction fees paid by the business that accept
credit
cards.
If you use your credit cards wisely, you can minimize the amount of money that
credit
card companies make of you because the interest rates are typically very very high.
So,
these are examples of how credit card companies make money. So, these three pillars
are
integral to any successful business model. They need to be clearly defined, aligned
with
each other and flexible enough to evolve with changing market dynamics and customer
preferences.
Now, let us look at what is the difference between Business Model and Business
Strategy. Normally, both these terms are very commonly used and sometimes
interchangeably used. Are they the same? Are they different? What is the
difference?
Look at strategy.
Strategy embodies a set of choices. The organization makes vis-a-vis its

competition.
The strategic choices will include what business to be in, how to position the
business,
where to compete etcetera. Business model, on the other hand, provides a blueprint
to
achieve the strategic position that we have just stated.
There could be multiple business models deployed to achieve the same strategic
position.
So, business model and strategy are interconnected concept, but they have different
meaning and roles within the business context. Business model describes how a
company
creates, delivers and captures value.
It outlines the processes, resources and structure that enable the business to make
a
profit. Business model outlines the company's value proposition, target customer
delivery mechanism for its products and services and how it generates revenue and
manages cost.
Strategy on the other hand, is a high-level plan that outlines how a business will
achieve
its objectives and gain competitive advantage. It involves making choices about
where to
compete, what unique value to bring in and how optimally to use resources to
achieve
these goals.
It includes decisions about market positioning, competitive differentiation, growth

direction and how to respond to market trends and competitors action. There are
linkages
and differences between business model and strategy. The strategy provides the
highlevel direction and decisions that guide the design and evolution of the
business model.
For example, a strategy focused on differentiation, might lead a business model

that
emphasizes on premium products and high-quality service. Conversely, a cost
leadership
strategy may lead to a business model that prioritizes efficiency and scale. For
example,
Ford Motors was able to bring down the cost by having only one color.
The business model, in essence, is implementation of a strategy. The differences
between
strategy and business model exists. The strategy deals with competition and ways to
achieve competitive advantage in the broader market. In contrast, business model is
about a system of operations within the company. It describes how various
components
of a business work together to create deliver and capture value.
So, a well formulated strategy and well-designed business model both are crucial
for
business success. They must be aligned with each other a successful strategy must
be
backed up by a business model that can implement it effectively. And a successful
business model must be guided by a strategic vision that sets the right objectives
and
direction.

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3 Pillars of a Business Model

Strategy embodies a set of choices. The organization makes vis-a-vis its

It includes decisions about market positioning, competitive differentiation, growth

For example, a strategy focused on differentiation, might lead a business model

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