Approaching Business Models from an Economic Perspective II [1st ed.] 9789811570575, 9789811570582

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Wei Wei Wuxiang Zhu Guiping Lin

Approaching Business Models from an Economic Perspective II

Approaching Business Models from an Economic Perspective II

Wei Wei Wuxiang Zhu Guiping Lin •

•

Approaching Business Models from an Economic Perspective II

123

Wei Wei HSBC Business School Peking University Shenzhen, China

Wuxiang Zhu Tsinghua University Beijing, China

Guiping Lin Tian An Cyber Park Group Co Ltd. Shenzhen, Guangdong, China

ISBN 978-981-15-7057-5 ISBN 978-981-15-7058-2 https://doi.org/10.1007/978-981-15-7058-2

(eBook)

© Springer Nature Singapore Pte Ltd. 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Foreword by Zhang Xindong

A Systematic Approach to Business Model Design If you are the founder of an enterprise, this book is recommended reading. It is best to read together with your team to design a better business model in a systematic manner. Business models can be independent of business intuition. So can a business model be systematically designed by a team and continuously upgraded? We say that, “Yes, it can.” Furthermore, it also puts forth methodologies, including nature-specific ones like the theories and principles for business model design, and also ones that are quantity-specific. Quantity specific is the main concept advanced in this book. It involves the business model-based “financial accounting methods” and the “financial analysis method” based on business ecospheres. Traditional accounting in the context of the industrial age focuses more on “product pricing” and is of little help to business model design. However, the “business model-based financial accounting methods” devised by the Wei & Zhu team, centers on “transaction pricing” with “stakeholders” and “activities” at the core. Transaction pricing is the key to business model design, and its realization is what makes it so outstanding. Nowadays, we have all realized the importance of business model innovation and suggested some enterprises setting up a Business Model Department to perform its specific functions, but the feedback was that there are no ready-made methods or tools. So here are some tools. The availability of these accounting and fiscal tools will greatly change the functions of Business Model Departments in enterprises. I believe the subsequent practice will bring us even more exciting results. From the end of 2006 when Profs. Zhu Wuxiang and Wei Wei published their first article in Chuangfuzhi up to now, the “Wei & Zhu business model theory” has grown from a seedling into a tall tree, with the growth process yielding pleasant surprises. At the onset, Wei & Zhu only proposed observing the six elements required for business models: positioning, business system, key resources/capacities, profit

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Foreword by Zhang Xindong

model, cash flow structure and enterprise value. With these elements in mind, the editorial and research teams of Chuangfuzhi went all out to search the vast business ecosystem and produced several hundred sample cases about business models to underpin theoretical research. During this period, Wei & Zhu determined the definition of business model to be the trading structure of stakeholders. In 2012, in An Economic Perspective on Business Models,1 Wei & Zhu set forth three criteria for measuring business models: whether transaction value is increased; whether transaction cost is reduced; and whether transaction risk is lowered. This has offered a yardstick and inner logic for business model design. On top of all these efforts, the book has set a broad background for business model design. When thinking over the issue, you should not only focus on the stakeholders of your own enterprise, but also the stakeholders of your stakeholders. After looking at it layer-by-layer, you will find a number of business ecospheres with you at the core, and this is the symbiont. In this way, the book widens your vision to see not just your own business model, but also those of your stakeholders. The sum of all these stakeholders and their trading structures constitutes the business world you are in, and the business model symbiont your enterprise relies on for survival. This makes its inner workings very vivid. What value can this symbiont create? How is its overall efficiency? What position do you hold in it? All these factors determine the efficiency of your business model, future returns to your enterprise and its real worth. It is essential that you have an in-depth understanding of your symbiont before setting out on business model design. You may choose what kind of symbiont you’d like to be in, or restructure to boost its value and efficiency, or change your position in it. The symbiont-based approach to business model design is the second key innovation of this book, and the third is “engineering principles for business model design.” When Mr. Wei Wei first mentioned to me the application of engineering thinking to business model design, we were talking via WeChat. He was then at Northwestern University in the United States and established a business model research center there for temporary intensive study. I was in Shenzhen, working on how to help enterprise founders effectively launch their own business models. We were quite excited by this perspective, and the work could be further fragmented, and business model design completed through work division and collaboration between teams. In their discourse about the “engineering principles for business model design”, Wei & Zhu talked about three principles they discovered: (1) Opportunity cost varies when the same resources and capacities are owned by different stakeholders. (2) Value enhancement varies when stakeholders transact in different modes. (3) Value enhancement varies when the “transaction object” has different attributes in the same transaction mode. Centering on these principles, this book has put 1

Wei & Zhu were granted the Management Science Award by the 4th session of the Society of Management Science of China for this book in June 2014. Congratulations to the team.

Foreword by Zhang Xindong

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forward a series of design principles and tools to make business model design well-grounded, supported and more systematic. Corporate teams can better a design model using the design engineering methodologies composed of these principles, rules and tools, and enhance their business models through division of work and cooperation. A symbiont perspective, engineering approach to thinking on business model design and quantitative analysis of the value and cost of various activities (the three major innovations of the book), when integrated into one, form a closed loop for business model design. The book, in its overall structure, aims to serve the goal of effective business model design. By breaking the boundaries of individual enterprises, it has broadened the perspective of financial accounting to cover the entire symbiont. When a symbiont’s income statement is prepared, the statement not only contains the revenue, costs, expenses and profit of the enterprise, but also the same data about the stakeholders. It shows a panoramic view and enables you to get the logical relationships of all elements and make well-informed final decisions. Furthermore, activities are broken down to the minimum units and the attributes of resources consumed by each activity are displayed in detail to determine whether it is transaction cost or monetary cost or whether it is fixed cost or variable cost. If it is a variable cost, what are the factors that make it variable? By such detailed analysis, we can judge how each activity can contribute to the stakeholders owning different combinations of resources and what the opportunity cost is. These quantitative references are very direct and useful in designing and restructuring business models. We’ve already entered the age of business model design. Emerging enterprises have become successful owing to business models, other than those with a technological edge. I’d like to thank the Wei & Zhu team for continuously creating better methods and tools for business model design, and allowing mission-driven enterprise founders to master them, make miracles happen and change the world. October 2014

Zhang Xindong Publisher of Chuangfuzhi magazine

Foreword by Zhang Ping

Building an Upgraded “Wei & Zhu Model” An Economic Perspective on Business Models II written by Wei Wei, Zhu Wuxiang and Lin Guiping is an upgraded version of the Wei & Zhu business model (version 2.0). It contains many new concepts, thoughts and methods, expands the business model theory to a new dimension, and puts forth the concept of the business model symbiont. The way to optimize business models is derived from the exchange and comparison of costs, resources and income of the focus enterprise and its stakeholders in a symbiont. This method not only has achieved major theoretical breakthroughs, but has also put them into practice through financial accounting and analysis so that entrepreneurs can easily grasp and apply them. It is an upgraded discussion about business models for the transactions (not simply exchange) among stakeholders, following the opening of enterprise boundaries. From a symbiont perspective, the paper analyzes the activity links of each stakeholder and comes up with financial solutions to facilitate the actual application of business models. It starts by opening the boundary of DG, a simple factory which then upgraded to being a service sector through cooperation with its stakeholders, then expanded from the service system to the maximum stakeholder system. Finally, it arrived at the core concept of a symbiont, which is the sum of the business models of the focus enterprise and stakeholders. To put it simply, there are two steps. First, after the enterprise boundary is opened, the system of the focus enterprise and its stakeholders forms a business model. Second, from a business model perspective, the resource utilization efficiency of stakeholders and the common boundary of the symbiont expand with the change of business models. This can be fully demonstrated by the business model evolution of DG. There are relatively few stakeholders, but the boundary of stakeholders expands after upgrading the model so that the boundary of a symbiont and the attribute of resource utilization efficiency are related to business models. With a symbiont taking shape, the business model theory continues to expand and defines the “activity” in business models based on the activity in the

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conventional value chain. The activity from the conventional value chain is used to measure its comparative advantage and select the activity with core advantages as the core of an enterprise, with other non-advantage “activities” outsourced. This is another transformative innovation in line with the globalized work division system, following the reform of specialization, i.e., opening up the value chain of enterprises and building a global value network. For example, Nike has opened up the value chain of its own factories. They established a production system covering its whole value chain, unleashing “manpower, capital, property, manufacturing, supply and sales” from this value chain, while focusing on branding and designing. Nike has outsourced manufacturing to factories the world over, with various parties handling production and sales participating in its value chain, while it concentrates on innovation and brand enhancement. This is the theory depicted by the global value network, only with the addition of more product complexity theories. This theory includes the famous smiling curve theory, showing the breakdown process of an enterprise’s value chain. This way an enterprise only engages in the part that it is the most competitive in. It discusses the contraction of enterprise boundaries, i.e., from specialization to kernalization. This involves vertical fragmentation and is the extension and innovation of the company theory in one dimension. However, the Wei & Zhu business model theory involves the analysis of horizontal relations by constructing a symbiont and centering on the links of a value chain as the activity unit, elaborating on the correlations of income, plus loss and risk of the symbiont during the transaction process. This is done to re-measure the optimization and new topological form of the symbiont, and specify the significance of the three laws to optimizing costs and boosting efficiency of business models. The three laws are: Law I: In a non-dissipative symbiont, though a focus enterprise adopts different business models, the efficiency of the symbiont does not vary. Law II: In a dissipative symbiont, a focus enterprise adopting different business models will lead to an efficiency variance of the symbiont. Law III: In a dissipative symbiont, if a focus enterprise selects a most-efficient initial business model, that may outperform the efficiency improvement realized through changes made by other business models. The first two laws demonstrate the necessity of the existence of business model design, while the last one demonstrates the path dependence feature of business model design. The introduction of activity into the business model symbionts provides us a theoretic tool to further study business models. Especially in the Internet age, the network connection of enterprises is a horizontal issue, so introducing activity into horizontal connections is a brand-new approach to the company theory and business model discussions. By analyzing the horizontal connection relationship and mechanism of a symbiont’s enterprises with activity, we can fully measure the dissipative cost and income boundary of the symbiont, and then derive symbiont-based financial accounting, providing powerful tools for business model improvement. Business model accounting includes: (1) the activity center; (2) stakeholders, activities and resources; (3) identification of activities and resources which deals

Foreword by Zhang Ping

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with what activities need which resources, and which stakeholders consume relevant resources. It is used to conduct new rounds of accounting without changing the original financial accounting system and compares the resource consumption and efficiency of activities to reveal the structure of direct cost and indirect cost of products and locate the transaction cost in the company theory. The authors also advance accounting-based financial discussions using the DuPont analysis method and illustrate that financial indicators have different meanings under different business models, and key financial indicators are distributed differently as a result. This helps solve the problem that it was previously impossible to compare the financial indicators of different enterprises under varied business models. There are also new analytical tools for comparing enterprises in different symbionts, and a two-dimensional diagram of the efficiency of the symbiont and the focus enterprise. If in the upper right corner of the diagram, the efficiency of both is the highest. If in the lower left corner, their efficiency needs to be improved. A focus enterprise can improve management and change strategy or business model to boost efficiency. For a symbiont to expand the business model efficiency, it can bring in new stakeholders, enhance the efficiency and capacities of stakeholders, or change the connection and coordination mechanisms of stakeholders. By identifying the key issues for the focus enterprise and in the sum of all stakeholders’ business models in the symbiont through financial analysis, we can improve on the existing problematic areas, lower dissipative costs and raise the overall efficiency. While discussing symbionts, the authors also introduce the issue of business ecosystem and the dynamic theory, and touch upon the issue that changes in external resource and capacity endowments and technology will result in efficiency changes, and reconnections of new products and enterprises. That is to say, resources accumulate which generates redundancy while this redundancy produces a mechanism under which a symbiont evolves into new ones. This book has proved itself to be an upgraded version of business model research, as the symbiont theory, dynamic evolution mechanism for business models, and the accounting and financial consistency with conventional business theories contained herein are all brand-new ideas, and it takes a lot of time to understand them. The preface is only a brief introduction to the Wei & Zhu business model theory (version 2.0). Readers are recommended to delve into the book and assimilate more of its rich nutrients. Prof. Zhang Ping Deputy Director of the Institute of Economics, the Chinese Academy of Social Sciences Associate Editor-in-Chief of Economic Research Journal

Contents

1 Symbiont: Concepts, Evaluation Criteria and the Three Laws . 1.1 Symbiont: Sum of Business Models for the Focus Enterprise and Its Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Development of Business Model Innovation Thinking from the Symbiont Perspective . . . . . . . . . . . . . . . . . . . . . . 1.3 Three Divide-and-Reorganize Symbionts and the Three Evaluation Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Summary: The Three Laws of Symbionts . . . . . . . . . . . . . .

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2 Symbiont-Based Business Model Design . . . . . . . . . . . . . . . . . . . 2.1 Traditional School Model of Training Centers . . . . . . . . . . . . 2.2 Authorization Model of Training Agencies . . . . . . . . . . . . . . . 2.3 Symbiont-Based Business Model Design: Unilateral Platform Model for Training Centers . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Business Model Design for a Home Appliance Manufacturer’s Community Stores: The Past, Present and Future of Home Appliance Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3 Engineering Principles for Business Model Design (I): Opportunity Cost Varies When the Same Resources and Capacities Are Owned by Different Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Collocation of Resources and Capacities with Stakeholders: One Example Is the Trading Structure Establishment of the China-Africa Photovoltaic Fund . . . . . . . . . . . . . . . . . . . 3.2 Selection Revenue, Selection Cost and Opportunity Cost . . . . . 3.3 Why Does Opportunity Cost Vary When the Same Resources and Capacities Are Owned by Different Stakeholders? . . . . . . . 3.4 New Transaction Theory: Exchange, Transaction and Opportunity Cost, Transaction Pricing . . . . . . . . . . . . . . . . 3.5 Design Tools to Match Resources and Capacities with Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4 Engineering Principles for Business Model Design (II): Value Enhancement Varies with Different Trading Modes Among Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Value Enhancement and Trading Modes . . . . . . . . . . . . . . . 4.2 Fulfillment of Trading Modes . . . . . . . . . . . . . . . . . . . . . . . 4.3 Configuration of Trading Modes . . . . . . . . . . . . . . . . . . . . . 4.4 Roles of Trading Modes . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Relations of Trading Modes . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Income and Expenditure Sources of Trading Modes . . . . . . . 4.7 Means of Income and Expenditure of Trading Modes . . . . . . 4.8 Cash Flow Structure of Trading Modes . . . . . . . . . . . . . . . . 4.9 Extensions of Trading Modes: Division and Reorganization, Selection Profit, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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5 Engineering Principles for Business Model Design (II): Value Enhancement Varies with Different Attributes of the Transaction Object in the Same Trading Modes . . . . . . . . . . . . . . . . . . . . . . . 5.1 How Attributes Create Value Space: From the Full Life Cycle of Customers to Attribute-Based Creative Pricing . . . . . . . . . . . 5.2 What Is Transaction?—A Look at Transaction Attributes Using the New Transaction Theory . . . . . . . . . . . . . . . . . . . . . 5.3 How to Fragment Attributes: Static Composition, Relations Among Components and Value to Others; Dynamic Implicit and Explicit Attributes, Stock and Flows, etc. . . . . . . . . . . . . . 5.4 How to Agglomerate Attributes: Superposition, Concomitance, Complementation, Multiplier and Exponential . . . . . . . . . . . . . 5.5 Attribution Relationship and Interests: Reduction and Extension of Attributes, and Allocation of Residual Income . . . . . . . . . . . 6 Engineering Design Rules for Business Model Design . . . . . . . . . 6.1 Design Rule I: Adding or Reducing Stakeholders Can Realize Different Value Enhancement . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Design Rule II: Adding or Reducing the Resources/Capacities of Stakeholders Can Realize Different Value Enhancement . . . 6.3 Design Rule III: Dividing and Reorganizing the Resources/Capacities of Stakeholders Can Realize Different Value Enhancement . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Design Rule IV: Reconfiguring the Resources/Capacities of Stakeholders in Different Trading Modes Can Lead to Different Value Enhancement . . . . . . . . . . . . . . . . . . . . . . 6.5 Design Rule V: Make Full Use of Existing Stakeholders Resources/Capacities to Generate Greater Value Enhancement, with no Need to Build New Resources/Capacities Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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6.6 Design Rule VI: Allocating More Residual Income to the Stakeholder and Exercising Greater Influence on Results Can Lead to Higher Value Enhancement . . . . . . . . . . . 112 6.7 Conclusion: Make Stakeholders, Resources and Capacities Play Proper Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 7 Business Model-Based Financial Accounting . . . . . . . . . . . . . . . 7.1 How to Conduct Transaction Pricing for the Construction, Implementation and Reconstruction of Business Models—A Defined Uniform Financial Accounting System . . . . . . . . . . 7.2 Activity-Based Analysis of Variable Factors and Financial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Business Model Accounting: Steps and Instances from the Perspective of Symbionts . . . . . . . . . . . . . . . . . . . 7.4 Application Scenarios of Business Model Accounting . . . . . .

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8 Symbiont-Based Financial Analysis . . . . . . . . . . . . . . . . . . . . . . . . 8.1 What Can Be Seen from the Description of General Financial Indicators and Business Models? It’s Necessary to Form a Symbiont-Based Perspective . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Four Steps About Financial Analysis of Symbionts . . . . . . . . . 8.3 Divergence Between Strong Symbionts and Strong Focus Enterprises: Inner Driving Force and Evolution Path for Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 How to Improve Business Models: The Two-Dimensional Comparison Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Unilateral Platform Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Unilateral Platform for International Trade: Li & Fung Group . 9.2 Create New Economies of Scale and Scope: Platform Enterprise and Business Entities on the Unilateral Platform . . . 9.3 Division, Reorganization and Transaction Value/Transaction Cost/Transaction Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Pricing, Analysis and Applicable Scope of Unilateral Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 Design Steps for Unilateral Platforms . . . . . . . . . . . . . . . . . .

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Appendix: Components of Business Models Based on Trading Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Chapter 1

Symbiont: Concepts, Evaluation Criteria and the Three Laws

DG is a producer of drip irrigation equipment that can help farmers increase output, conserve water, save on labor costs and fertilizers. By adopting the distribution model, DG sells drip irrigation equipment to farmers, and provides technical services through distributors (Fig. 1.1). Though an industry leader in R&D design, product quality and after-sales service, DG has not yet turned these into effective advantages in its business model and is largely struggling in the market. This is mostly shown in the following aspects. First, many small manufacturers of drip irrigation equipment have inferior quality compared to DG, but they have a cost advantage as they neither engage in R&D design nor provide technical services. They can better afford a price war. Second, by targeting field crops (such as rice and wheat) which normally require vast planting areas, DG has solved the planting difficulties in arid regions plagued by water shortage. DG is widely recognized for the effectiveness of their products in terms of water conservation. However, income from field crops is only a little over 1000 RMB ($163 USD) per mu with the increased output valued at several hundred RMB. This makes the equipment economically unattractive to farmers as the depreciation in value of DG’s drip irrigation equipment reaches 300 RMB each year. DG drafted a new business model for province H. The planting area for sugar cane in H exceeds 10 million mu, and it is all sold to local sugar mills for refining. The farmers are each responsible for a specific planting area and their output is designated by the local government as to which sugar mills are supplied by which farmer. The sugar mills and the farmers open joint bank accounts. During each year’s farming season, the sugar mills provide certain means of production to the farmer. Then at harvest time, the sugar mills purchase the sugar cane, deduct their expenses for the means of production, and make a residual payment to the farmers. In recent years, refined white sugar has become a strategic material in the country, with sugar prices stabilizing and then rising. Sugar cane planting has also become a pillar of the local economy.

© Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_1

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

Fig. 1.1 DG’s Business Model 1.0

DG and a certain fertilizer company then jointly established an agricultural services company, and entered into service contracts with the farmers and sugar mills. DG and its partner would consolidate land and provide water-fertilizer integrated solutions to the farmers. The farmers got targeted services without having to put in any initial capital. The water-fertilizer integration can also increase sugar cane output by over 1500 RMB, which is to be shared among the farmers, the agricultural services company and the sugar mills. To lower funding pressure, the agricultural services company obtained bank loans pledged with sugarcane harvests (guaranteed by sugar mills) to solve the capital investment in the early stage. In addition, as agriculture is subject to various natural disasters, the local government organized the agricultural services company and the sugar mills (which acquire part of the final revenue) to establish a risk fund to ensure that the farmers get a minimum amount of income even in the worst case scenario (Fig. 1.2).

Fig. 1.2 DG’s Business Model 2.0

1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

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From 1.0 to 2.0, DG’s business model has shifted from selling drip irrigation equipment to an agricultural services provider involved as an integral part of the planting link by setting up a project entity—agricultural services company. DG’s breakthrough in business model thinking is due to the expansion of its perspective— from a business model perspective to a symbiont perspective.

1.1 Symbiont: Sum of Business Models for the Focus Enterprise and Its Stakeholders In contrast with Model 1.0, Model 2.0 has brought in stakeholders such as sugar mills, the government and banks, and thus expanded the scope of stakeholders on the surface. But in effect, Model 1.0 can also be illustrated by the Fig. 1.3 (still take the sugar cane business ecosystem in H for example). In the ecosystem shown in Fig. 1.3, the sum of stakeholders and the sum of activity systems under Model 1.0 and Model 2.0 are actually the same. Why it is different from Fig. 1.1 is because DG was only concerned about the sales of drip irrigation equipment under the previous business model, without considering the value brought by the planting link. In other words, it is unnecessary for DG in Model 1.0 to study the activity system and stakeholders in the planting link. But for Model 1.0 to evolve into Model 2.0, it is imperative to expand the trading activities of the stakeholders to the planting link. If we illustrate Model 1.0 with the business system shown in Fig. 1.3 from the very beginning, it is more likely to derive the innovated Model 2.0.

Fig. 1.3 DG’s Business Model 1.0 (sugar cane business ecosystem in H)

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

The trading structure in the purple dashed box in Fig. 1.3 DG’s business model, and the overall picture can be called a symbiont. Concept 1: The business model means a trading structure between a focus enterprise and its stakeholders In order to expand research and innovate on business models, it is usually necessary to demonstrate the business models of stakeholders (for example, the business model of farmers is also shown in Fig. 1.3). In a trading structure, what is displayed is not just limited to the focus enterprise and its stakeholders, but also involves the stakeholders of stakeholders, for instance the customers of customers, suppliers of suppliers and competitors of suppliers, etc. Moreover, it is also important to include internal stakeholders with independent input/output, interests and rights allocation into the research scope of symbionts, such as logistics, information platforms and payment platforms. How far the boundary shall extend is not dictated, but depends on creative visions. Obviously, the sum of this trading structure not only shows the business model of the focus enterprise, but also some business models of its stakeholders. This brings us to: Concept 2: The symbiont (commonly known as ecosphere) means the sum of the business models of a focus enterprise and its stakeholders The boundary of a symbiont may constantly expand with the creative vision for business models. As shown in Fig. 1.4, the innermost solid line circle represents the symbiont’s boundary when DG was under Model 1.0, and only involves DG and its stakeholders—distributors and farmers. In the dashed circle in the middle, the symbiont has grown to cover the fertilizer company, banks and sugar mills. Along the line of the symbiont’s expansion, we can find a direction for the innovation of DG’s business model, which is exactly how Model 1.0 evolves into Model 2.0. Of course, the boundary of the symbiont can still extend to cover the stakeholders of the fertilizer company, banks and sugar mills, which are in the outermost circle. The boundary of a symbiont is dynamically defined and largely depends on the target for business model innovation. For example, the innovation target for DG lies in expanded sales of equipment, so there is little analysis of suppliers of parts and components.1 But if the bottleneck concerns the suppliers of parts and components, the boundary of the symbiont will be somewhat different. When it comes to the business models of specific stakeholders in a symbiont, we usually only analyze the part (concerning direct, indirect and potential transactions with the focus enterprise) in connection with the focus enterprise, which means “part” of the business models of stakeholders.

1 The innovative idea of "expanding equipment sales through the suppliers of parts and components"

is ignored here.

1.1 Symbiont: Sum of Business Models …

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Fig. 1.4 A Set of Stakeholders (There is a similar definition for activity systems. To simplify the diagram, activity systems are omitted here.): A Symbiont with an Ever-expanding Boundary

Concept 3: The business ecosystem means the sum of a focus enterprise’s symbiont and those of its competitors (including those of the same products and substitute products), partners and upstream/downstream stakeholders In addition to the business model and symbiont (of a focus enterprise), we often talk about another concept: business ecosystem. Essentially the business model, symbiont and business ecosystem (of a focus enterprise) are three concepts expanding layer on layer. The business model includes the focus enterprise, its stakeholders and activity system. As shown in Fig. 1.5, Model 1.0 of DG covers three stakeholders: DG, distributors and farmers. Besides the business model of the focus enterprise, a symbiont also includes certain business models of stakeholders (concerning direct, indirect and potential transactions with the focus enterprise), and represents the set of business models. As shown in Fig. 1.5, DG’s symbiont in province H also includes banks, sugar mills, the government and the fertilizer company, in addition to DG, its distributors and farmers. Among them, each stakeholder also has their own business model. For instance, the business model of sugar mills includes farmers, suppliers of sugar refining equipment and sales channels. In DG’s symbiont, sugar mills are mainly related to farmers, so it only involves part of the business model for sugar mills. Beyond the focus enterprise’s symbiont, a business ecosystem still includes the symbionts of its competitors for the same product and of substitute products, and

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

Fig. 1.5 A Set of Stakeholders3 : Business Models, Symbiont and Business Ecosystem. There is a similar definition for activity systems. To simplify the diagram, activity systems are omitted here

upstream/downstream stakeholders in the industry. This makes it a set of symbionts. For example, as shown in Fig. 1.5, apart from DG, drip irrigation enterprise 2 sells its equipment to farmers through distributors and obtains funding from banks, so its symbiont includes banks, distributors and farmers. Drip irrigation enterprise 3 mainly sells its equipment to government projects and gets project financing from banks, so its symbiont includes banks, governments and farmers. Therefore, the sum of DG’s symbiont and those of drip irrigation enterprises 2 and 3 are collectively referred to as business ecosystem.

1.2 Development of Business Model Innovation Thinking from the Symbiont Perspective Development I: Expand from stakeholders to the stakeholders of stakeholders (or even further down the road) Still under Model 1.0, the symbiont perspective in Fig. 1.3 allows us to expand our thinking on business model innovation to the customers of customers, suppliers of suppliers and partners of customers, which lays the foundation for Model 2.0 (as shown in Fig. 1.6).

1.2 Development of Business Model Innovation Thinking …

7

Fig. 1.6 Expansion of the Stakeholder Perspective (from Business Model to Symbiont)

Development II: Expand from the existing industry chain, vertical value chain and horizontal activity chain to the entire business ecosystem, break and reorganize the links to form new stakeholders (see Development IV) See Fig. 1.7, 1.8. Development III: Expand from the existing value space to the value space of the entire business ecosystem As shown in the Fig. 1.9 a symbiont creates transaction value for all the stakeholders concerned at a certain transaction cost (incurred during the transaction process). The difference between the two is the value space of a trading structure. Apart from the transaction cost, the focus enterprise and its stakeholders all need to pay a monetary cost (incurred from transaction objects), like the cost of purchasing raw materials. Value space less the monetary cost is the added value realized by a business model for all the stakeholders, and its composition is the residual income of the focus enterprise (i.e. corporate value of the focus enterprise) plus that of stakeholders.

Fig. 1.7 Industry Chain from a Business Model Perspective (horizontal activity chain for DG’s drip irrigation equipment)

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

Fig. 1.8 Business Ecosystem from a Symbiont Perspective (the dashed box indicates the horizontal activity chain of DG under Model 1.0)

Fig. 1.9 Value Space and Added Value

In Model 1.0, the income of DG mainly is from equipment sales, but the pricing of its equipment depends on DG’s costs and the value brought to farmers. The former determines whether DG makes any profit, while the latter decides if DG can get more out of the value to farmers as profit. From the perspective of a symbiont, DG can learn the value gained by farmers from its equipment, as well as the pricing range that ensures a normal profit. Judging from the symbiont’s perspective: the total income of DG, the farmers and sugar mills (i.e. added value) is the final sales value of the agricultural product (total sales value = unit retail price X output X planting area) less the transaction costs

1.2 Development of Business Model Innovation Thinking …

9

and monetary cost of the raw materials and the processes of manufacturing, planting, processing and selling. This is also the maximum corporate value DG can obtain. That means for DG to maximize corporate value, they might want to work hard on these aspects: boost the transaction value (namely, total sales value of the agricultural product = unit retail price x output x planting area. The target is to raise the unit retail price, output or planting area as shown in the text below. The size of planting area rises essentially for Model 2.0 to upgrade to 3.0 and 4.0). Then they reduce the transaction cost and lower the monetary cost (raw materials, manufacturing and labor cost of planting). If some creative thinking centers on boosting the transaction value, transaction cost and monetary cost at the same time, it is necessary to compare of the difference of the three (i.e. added value = transaction value—transaction cost—monetary cost). In the text below, DG’s transaction value, transaction cost and monetary cost keep rising during the continued business model upgrade, but the increase in the transaction value far outpaces that in the transaction cost and monetary cost, and leads to a net growth in the added value. Development IV: Expand from the set of the existing stakeholders to new stakeholders DG realizes a sales area of around 10,000 mu under Model 2.0. But through a period of practice, DG finds that despite a higher share of income from more output under Model 2.0, it gets increasingly tied to the interests of farmers. With the growing size of farmers, the costs of negotiation and transaction execution quickly surge. Given the fact that each farmer has a planting area of several mu, DG needs to deal with hundreds or even thousands of farmers to attain a planting area of 100,000 or 1,000,000 mu. This will turn out to be an impossible mission. Therefore, DG further restructured the business model (Fig. 1.10). Under Model 3.0, DG breaks and reorganizes at two levels. First, it divides agricultural planting into two parts: management and laboring. Responsibility for field management is delegated to XX company which is experienced in large-scale planting and also is responsible for formulating planting standards and supervising implementation. Then farmers who have transferred their land use rights are employed to do the labor. Based on past experience, 100 mu is a labor unit while 1,000 mu is a management unit, which can greatly boost the scale of serviceable planting area. Second, lands with scattered planting rights are consolidated and upgraded to the transfer to land use rights at two levels: farmers transfer such rights to the local government, which then transfers the rights to the agricultural services company. Farmers get two income streams: rents for the transfer of land use rights and wages for planting. The rents for the transfer of land use rights alone exceed the previous earnings from planting on their own. Model 3.0 overcomes the weaknesses of Model 2.0 such as scattered planting rights and costs that are too high for transacting with farmers, realizes a higher economy of scale by breaking and reorganizing the planting process, and further boosts the added value of the symbiont.

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

Fig. 1.10 DG’s Business Model 3.0

By comparing the sets of stakeholders of Model 3.0 and Model 2.0, we can see stakeholder XX company is added to Model 3.0, the appearance of which is the inevitable choice of business model transformation. Decentralized agricultural planting lacks economy of scale. The approach of large-scale management and smallscale laboring is conducive to raising the efficiency of the entire symbiont, which objectively requires a stakeholder capable of large-scale planting field management. The experience of XX company in large-scale planting and previous cooperation with DG suggest that XX is the most suitable option. Introducing XX company also makes closer ties and more reliable binding of interests between DG and the agricultural services company, while realizing multi-point interest control. Development V: Expand from the sole pursuit of scale and profit to the corporate value-oriented unification of transaction value, transaction cost and transaction risk In addition to the aforesaid transaction value and transaction cost, another element that affects the value of a symbiont is transaction risk. With expansion of the planting area, DG finds that Model 3.0 runs the following transaction risks: First is the planting process. Due to uniform management, there are certain management criteria for plowing and harrowing. If the area increases, supervision cost will run high.

1.2 Development of Business Model Innovation Thinking …

11

Fig. 1.11 DG’s Business Model 4.0

Second is the harvesting process. If sugar cane is not cut from the root, that will reduce output and cause trouble in the next planting season. Sugar cane can be moved to other peoples’ fields or even stolen during transportation to sugar mills after harvest. These two risks will continue to rise with the expansion of the planting area. So, DG restructures the business model once again (Fig. 1.11). The agricultural services company innovates in two areas: First, it brings in investors, divides and subcontracts the sugar cane fields, with each district assuming its own risks. Second, its function is shifted to “organizing and establishing an infrastructure network, planting management network and agricultural services network”. In other words, the agricultural services company becomes an agricultural commercial property developer. Under Model 4.0, the model of the agricultural services company becomes more flexible, as it positions itself as a builder and operator of an agricultural symbiont platform, and hands over the detailed implementation to various stakeholders. Although its share of interests reduces (to take care of other stakeholders), the types, sizes and effort levels of the stakeholders in the symbiont are all enhanced. As a result, the total corporate value of the agricultural services company is lifted. With the serviceable land scale of the agricultural services company growing (around ten thousand mu under Model 2.0, several ten thousand mu under Model 3.0, hundreds of thousands to over one million mu under Model 4.0), DG equipment sales will keep rising.

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

Model 4.0 is built on the basis of the previous three models. Model 1.0 accumulates the market brand, manufacturing scale and service experience. Upon upgrading, Model 2.0 initially establishes a sugar cane business eco-relationship in province H, and transactional relations with sugar mills, local government and banks as well as a profile in the regional market as the near 10,000-mu planting area proves drip irrigation can help increase output. Under Model 3.0, XX company is brought into formulate and implement a standardized management process, which allows DG and the agricultural services company to move far ahead of their competitors in size, enables a forest-like business ecosystem to take shape, while providing a replicable and successful operation example to attract big investors. Model 4.0 brings in big agricultural investors. The role of DG and the agricultural services company is turned into a cultivator and builder of a forest-like symbiont platform, and they co-exist with various stakeholders capable of operating the business ecosystem to realize sustainable development of the business ecosystem. The focus enterprise also reaps enormous corporate value at the same time. During the evolution of DG’s business model, the backgrounds of technical facilities, management facilities and equipment facilities have changed to a certain degree. But as this doesn’t affect our analysis process and results, we separate the background changes of facilities from the evolution of business models for the convenience of our research. The assumption is the backgrounds of the three facilities are the same. However, note that under different facility backgrounds, even in the same set of stakeholders and activity systems, the meaning and value of a symbiont may vary.

1.3 Three Divide-and-Reorganize Symbionts and the Three Evaluation Criteria A symbiont allows us to broaden our perspective from the focus enterprise and its stakeholders to cover the entire business ecosystem, from the activity value chain to the entire industry value chain. Meanwhile, the business ecosystem can be divided up and reorganized from three angles, into more delicate and micro operations. Any activity link involves input, processing and output. Input refers to resources. Processing reflects the capacity of stakeholders. Output defines roles of stakeholders (including functions, rights, resources, capacities and other attributes). The three parts can all be divided up: breaking down input, dividing up activities (both vertically2 and horizontally3 ), and dividing up output. Here we need to distinguish resources from capacities. Resources mean inputrelated raw materials, parts and components that are transaction objects before processing. Capacity means a certain attribute of stakeholders that affects output and 2 It

means dividing the activity system into individual activities, like the three activities shown in the figure. 3 It means each activity can be further divided into smaller activities.

1.3 Three Divide-and-Reorganize Symbionts …

13

Fig. 1.12 Three Division Angles

is seen throughout the activity processing process. We usually evaluate the capacity attribute of a stakeholder as either high or low. This can fall into two dimensions. First is the size of capacity. For the same activity link, the more output after processing by a stakeholder, the bigger its capacity. Second is the stability of capacity. For the same activity link and stakeholder, the smaller the output variance after processing under different time periods and conditions, means that the capacity is more stable (Fig. 1.12). These divided-up resources, capacities, business activity links, management activity links and output (roles) can be reorganized into new stakeholders, which is how business models are innovated. A symbiont is a set of activity systems and stakeholders. Different business models adopted by the stakeholders in a symbiont actually indicate the variance of affiliate relationships between activity systems and stakeholders. Looking at a symbiont (or business model) from the angle of activity systems or stakeholders is interpreting the same issue from different perspectives. Let’s take the business activity link for example and compare Models 1.0, 2.0, 3.0 and 4.0 (Figs. 1.13, 1.14, 1.15, 1.16). The affiliate relationships between stakeholders and activity links can be illustrated more clearly with the table below. The first column means activity links

Fig. 1.13 Affiliation of Stakeholders at Different Business Activity Links under Model 1.0

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

Fig. 1.14 Affiliation of Stakeholders at Different Business Activity Links under Model 2.0 (words in black on the left represent new activity links carved out of Model 1.0 (This division is only a new form of dividing up the original activity system, which makes no difference in the total set of activity systems. For example, “apply for loans” and “farmers and sugar mills jointly undertake the initial input in the means of agricultural production” are two different representations of the same activity system.))

further divided up. From the second column on, each column represents reorganized new stakeholders. Table: Division and Reorganization of Activity Links and Stakeholders Activity Link\Stakeholder

Stakeholder 1

Stakeholder 2

Stakeholder 3

Stakeholder 4

Stakeholder 5

…

Activity link 1 Activity link 2 Activity link 3 Activity link 4 Activity link 5 Activity link 6 Activity link 7 Activity link 8 …

The division and reorganization of functions, resources and capacities may take similar approaches.

1.3 Three Divide-and-Reorganize Symbionts …

15

Fig. 1.15 Affiliation of Stakeholders at Different Business Activity Links under Model 3.0 (text in black on the left represent new activity links carved out of Model 1.06 )

Fig. 1.16 Affiliation of Stakeholders at Different Business Activity Links under Model 4.0 (words in green on the left represent new activity links carved out of Model 3.0)

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

There are three evaluation criteria for such division and reorganization: transaction value, transaction cost and transaction risk. It takes specific transaction costs and transaction risks to divide and reorganize a specific activity link, function, resource or capacity. This also brings a certain transaction value; but the point lies in boosting efficiency through reorganization with transaction value, transaction cost and transaction risk all taken into account. DG’s evolution from Model 1.0 to Model 2.0 mainly involves the expansion of transaction value, from equipment sales to sharing planting link value. The upgrade from Model 2.0 to Model 3.0 divides planting into management and labor. Next, management activities are further divided into formulation of the management standards, and the execution and evaluation of the standards. Next, a new stakeholder is added—XX company, which is responsible for field management, standards setting and evaluation. In this way greater economies of scale are realized. The shift from Model 3.0 to Model 4.0 involves dividing planting into capital and planting laborers by resource, and into supervision and field planting by management activity. Then capital and supervision is configured to big agricultural investors for subcontracting by district, which realizes value in three aspects: First, the transaction risk associated with Model 3.0 is lowered. Second, the problem of too much initial capital input is resolved (transaction risk with banks). Third, the scale of serviceable planting area is further enhanced (from many thousands of mu to several hundred thousand mu, to over one million mu). After allocating certain value to the big investors, the agricultural services company gets relatively lower profits by unit planting area. However, as the total planting area increases, the total corporate value also increases. Therefore, the division and reorganization of resources, capacities, business activity links, management activity links, and roles of stakeholders has to fulfill at least one of the following objectives: boost transaction value, reduce transaction cost, and lower transaction risk. Furthermore, net increase shall be realized in terms of the combined effects of transaction value, transaction cost and transaction risk. Some methods for raising the added value of a symbiont are below: Boost transaction value. Add stakeholders (for example, iPhone adds music and App stores), enhance the scale of stakeholders of the same category (such as chain operations and bilateral platforms), increase the demands of stakeholders of the same category (such as group buying and package solutions), etc. Reduce transaction cost. Standardize modules, unify the back office, merge the terms of similar transactions, control governance structure, control resources and capacities, etc. Lower transaction risk. Break up and re-construct (like evolving from Model 3.0 to Model 4.0), divide up and transfer risks, real options, risk aversion through profit model design, etc. In terms of finance, we can analyze the sub-items of transaction value, transaction cost and transaction risk of an existing symbiont and then realize higher efficiency through division and reorganization. Details on how to boost transaction value, reduce transaction cost, lower transaction risk and make financial analyses are provided below.

1.4 Summary: The Three Laws of Symbionts

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1.4 Summary: The Three Laws of Symbionts When DG’s business model evolved from 2.0 to 3.0 and then 4.0, the total sets of its stakeholders and activity systems remained relatively stable. In other words, the extension of its symbiont stays consistent during the business model evolution. Next, consider what can be learned from the changes in and comparison of the efficiency of the symbiont during evolution. Generally speaking, we arrived at the following three laws of symbionts. Law I: In a nondissipative symbiont, if a focus enterprise adopts different business models, the efficiency of the symbiont does not vary With a definite boundary of a symbiont and if value can be transmitted equivalently from a certain stakeholder (or activity system) to another or several stakeholders (or another or several activity systems) in the symbiont during each transaction, without any decrease in value midway, this is a nondissipative symbiont. Otherwise, it is dissipative. By different business models, we mean the changes that take place in the affiliate relationships between activity systems and stakeholders. A nondissipative symbiont needs to fulfill two conditions. First, each transaction process has to consume transaction cost, whereas the transaction costs of all transaction processes have been internalized into one or several activity systems and stakeholders in the symbiont. Second, each transaction object has many attributes, all of which have been fully priced and traded, and the transaction process meets the first condition. By different business models, we mean changes take place in the affiliate relationships between activity systems and stakeholders. The efficiency of a symbiont is derived from the combined effect of transaction value, transaction cost and transaction risk. Under ideal nondissipative circumstances, as a symbiont has defined the extensions of the stakeholder set and the activity system set (as well as that of resources and capacities), different business models only determine the affiliation relations between activity systems and stakeholders. The symbiont is then without any capacity misplacement, right configuration misplacement, or dissipation of transaction cost and other internal value. Given the definite boundary of the symbiont and lack of value exchange with the outside, there is no impact on the efficiency of the symbiont. Law II: In a dissipative symbiont, a focus enterprise adopting different business models will lead to efficiency variance of the symbiont When a symbiont has a definite boundary and is dissipative, if the focus enterprise adopts different business models, the transaction cost and transaction risk incurred from transactions, division and reorganization among stakeholders will vary. Also, there will be value dissipation inside the symbiont that will result in efficiency variance. The symbiont may dissipate in two aspects. First, transaction cost falls into two parts: one part is internalized into one or several activity systems and stakeholders in the symbiont. The other part has externality and incurs loss of value as it is not

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1 Symbiont: Concepts, Evaluation Criteria and the Three Laws

transmitted to the internal activity systems and stakeholders, but is not zero. Second, among the many attributes of a transaction object, some attributes are not fully priced or obtain externality during transaction, thereby incurring loss of value. When a symbiont has a definite boundary and is dissipative, if the focus enterprise adopts different business models, the transaction cost and transaction risk incurred from transactions, division and reorganization among stakeholders will vary. There will also be value dissipation inside the symbiont that will result in efficiency variance. Take Model 2.0 for example. With the scale of farmers rising, the transaction cost of the agricultural services company with farmers increases exponentially, and value dissipation also rises. In the case of Model 3.0, this distributed transaction is replaced by centralized transactions including field management of large-scale planting, and centralized transfer of land use rights, so value dissipation decreases, while the efficiency of the symbiont rises. But Model 3.0 cannot effectively control the transaction risks of sugar cane theft and scattered supervision because of large-scale planting. Through further upgrading, Model 4.0 lowers value dissipation incurred from the transaction risks above and further boosts the efficiency of the symbiont. As a result, we get Law III, which is equivalent to Law II. Law III: In a dissipative symbiont, if a focus enterprise selects the most-efficient initial business model, it could outdo efficiency improvement realized through changes made by other business models It costs to change a business model, and it is important for an enterprise to improve the design of business model and select the correct one. If dissipation from the establishment of different business models is equal, the efficiency of a symbiont then depends on the size of transaction value of a business model and dissipation level due to business model changes. Any change to a business model requires the division and reorganization of activity systems and stakeholders, and causes certain value dissipation, which should not be ignored. If an enterprise selects the most efficient business model from the very beginning, and avoids value dissipation (from the division and reorganization process), its efficiency will be higher than that realized through change (evolution or restructuring) of other initial business models. Even if an existing business model is unreasonable, if the cost of a business model changes (division and reorganization) is infinite, or the incremental value dissipation due to such change is larger than the incremental transaction value, it is then unnecessary to make the changes. More specifically, if the total value dissipation of a symbiont exceeds the transaction value, the symbiont will be dead unless there is input of external value. The trading structure (business model) of the focus enterprise and its stakeholders will collapse. Business modes can be changed by means of division and reorganization. Specifically, division means breaking down resources input, dividing up activity links (business activities, management activities, vertical and horizontal division) and output (roles of stakeholders). Reorganization is redefining the affiliate relationships between activity systems and stakeholders.

1.4 Summary: The Three Laws of Symbionts

19

The target of business model changes is to fulfill at least one of the following three conditions: boost transaction value, reduce transaction cost, and lower transaction risk, with higher efficiency (the combined effect of transaction value, transaction cost and transaction risk).This is also the direction of business model innovation. Law III undoubtedly indicates the importance of business model design. During business model design and implementation the initial condition is the resource and capacity endowment of different stakeholders. When different stakeholders enter a business model with their resource and capacity endowments, the accumulation process and scale of various resources and capacities will vary. New resource and capacity bundles of different stakeholders will take shape. These resource and capacity bundles will become the starting point for business model design and implementation at the next stage. The trading structure formed by stakeholders, resource and capacity bundles at the same time point constitutes the whole symbiont panorama at that time point. The integration of stakeholders, resource and capacity bundles and symbionts at different time points makes up a dynamic evolution map of business models. With the business model evolution of a lot of stakeholders in the same symbiont, its accumulated resource and capacity bundles are strengthened, competitiveness enhanced, which then leads to increased industrial output for society. Therefore, the upgrade of economic and industrial structures is a mesoscopic and macroscopic reflection of the dynamic accumulation of resource and capacity bundles of different stakeholders in a microscopic trading structure. There are large numbers of varied focus enterprises in the same industry. They may adopt different business models. As a result, their symbionts vary, as do their mostefficient business models. Due to their varied business models, these focus enterprises establish monopoly power in their respective markets. But such monopoly is in terms of model, not in terms of market demand. That leaves the possibility of innovation for other enterprises. So these disparate business models in the same industry are monopolistic in their own rights and the most efficient. In market terms, they are innovative and virtuously competitive between each other. We call this a “perfect monopoly”. In a traditional market pattern, the appearance of a perfect monopoly is no doubt disruptive. What we call destructive disruption in the conventional sense means a new market entrant eliminates the incumbent. A perfect monopoly brought about by the diversity and uniqueness of business models is disruptive in a constructive sense, rather than destructive. Its existence stimulates creative forces in the market and propels other competitors to relentlessly innovate, jointly pushing the market to higher levels. This is a disruption in which business model efficiency and market efficiency are lifted to higher levels. Therefore, a perfect monopoly is also deemed as “consruptive” (constructive + disruptive).

Chapter 2

Symbiont-Based Business Model Design

Every few years, there will be a huge transformation in the home appliance channels. During this process, a series of names have sprung up in China: Gome, Suning, Gree, Haier, JD, Tmall and others. The community stores of a certain home appliance maker are a brand-new name. Within a few years, it has become a strong force in home appliance channels. Behind the success story of this home appliance maker’s community stores is the new idea about business model design—business model design based on symbionts. To better elaborate on this idea of design, we’ll start with the business model of training centers.

2.1 Traditional School Model of Training Centers With a large population, China is famous for its ardent learners and with social development, learning is even more important. As instinctive interest combines with social demand, training agencies in China have multiplied in number. According to incomplete statistics, taking on-the-job training agencies as an example, there are no less than ten business model prototypes. Additionally, there are numerous derivative business models through the permutation and combination of these prototypes. One of the most traditional models of training agencies originates from schools.

© Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_2

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2 Symbiont-Based Business Model Design

Training agency model 1 (traditional school model): School A has lecturers and professors (on fixed wages), and students pay tuition fees by the price of courses. School A is responsible for enrollment and educational administration management A business model is a trading structure among stakeholders. The above model can be illustrated with the structure diagram below, which shows the key stakeholders and the trading activities among them. The school in the dashed box is the focus enterprise.

This trading structure can also be expressed in another way. The elements of a trading structure include transaction subjects (i.e. stakeholders), activities, and resources and capacities behind relevant activities. In short, there are several questions about a business mode: Who are the stakeholders (subjects)? What activities do they engage in? What resources and capacities do they need to have to engage in these activities? How do they transact with each other? All of these questions can be demonstrated in a number of two-dimensional tables. Two-dimensional tables are a standard machine language. In other words, if we can put a business model in two-dimensional tables, which means business model design can be broken down into multiple steps, with different design teams in charge of different two-dimensional tables. Furthermore, computerized tools may be introduced to boost design efficiency and make up for the limited logic capabilities of humans.

2.1 Traditional School Model of Training Centers

23

Two-dimensional table I: Diagram of Relationships between Subjects and Resources Owned The attribute of a resource includes description of its features. The relationships between subjects and the resources owned by them are described in Table I in the following manner: Level Owned Of which: ‘Owned’ is valued at 0 and 1, indicating whether a subject owns this type of resource (No/Yes); ‘Level’ indicates the level of owning or control of such resource by the subject (qualitative description, valued as high, medium and low).

Table I Subject/Resource Relationships Diagram

In model 1 (traditional school model) for example, the two-dimensional Table I can be demonstrated as below with the shaded area representing the focus enterprise.

Students

School A

1/High

Professors—School A

Students

1/High

Lecturers—School A

School A-

Faculty resource 1/High

Site resource

1/High

1/High

Student resource

1/High

1/Low

1/High

Brand resource

1/High

1/High

Capita l resource 1/High

Educational resource 1/High

Administrative staff resource

24 2 Symbiont-Based Business Model Design

2.1 Traditional School Model of Training Centers

25

Two-dimensional table II: Diagram of Relationships between Activities and Resources Used

Table II Activity/Resource Relationships Diagram

The attribute of an activity is used to describe the features of the activity. The relationship between an activity and the resource required are described in Table II in the following manner: I nput Pr ocess Out put , Capacit y, Rank Requir ed ‘Required’ is valued at 0 and 1, indicating whether an activity requires this type of resources (No/Yes). ‘Input’, ‘Process’ and ‘Output’ are all valued at 0 and 1, indicating whether the resource can be used to input, process and output the activity. ‘Capacity’ indicates a certain capacity formed as the activity uses the resource (capacity is categorized by its value, like selling capacity). ‘Rank’ represents the intensity of a capacity formed by the activity (qualitative description). In model 1 (traditional school model) for example, two-dimensional Table II is demonstrated below (only ‘Required’ is used for simplification). Faculty Site Student Brand Capital Educational Administrative resource resource resource resource resource resource staff resource Enrollment

1

1

1

Teaching plan 1 development Teaching

1

Educational administration management Brand management

1

1

1 1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

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2 Symbiont-Based Business Model Design

Two-dimensional table III: Diagram of Relationships between Subjects and Activities

Table III Subject/Activity Relationships Diagram

The relationship between a subject and an activity are described in Table III in the following manner: Capacit y Rank Par tici pated ‘Participated’ is valued at 0 and 1, indicating whether a subject participates in an activity (No/Yes). ‘Capacity’ indicates the amount of capacity formed as the subject participates (refer to the explanation in Table II). ‘Rank’ represents the intensity of a formed capacity (refer to the explanation in Table II). In model 1 (traditional school model) for example, two-dimensional Table III can be demonstrated as below. The shaded area represents the focus enterprise.

Students

School A

Students

Teaching plan Teaching development capacity, capacity, strong/1 medium/1

Professors—School A

Teaching capacity, strong/1

Teaching

Teaching plan development capacity, medium/1

Enrollment capacity, strong/1

Teaching plan development

Lecturers—School A

School A-

Enrollment

Educational administration management capacity, strong/1

Educational administration management Brand management capacity, strong/1

School brand management

Learning capacity, medium/1

Learning capacity

2.1 Traditional School Model of Training Centers 27

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2 Symbiont-Based Business Model Design

Two-dimensional table IV: (Structure) Diagram of Relationships among Subjects

Table IV shows the relationships among subjects, while the triangle table on the right describes the transactional relationships between one subject and other subjects. Each diamond box represents the transactional relationships between two subjects. The shaded boxes above indicate the transactional relationships between Subject 2 and other subjects, among which, r12 , r23 ,…r2m indicate transactional relationships between Subject 2 and Subjects 1, 3,…m. The specific trading model among subjects is described below: T1 T2 T3 T4 T5 G T 1 ,…T 5 respectively represent the 5 + 1 attributes of the trading mode among subjects: (1) method of meeting requirements; (2) income and expenditure sources; (3) means of income and expenditure; (4) cash flow structure; and (5) roles. Each attribute is defined based on different content (which is omitted). ‘G’ represents the governance relationship among subjects (omitted). Based on actual needs, Table IV can also be integrated into Table I or Table III. In model 1 (traditional school model) for example, two-dimensional Table IV can be demonstrated as below. The shaded area represents the focus enterprise.

Students

Students

Professors—School A

Lecturers—School A

School A School A

Positioning: Lecturers deliver lessons based on lecture notes provided by School A. The traditional teaching mode/income and expenditure direction: School A pays lecturing fees to lecturers. Means of income and expenditure: School A makes payment based on fixed annual salary. Cash flow structure: one-time investment and income of School A. Role: the role of lecturers is teaching/relationships: internal stakeholders, employment relations (School A—employer; lecturers—employees)

School A Lecturers—School A

Positioning: Professors provide lecture notes to lecturers and meet their demand for lecturing. Income and expenditure direction: none. Means of income and expenditure: none. Cash flow structure: none. Role: the role of lecturers is teaching, while the role of professors is developing teaching plans. Relationships: internal stakeholders

Positioning: Professors provide lecture notes to School A and give lessons based on the lecture notes. The traditional teaching mode/role: the role of professors is developing courses and teaching/income and expenditure direction. School A pays lecturing fees to professors/means of income and expenditure: School A makes payment based on fixed annual salary/cash flow structure: one-time investment and income of School A. Relationships: internal stakeholders, employment relations (School A—employer; professors—employees)

Professors—School A School A provides a site for learning to students and meets their demand to gain knowledge. Role: learning. School A charges tuition fees to students. School A fees are based on the courses chosen by students and the number of subjects. School A makes investment and gets income on a multiple-time basis. Relations: purely market relations (service provider—School A; customers—students)

Students

2.1 Traditional School Model of Training Centers 29

30

2 Symbiont-Based Business Model Design

2.2 Authorization Model of Training Agencies Model 1 (traditional school model) is only one of the many business models for training centers. In fact, we can randomly find several business models of training centers and describe these models with these four two-dimensional tables. We will only look at the authorization model as an example. Training agency model 2 (authorization model): School A (some activities of professors are assigned to a new subject) only engages in developing teaching plans, while other activities are still carried out by School B (focus enterprise). School B shares income with School A based on the number of students taking courses The diagram of this trading structure can be shown as below:

2.2 Authorization Model of Training Agencies

31

Its two-dimensional tables are shown respectively below (the shaded areas indicate the focus enterprise. Two-dimensional table I: Diagram of Relationships between Subjects and Resources Owned

Students

School B-

School B

1/High

Students

Lecturers—School B 1/High

School A (the original role of professors))

School A

Faculty resource

1/High

Site resource

1/High

1/High

Student resource

1/High

1/Medium

Brand resource

1/High

1/High

1/Medium

Capital Resource

1/High

Educational resource

1/High

Administrative staff resource

32 2 Symbiont-Based Business Model Design

2.2 Authorization Model of Training Agencies

33

Two-dimensional table II: Diagram of Relationships between Activities and Resources Used Faculty Site Student Brand Capital Educational Administrative resource resource resource resource resource resource staff resource Enrollment Teaching

1 1

Educational administration management

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

School brand management

1

1

Training of lecturers

1

1

Two-dimensional table III: Diagram of Relationships between Subjects and Activities Enrollment Teaching Teaching Educational School plan administration brand development management management School A

School A

School B

School B-

Lecturers—School B

Teaching Teaching plan capacity, development strong/1 capacity, strong/1 Enrollment capacity, strong/1

Brand management capacity, strong/1 Educational administration management capacity, strong/1

Brand management capacity, strong/1

Teaching Teaching plan capacity, development strong/1 capacity, weak/1

Students Students

Two-dimensional table IV: Structure Diagram of Relationships among Subjects

Students

Students

Lecturers—School B

School B School B-

School A School A

Positioning: Lecturers give lessons at School B according to lecture notes provided by School A and meets the latter’s demand for lecturers. Income and expenditure direction: School B pays lecturing fees based on the teaching time of lecturers. Means of income and expenditure: one-time input and output for School Brule: the role of lecturers is teaching/relations: internal stakeholders, employment relations (School B—employer; lecturers—employees)

Positioning: School A provides lecture notes and training service to lecturers. Income and expenditure direction: none. Cash flow structure: none. Role: the role of lecturers is teaching. Relationship: School A—service provider; lecturers—consumers

Positioning: School B provides a site for learning to students and meets their demand to learn knowledge. Income and expenditure direction: School B charges tuition fees on students. Means of income and expenditure: School B charges based on the courses chosen by students and the number of subjects (fuel charges). Cash flow structure: School B makes input and gets output on a multiple-time basis. Role: the role of School B is a teaching institution. Relationships: purely market relations

Students

Positioning: School A creates teaching content for School B and gives lessons. Income and expenditure direction: School B pays teaching content development fees to School A. Means of income and expenditure: School B makes payment to School A by adopting the admission fee + sharing of income method. Cash flow structure: School B makes a one-time investment, but receives income on a multiple-time basis. Role: School A is the developer of teaching plans and trainer of lecturers. Relationships: purely market cooperation relations

Students

School A School B

Lecturers—School B

School A School B

34 2 Symbiont-Based Business Model Design

2.2 Authorization Model of Training Agencies

35

2.3 Symbiont-Based Business Model Design: Unilateral Platform Model for Training Centers From the four two-dimensional tables for Model 0, Model 1 and Model 2, we can find some basic elements of training center business models, such as activities, resources, capacities, subjects and their relationships. The complete presentation of the four tables not only describes the business model of the focus enterprise, but also those of other stakeholders, and shows a symbiont of training agencies. A symbiont is the sum of the focus enterprise business models and its stakeholders. The more training centers we looked at, the richer the basic elements of business models for training centers become theoretically. By re-grouping and analyzing these elements, we can arrive at a new business model. The business model design process can be divided into three stages from a symbiont’s perspective. The first stage is a current status description (static). First, define the scope of a symbiont internal and external stakeholders transacting with each other and the activities they engage in. Next, analyze the stakeholders and trading structures (parameters) in the symbiont; describe the relationships between the existing stakeholders, activities, and resources with the business model analysis diagram (refer to the above four two-dimensional tables). The description of the traditional school model above and the authorization model is at this stage. The second stage involves analysis and introduction (dynamic). Based on requirements and possibilities, separate, regroup, select, divide and reorganize. Then aggregate and introduce elements in a cyclic manner until a satisfactory business model for the focus enterprise appears.

36

2 Symbiont-Based Business Model Design

Take the traditional school model for example. professors and lecturers are both related to the teaching plan. Professors develop the teaching plan and finally provide it to lecturers, but this activity needs to be completed through an intermediary transaction brokered by the school. Here we can separate first and then aggregate. First separate professors and lecturers from the school, and then aggregate professors and lecturers into one for transacting with the school. For instance, Tables I, II and III divide up subjects, activities and resources and capacities. Based on different analysis purposes, the dividing granularity may be large or small. Through these actions, we will get lots of possible business models; compare them and select the most satisfactory one. The third stage is new status description (static): use Tables I, II, III and IV under the business model analysis diagram (refer to the four two-dimensional tables above) to make a static description of the newly-formed symbiont at a designated granularity. The three stages can be illustrated by the diagram below:

For instance, we can derive a new training agency business model - the unilateral platform.1 Training agency model 3 (unilateral platform model): a school (focus enterprise) engages in activities that can be scaled up, such as brand, educational administration, and enrollment; other activities like teaching are assigned to independent business entities. The owners of these business entities gain from sharing business revenue The diagram of this trading structure is shown below:

1 See

Chap. 9 for a detailed theoretical explanation of the unilateral platform.

2.3 Symbiont-Based Business Model …

37

Its two-dimensional tables are shown respectively below with the shaded areas indicating the focus enterprise. Two-dimensional table I: Diagram of Relationships between Subjects and Resources Owned

Students

School A

1/High

Professors—School A

Students

1/High

Lecturers—School A

School A

Faculty resource 1/High

Site resource

1/High

1/High

Student resource

1/High

1/High

Brand resource 1/High

Investment capital 1/High

Educational resource 1/High

Administrative staff resource

38 2 Symbiont-Based Business Model Design

2.3 Symbiont-Based Business Model …

39

Two-dimensional table II: Diagram of Relationships between Activities and Resources Used Faculty Site Student Brand Investment Educational Administrative resource resource resource resource capital resource staff resource Enrollment

1

1

1

Teaching plan 1 development Teaching

1

Educational administration management School brand management

1

1

1 1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

1

Two-dimensional table III: Diagram of Relationships between Subjects and Activities

School A School A

Students

Enrollment Teaching Teaching plan development

Educational School brand administration management management

Enrollment capacity, strong/1

Educational administration management capacity, strong/1

Lecturers School A

Teaching plan compilation capacity, weak/1

Teaching capacity, strong/1

Professors School A

Teaching plan compilation capacity, strong/1

Teaching capacity, medium/1

Brand construction capacity, strong/1

Students

Two-dimensional table IV: Structure Diagram of Relationships among Subjects

Students

Students

Professors—School A

Lecturers—School A

School A School A

Positioning: Lecturers give lessons according to the lecture notes provided by the school, and the demands of students to meet the school’s demand for lecturer manpower. Income and expenditure direction: the school pays lecturing fees based on the teaching time of lecturers. Means of income and expenditure: the school pays a fixed salary to lecturers on a regularly basis (parking fee). Cash flow structure: one-time input and multiple output for the school. Role: the role of lecturers is teaching. Relationships: internal stakeholders, employment relations (School A—employer; lecturers—employees)

School A Lecturers—School A

Positioning: Professors provide lecture notes to lecturers. Income and expenditure direction: none. Means of income and expenditure: none. Cash flow structure: none. Role: none. Relationships: internal stakeholders

Positioning: Professors create teaching content and give lessons based on individualized demands provided by the school’s platform and meet the school’s demand for delivering content and teaching manpower. Income and expenditure direction: the school pays remuneration to professors. Means of income and expenditure: the school adopts the fixed income—residual revenue method, and distributes bonus to professors based on the revenue from the courses developed by professors in addition to the fixed salary. Cash flow structure: one-time input and multiple output for the school. Role: the role of professors is developing the teaching plan. Relationships: internal stakeholders, employment relations (School A—employer; professors—employees)

Professors—School A Positioning: The school provides a site for learning to students and meets their individualized demand to gain knowledge. Income and expenditure direction: the school charges tuition fees to students. Means of income and expenditure: the school charges based on the courses chosen by students and the number of subjects (fuel charges). Cash flow structure: the school makes input and obtains output on a multiple-time basis. Role: the school provides teaching services. Relationships: purely market relations (service provider—school; customers—students)

Students

40 2 Symbiont-Based Business Model Design

2.3 Symbiont-Based Business Model …

41

2.4 Business Model Design for a Home Appliance Manufacturer’s Community Stores: The Past, Present and Future of Home Appliance Channels Before the appearance of community stores, the mainstream channel of the home appliance manufacturer in tier-1 and tier-2 cities was home appliance stores. Their trading structure diagram is below:

42

2 Symbiont-Based Business Model Design

This model can also be illustrated with two-dimensional tables for symbionts. Two-dimensional table I: Diagram of Relationships between Subjects and Resources Owned Brand resource HQ of the enterprise

Store Sales resource human resource

Customer Customer Logistics resource data network resource resource

1/High

1/High

1/High

1/Medium 1/High

1/Medium 1/High

Distributors Home appliance stores

Capital resource

1/High 1/High

Logistics company

1/Medium 1/High

1/High

Consumers

1/Medium

1/High

Two-dimensional table II: Diagram of Relationships between Activities and Resources Used Brand resource Sales activities

Store resource

1

Sales human resource

Customer resource

Customer data resource

1

1

1

Logistics distribution Sales promotion

1 1

1

1

After-sales service

1

1

1

1

Brand maintenance

1

1

1

1

1

Customer maintenance

1

1

1

1

1

Development of new customers

1

1

1

1

1

Logistics network resource

Capital resource 1

1

1

1

1

Two-dimensional table III: Diagram of Relationships between Subjects and Activities

Sales promotion capacity, strong/1

Consumers

Logistics company

Logistics distribution capacity, strong/1

After-sales service capacity, medium/1

Brand maintenance capacity, medium/1

Brand maintenance

Customer maintenance capacity, medium/1

Customer maintenance Market expansion capacity, weak/1

Development of new customers

Market expansion capacity, medium/1

Distribution capacity, medium/1

After-sales service capacity, strong/1

After-sales service

Home appliance stores

Selling capacity, medium/1

Sales promotion

Market expansion capacity, strong/1

Selling capacity, strong/1

Logistics distribution

Distributors

HQ of the enterprise

Sales activities

Purchasing capacity, medium/1

Consumption

2.4 Business Model Design for a Home Appliance … 43

44

2 Symbiont-Based Business Model Design

Two-dimensional table IV: Structure Diagram of Relationships among Subjects HQ of the enterprise HQ of the enterprise

Distributors

Home appliance stores

Logistics company

Positioning: Distributors provide capital, seek cooperative stores for the enterprise, and stabilizes local relations. Income and expenditure direction: the enterprise pays commission to distributors. Means of income and expenditure: commission related to sales revenue. Cash flow structure: distributors put in capital first and obtain revenue later. Role: the role of distributors is capital provider and local relations coordinator Relationships: external stakeholders, market relations

Positioning: Home appliance stores provide venues, while the enterprise provides salespeople at counters to facilitate sales. Income and expenditure direction: the enterprise pays various fees to home appliance stores. Means of income and expenditure: admission fee, advertising fee, etc. (on a shared basis). Cash flow structure: the enterprise and distributors make investments first and obtain revenue later. Role: home appliance stores are sales venues. Relationships: external stakeholders, market relations

Positioning: The logistics company undertakes logistics distribution. Income and expenditure direction: the enterprise pays logistics fees to the logistics company. Means of income and expenditure: logistics fees are calculated by weight, distance and time of arrival. Cash flow structure: one-time input, one-time income. Role: the logistics company is the provider of logistics distribution service. Relationships: external stakeholders, market relations

Consumers

(continued)

2.4 Business Model Design for a Home Appliance …

45

(continued) HQ of the enterprise Distributors

Distributors

Home appliance stores

Logistics company

Consumers

Positioning: Distributors negotiate with home appliance stores and the enterprise, and bear the payable expense in the sales process. Income and expenditure direction: home appliance stores transfer income to distributors which then transfer it to the enterprise, and distributors obtain the difference. Means of income and expenditure: commission related to sales revenue. Cash flow structure: distributors put in capital first and get revenue later. Role: home appliance stores are sales venues. Relationships: external stakeholders, market relations (continued)

46

2 Symbiont-Based Business Model Design

(continued) HQ of the enterprise Home appliance stores

Logistics company Consumers

Distributors

Home appliance stores

Logistics company

Consumers

Positioning: Home appliance stores provide venues. Income and expenditure direction: consumers go to home appliance stores. Means of income and expenditure: commission related to sales revenue. Cash flow structure: home appliance stores make investment first and get revenue later. Role: home appliance stores are sales venues. Relationships: external stakeholders, market relations

2.4 Business Model Design for a Home Appliance …

47

The reason why this enterprise’s community stores have rapidly grown within in a few years is because it has re-optimized the relationships between each subject and activities, resources and capacities, and thereby achieved impressive results. Their trading structure is:

48

2 Symbiont-Based Business Model Design

Two-dimensional table I: Diagram of Relationships between Subjects and Resources Owned Brand resource HQ of the enterprise

Store resource

Sales human resource

Customer resource

Customer data resource

Logistics network resource

1/High

Community stores

Capital resource 1/High

1/High

1/High

1/High

Logistics company

1/High

Consumers

1/Medium

1/High

Two-dimensional table II: Diagram of Relationships between Activities and Resources Used Brand resource Sales activities

Store resource

1

Sales Human resource

Customer resource

Customer data resource

Logistics network resource

Capital resource

1

1

1

1

1

1

1

1

Logistics distribution Sales promotion

1

1

1

After-sales service

1

1

1

1

1

1 1

Brand maintenance

1

1

1

1

1

Customer maintenance

1

1

1

1

1

Development of new customers

1

1

1

1

1

1

Two-dimensional table III: Diagram of Relationships between Subjects and Activities

Selling capacity, strong/1

Community stores

Consumers

Logistics company

Selling capacity, weak/1

HQ of the enterprise

Sales activities

Logistics distribution capacity, strong/1

Distribution capacity, strong/1

Logistics distribution

Sales promotion capacity, weak/1

Sales promotion capacity, weak/1

Sales promotion After-sales service capacity, strong/1

After-sales service

Brand maintenance capacity, strong/1

Brand maintenance capacity, medium/1

Brand maintenance

Development of new customers

Customer maintenance capacity, strong/1

Market expansion capacity, medium/1

Customer Market maintenance expansion capacity, weak/1 capacity, weak/1

Customer maintenance

Purchasing capacity, medium/1

Consumption

2.4 Business Model Design for a Home Appliance … 49

50

2 Symbiont-Based Business Model Design

Two-dimensional table IV: Structure Diagram of Relationships among Subjects HQ of the enterprise HQ of the enterprise

Community stores

Logistics company Consumers

Community stores

Logistics company

Positioning: Community stores sell products for the enterprise, get orders and deliver such orders to the enterprise for execution. Income and expenditure direction: the enterprise pays commission to community stores. Means of income and expenditure: share the revenue. Cash flow structure: the enterprise and community stores (mainly) make investments first and get revenue later. Role: community stores acquire orders. Relationships: external stakeholders, market relations

Positioning: The logistics company carries out logistics distribution. Income and expenditure direction: the enterprise pays logistics fees to the logistics company. Means of income and expenditure: logistics fees are calculated by weight, distance and time of arrival. Cash flow structure: one-time input, one-time income. Role: the logistics company is the provider of logistics distribution services. Relationships: external stakeholders, market relations

Consumers

Positioning: Community stores provide shopping venues for home appliances. Income and expenditure direction: consumers go to the HQ of the enterprise. Means of income and expenditure: one-time sales. Cash flow structure: community stores put in venues first and get revenue later. Role: community stores are salespeople and venues. Relationships: external stakeholders, market relations

2.4 Business Model Design for a Home Appliance …

51

We can briefly compare the home appliance store model and the community store model. In fact, in the table for relations between subjects and activities, we can put down the revenue and cost structure of each subject for the corresponding activity (In each blank, the first number represents the revenue from a specific activity, while the second number indicates the cost of the activity with both being of relative value). Therefore, Table 3 for the home appliance store model can also be expressed as follows: Two-dimensional table III-I: Revenue and Cost Structure of Subjects for Relevant Activities (Home Appliance Store Model)

Consumers

Logistics company

1.5, 0

0, 10

0, 10

0, 3

0, 2

0, 2

Customer maintenance 0, 2

Development of new customers

0, 8

40, 20

0, 3

Brand maintenance

Home appliance stores

0, 4

After-sales service

120, 100

0, 1.5

140, 100 + 40

Sales promotion

Distributors

HQ of the enterprise

Logistics distribution

Sales activities

0, 140

Consumption

52 2 Symbiont-Based Business Model Design

2.4 Business Model Design for a Home Appliance …

53

Likewise, Table 3 of the community store model can be expressed as below: Two-dimensional table III-I: Revenue and Cost Structure of Subjects for Relevant Activities (Community Store Model)

10, 3

Community stores

Consumers

1.5, 0

0, 1.5

130, 100 + 10

HQ of the enterprise

Logistics company

Logistics distribution

Sales activities

0, 2

0, 4

Sales promotion 0, 3

After-sales service 0, 3

Brand maintenance 0, 2

Customer maintenance

0, 2

0, 2

Development of new customers

0, 130

Consumption

54 2 Symbiont-Based Business Model Design

2.4 Business Model Design for a Home Appliance …

55

By comparing these two tables, we can see that the efficiency of community stores is higher than home appliance stores. In the future, community stores can also adopt the “real-time, online spot trading” model by seamlessly connecting with the mobile Internet platform. When a consumer sees a nice product offline, he/she can scan the QR code in real-time, complete the transaction online and have the product directly delivered to his/her home. Consumers can also send information of products to their friends if they want to, and this helps the enterprise gain from free word-of-mouth advertising.

Chapter 3

Engineering Principles for Business Model Design (I): Opportunity Cost Varies When the Same Resources and Capacities Are Owned by Different Stakeholders

Opportunity cost varies when the same resources and capacities are owned by different stakeholders. Sometimes merely by offering the resources on hand to the suitable stakeholder, huge added value can be created. Stakeholder A has a resource capacity ‘a’ and A values ‘a’ at 500 RMB. Stakeholder B has a resource capacity ‘b’ and B values ‘b’ at 600 RMB. Meanwhile, A values ‘b’ at 1000 RMB, and B ‘a’ at 1200 RMB. Then both sides have the opportunity of transacting with each other and boosting their situations. A traded ‘a’ with B for ‘b’, and B for ‘a’. As a result, A’s resource and capacity turns from a to b, with valuation rising from 500 RMB to 1000 RMB; while B’s resource and capacity turns from b to a, with valuation rising from 600 RMB to 1200 RMB. There is no change to the set of resource capacities and the set of stakeholders. But through the transaction, the assessed value of both sides has increased, with the total valuation even growing substantially, as shown in the table below:

Stakeholder A B Total Value Assessment

Resource and Capacity before Transaction a b

Value Assessment before Transaction 500 600

Resource and Capacity after Transaction b a

1100

Value Assessment after Transaction 1000 1200 2200

Just with A and B re-allocating their resources and capacities, they have realized more value. If there are more stakeholders, resources and capacities, there will be more trading opportunities and greater added value to be created. It is true that an insignificant thing for a stakeholder may be a critical resource for another stakeholder. When resource and capacity ‘a’ is owned by Stakeholder A, the opportunity cost is 500 RMB, but when it is owned by Stakeholder B, the opportunity cost is 1,200 RMB. Obviously, more value is created when ‘a’ is allocated to Stakeholder B. When the same resources and capacities are owned by different © Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_3

57

58

3 Engineering Principles for Business Model Design (I) …

stakeholders, the opportunity cost incurred varies, and the efficiency of the final formed business models will definitely vary. The objective of business model design is to allocate resources and capacities to more efficient stakeholders to realize value enhancement in the entire trading structure. We’ll start with the establishment of a trading structure.

3.1 Collocation of Resources and Capacities with Stakeholders: One Example Is the Trading Structure Establishment of the China-Africa Photovoltaic Fund Currently, China has plenty of spare photovoltaic capacity, but how to turn it into cash? There are abundant solar energy resources in Africa which cannot be effectively used, but can they be properly utilized? Suppose we want to trade China’s spare photovoltaic capacity with Africa’s solar energy resources, but Africa doesn’t have enough economic strength to purchase this photovoltaic capacity. How will we design the trading structure? We can make a list of the resources and capacities of photovoltaic manufacturers and African countries, and hunt for suitable transaction objects (i.e. other stakeholders) for them to establish an appropriate trading structure. See the table below: Stakeholder Photovoltaic manufacturers African countries

Energy enterprises Chinese government Investors ……

Spare Resources and Capacities Photovoltaic equipment Mineral resources, solar energy resources Minerals operation capacity Aid programs to Africa Capital ……

Potential Stakeholder

Deficient Resources and Capacities

Potential Stakeholder

African countries Energy enterprises

Photovoltaic equipment, capital

Photovoltaic manufacturers

African countries

Mineral resources

African countries

African countries

Suitable projects

All stakeholders

All stakeholders

First of all, we list the spare resources and capacities of photovoltaic manufacturers, and look for stakeholders that need these resources and capacities. Then we search for stakeholders that have other resources and capacities for transactions until a closed loop forms. Of course, we can also start with resources and capacities lacking, and move forward until a closed loop forms.

3.1 Collocation of Resources and Capacities …

59

The diagram below will give you a more vivid picture. By starting with the resource and capacity closed loop of photovoltaic manufacturers (at the right lower corner), look for the stakeholder chain that can solve the resource and capacity problem. After running into one of the major issues (capital) of African countries, start thinking about the second closed loop (left upper corner). The final target is for each stakeholder to obtain and offer some resources and capacities for transaction in order to form a closed loop in logic.

The joint point of the two closed loops is the Chinese government. This means that a trading structure initiated by the government, financed by policy banks and focused on the China-Africa fund has roughly taken shape. The Chinese government has lots of aid programs to help Africa each year. It is capable of setting up a China-Africa photovoltaic fund to resolve the power supply and lighting problems of African countries. The China-Africa photovoltaic fund places orders for photovoltaic products with domestic photovoltaic manufacturers (on credit), and sells them to specific African countries to solve their power supply and lighting problems. Then the governments of these countries make payment commitments with their mineral resources. The China-Africa photovoltaic fund gets loans from China Development Bank and the Export-Import Bank of China (both have many loans for aid programs to Africa each year). Then with the payment commitment guarantees issued by relevant African countries, pays the photovoltaic manufacturers with these loans. Upon completion of relevant photovoltaic projects, the China-Africa photovoltaic fund resells mineral resources to energy enterprises. A detailed trading structure is shown below:

60

3 Engineering Principles for Business Model Design (I) …

The same resources and capacities, when put in the hands of different stakeholders, can have completely different liquidation paths and realizable values. For instance, Africa is a continent rich in mineral resources and solar energy resources. However, due to a persistent lack of capital and equipment, these resources have little value in the hands of African countries. Through transactions with the China-Africa photovoltaic fund, these mineral resources and solar energy resources can be better made use of. In other words, the mineral resources have different valuations when owned by Chinese energy enterprises than by African countries. Likewise, the value of solar energy resources when combined with photovoltaic manufacturers is different from that simply put in the hands of African countries. An appropriate trading structure will trade the focus enterprise’s resources and capacity with low valuation for other resources and capacities with higher valuation. Apparently, if the resources and capacities needed by the focus enterprise are not valued highly in the hands of the counterparty, then both sides can obtain value enhancement through transactions. This is exactly the point of business model design. Value assessment originates from the trading structure between specific resources, capacities, and relevant stakeholders. In this case, as long as the transaction cost is low enough, it is more appropriate to allocate resources and capacities to stakeholders with higher valuations. In case of valuation mismatches between multiple resources, capacities and stakeholders, there is the possibility of matching the valuations of resources, capacities and stakeholders through transactions. That is why we design a trading structure to enhance valuation. The transactions conducted by the China-Africa photovoltaic fund realize this target. The value assessment and benefit improvement mentioned here involve the revenue and cost of stakeholders in selecting resources and capacities.

3.2 Selection Revenue, Selection Cost …

61

3.2 Selection Revenue, Selection Cost and Opportunity Cost Selection revenue means the revenue to be obtained by a stakeholder when it chooses to participate in a specific transaction. Selection cost means the cost to be paid by a stakeholder when it chooses to participate in a specific transaction. A rational stakeholder will choose the transaction that maximizes the difference between its selection revenue and selection cost. Before participating in a transaction, a stakeholder already owns a certain combination of resources and capacities. The purpose of trading structure design is to find suitable transaction subjects for these resources and capacities and realize value through transaction. But the same resources and capacities, when owned by different stakeholders, will incur relevant selection revenue and selection cost. Stakeholders need to choose among the myriad of realizable transaction plans with the greatest difference between selection revenue and selection cost to maximize profit. When the same amount of capital is lent by banks, provided to an entrepreneur as equity investment, or used to establish a joint venture, the three business models are confronted with different stakeholders. As a result, the selection revenue and selection cost involved will vary. When capital is given to a bank for lending, the selection revenue is the interest rate of deposits, while the selection cost is the transaction cost with the bank, which can be considered as zero. When the same capital is provided to an entrepreneur as equity investment, the selection revenue is the dividend when the startup becomes bigger and stronger or IPO investment proceeds. The selection cost is the transaction cost required for contacts with the entrepreneur, due diligence investigation and post-investment management. As it is merely an investment, other than any involvement in enterprise operation, the selection revenue here needs to be discounted by a relatively high risk coefficient. If the same capital is used to establish a joint venture, the selection revenue is a dividend at a specific ratio or IPO investment proceeds, while the selection cost involves the costs of other resources and capacities (including technologies, channels and the time of entrepreneurs) put in the joint venture. As the capital goes into a joint venture here, the risk coefficient discount on the selection revenue may be lower relative to the second equity investment. For different stakeholders, the value of selection revenue and selection cost varies. For individuals, the selection cost of equity investment and a joint venture could be too high to be bearable, so it is relatively appropriate to given the capital to banks for loan extension, even though the selection revenue concerned is the lowest among the three choices. For professional investment institutions, the transaction cost concerning contacts with entrepreneurs and due diligence investigations is not very high, but technologies and channels are not their strong suits; so the selection cost is too high. When the selection cost lower the third proposal and the selection revenue is higher than the first proposal, the second proposal will turn out ideal. But for entrepreneurs with certain technology and channel resources, establishing a joint

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venture with others could be the choice that creates the greatest difference between selection revenue and selection cost. Therefore, any stakeholder, when trading in a specific resource and capacity, can list the various stakeholders that need such resource and capacity, work out a number of realizable transaction proposals, calculate their respective selection revenue and selection cost, and finally select the proposal with the maximal difference (which is defined herein as selection profit). An oft-mentioned concept in economics is called opportunity cost, which means the profit from the optimal proposal in an alternative option set when a subject is making a choice. It sounds like profit, but is a deduction item in the text below; so it is called opportunity cost. In economic parlance, a rational choice is to make the profit realized by a subject higher than the opportunity cost. For example, there are five optional proposals: a, b, c, d and e, and the profit a stakeholder gets for choosing each proposal is 400, 500, 300, 200 and 600, respectively. If the stakeholder decides to choose b, it gets 500 in profit. Of the four remaining alternative proposals, the highest profit is 600, then 600 is the opportunity cost for choosing proposal b. The realized profit (500) is lower than the opportunity cost (600), so it is not an ideal choice. The rational choice shall be proposal e, whose profit is 600; whereas the opportunity cost is the highest profit among the alternative proposals, which is 500, the profit of proposal b. The profit realized by the stakeholder is higher than the opportunity cost. Opportunity cost defines the cost of a choice. Directly compare the profits of the above optional proposals (400, 500, 300, 200, and 600 respectively), and directly choose the proposal with the highest selection profit. So the selection profit is 600. Opportunity cost is correlated to selection revenue and selection cost to a certain degree. In most cases, opportunity cost refers to the opportunity cost of a specific resource and capacity, with emphasis on the scarcity of the resource. Engaging in one activity means losing another opportunity which requires us to consider the cost of losing the opportunity. However, even the same resource and capacity, when put in the hands of different stakeholders, has varied opportunity costs. We’ll deal with this issue in detail later. For stakeholders, “selecting” which resources and capacities to retain and which to give up requires an evaluation of selection profit. The size of selection profit is obviously closely related to the business model chosen by a stakeholder. What’s more important is the evaluation of the same resource and capacity owned by different stakeholders, which can better explain the logic behind the design of a trading structure. Any stakeholder has its own initial resource and capacity endowment. In a trading structure, a stakeholder offers its resources and capacities while other stakeholders offer theirs to jointly participate in a transaction, and achieve growth in their resources and capacities (which is shown as the enhancement of the entire valuation). When resources, capacities and stakeholders are put together, we actually need to evaluate the opportunity cost of a stakeholder participating in a specific trading structure before we can appraise whether such trading structure can be established.

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In fact, such evaluation is a two-way exercise. The stakeholder owning a specific resource and capacity needs to evaluate the other stakeholders, calculates the selection profit (=selection revenue—selection cost) respectively, and chooses the maximal value; while other stakeholders in the transaction also have to evaluate their selection profits, compare the profit of other alternative proposals, and choose the one with the highest selection profit. If the transaction is close-ended (both sides only trade in this resource and capacity), and the selection profit is the highest for both, the transaction is likely to be established. Otherwise, other compensation is required (that is to say, both sides do not trade in this resource and capacity alone, and the transaction is open-ended). So if all the stakeholders in a symbiont need to contribute their respective resources and capacities to form a complete trading structure, the entire symbiont needs to realize positive value space (=transaction value—transaction cost); each stakeholder also has to evaluate and compare the selection profit for joining or not joining this symbiont. Only when the selection profit of each stakeholder for joining the symbiont is higher than its opportunity cost (i.e. the highest selection profit for not joining), the trading structure of the symbiont is stable.

3.3 Why Does Opportunity Cost Vary When the Same Resources and Capacities Are Owned by Different Stakeholders? Why does opportunity cost vary when the same resource and capacity is owned by different stakeholders? There are three reasons. Reason 1: As different stakeholders are different in their original resource and capacity sets, the combination efficiency varies Any stakeholder has a certain combination of resources and capacities. When a stakeholder combines with a new resource and capacity, it actually combines its original resources and capacities with the new one. Different combinations of resources and capacities have varied efficiencies. But due to the variance in the original resources and capacities of different stakeholders, opportunity cost varies too. The revival of “Xie Fu Chun”, a 100 year-old brand, is a good case in point. Xie Fu Chun is China’s first cosmetics enterprise with a history of around 200 years, and a truly centenarian brand. In 1915, it won the silver medal and certificate of the Panama Pacific International Exposition held in the United States, and was a world-renowned cosmetics brand and the top brand in China. However, it struggled in the wake of the modern economic waves and was once even closed down. The trouble of the cosmetics maker was apparent. In terms of products, it faced the problems of an aging brand, outdated technology, and insufficient innovation, which made it difficult to compete with the world’s modern cosmetics giants.

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In terms of channels and pricing, there were issues. On the one hand, price cuts would degrade its brand image and relegate it to the low-end market. On the other, maintaining relatively high prices would overstretch its channels and make it hard to build up sales scale. In other words, Xie Fu Chun could hardly exert the role of its time-honored brand resources as the first cosmetics enterprise in China. But the same resources, when applied to scenic spots, will perform differently. Most tourists (especially those visiting places of historic and cultural heritage) would like to buy some gifts with cultural significance and send them to relatives and friends when returning home, so they are particularly interested in products of time-honored brands for their historical inheritance. There is no need to elaborate on the Xie Fu Chun brand. Their face powders are world famous for resembling duck eggs in shape, and suit the niche tourism market perfectly. In addition, many tourist destinations lack the decoration of traditional brands to boost their offerings, so they were naturally inclined to cooperate with Xie Fu Chun. Given this background, the cosmetics maker opened franchise chain stores by cooperating with Zhouzhuang of Suzhou, Gulangyu Island of Xiamen, and Tunxi of Mount Huangshan, among others. Each store is rendered the atmosphere of Xie Fu Chun’s time-honored brand, and brings tourists back to Yangzhou’s local markets more than one hundred years ago: store fronts are decorated with antique flavors, with the Chinese characters of “Xie Fu Chun” written on the classic and lacquered plaques and shop assistants are dressed up in imperial palace costumes of the Qing dynasty. Neatly lined up on counters are the various sachets and face powder boxes, filling the air with rich fragrance. In this atmosphere, all sorts of classic cosmetic products from Xie Fu Chun, priced from tens of RMB to over several hundred RMB, are readily accessible to tourists. Their aesthetics go perfectly well with the scenic spots, and remain very popular among tourists. In this business model reform for Xie Fu Chun, a centenarian brand is not of great value to the cosmetics maker, or modern supermarkets, stores and other channels. In other words, when this resource is used to transact with the relevant stakeholders, the selection revenue is not high. However, for scenic spots, especially places of historical and cultural heritage, a 100 year-old brand means historical inheritance and higher cultural taste, and matches well with the existing atmosphere of these places; so the selection revenue is relatively high. That is to say, by cooperating with tourist destinations, Xie Fu Chun can realize higher selection revenue and sell at higher prices and more products, than working with modern supermarkets. Its selection cost is lower; and it need not pay admission fees or commissions to supermarkets. Good business model design will fulfill the target for a key stakeholder: The difference between the selection revenue and selection cost shall be greater than that before a transaction is completed. Namely, benefit improvement is realized for the key stakeholder. Reason 2: Different stakeholders have different constraints A difficulty in the eyes of Stakeholder A might be a piece of cake for Stakeholder B. Realizing this point enables us to look for more suitable transaction objects for resources and capacities.

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First of all, different stakeholders have different capital constraints. In a local home furnishing market, there are various kinds of merchants selling furniture, lamps, building materials and decorations. These merchants usually pay a fixed monthly rent to the home furnishing market. Considering the ample cash flow in the entire market, the home furnishing market cooperates with a bank where sub-accounts are opened for each merchant for financing in proportion to the sales volume of the merchants, which provides working capital for the merchants and lowers their fund occupation levels. Later, the home furnishing market provides these merchants with uniform financial, logistics, and other supporting services, allowing it to establish closer ties with the merchants and grasp their operation conditions. At last, the home furnishing market changes the fixed monthly rent to turnover-based commissions, thus completing the transformation of its profit model. Single merchant usually does not have a large monthly cash flow, and it is difficult to acquire favorable financing conditions from banks. However, when all the merchants are added up, the monthly cash flow of the whole home furnishing market is very impressive; so it is naturally easy to establish cooperation with banks. Obviously, in terms of financing with the cash flow resource, the capital constraints for single merchants and the entire home furnishing market are different. Next, different stakeholders have different risk constraints. For the same amount of investment, Stakeholder A may not mind much losing it all as it only represents a very small portion of its assets; but it may mean life or death for Stakeholder B, for it could be close to all of its wealth. Here we find that A and B have different risk tolerance capacities. That is why in the old days, many peasants would rather work as long-term laborers for fixed wages than lease farmlands. To lease land, a peasant had to pay a rent which might represent a hefty part of his whole fortune. In a bad year, he could not afford the rent and his family had to suffer huge risks. But long-term laborers had a fixed income, which might not be high, but incurred relatively low risks. Relatively speaking, landlords owned lots of lands and properties, could undertake risks, and pay fixed wages to peasants. Even in case of a poor harvest in certain lands or a bad year, they could end up unharmed. So in terms of land investment, landlords obviously had stronger risk tolerance and were more capable of making investment decisions. In terms of risk management capability for the same investment, different stakeholders have different constraints. In recent years, Alibaba has been very successful in microfinance, which has so far become one of the three troikas (platform, finance and data) of the company. Jack Ma, its boss, once remarked proudly, “If banks do not change, we’ll change banks.” The reason why Jack Ma can be so confident is because Alibaba outdoes banks in loan risk management capability. Alibaba’s many customers are SMEs. While providing integrated e-commerce solutions to its customers, Alibaba has familiarized itself with the internal operation conditions of customers, and better established a credit system based on customers’ historical operation information. Plus its logistics system and payment system, Alibaba exercises strict management of customers’ information during the entire transaction process and can effectively control risks. These advantages are not in the possession of traditional banks. It is reported that by

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the middle of 2012, the company’s daily interest income from microfinance business alone already exceeded 1 million RMB. At present, Alibaba’s microfinance has become an important force in the loan market. The resources, capacities and stakeholders stated herein may not only mean individual resource, capacity and stakeholder, but also refer to bundled resources, capacities and stakeholders. For the same home appliance chain terminal, some manufacturers bundle such resources and capacities as sales, distribution, door-to-door installation and aftersales service into one package and configure it to store managers; while some others only configure sales to store managers but bundle distribution, door-to-door installation and after-sales service into one package and configure it to the HQs. Thus the resources and capacities are bundled and configured in different ways to the same stakeholder. In the event of an IPO or M&A for an enterprise, its service team is usually composed of investment banks, lawyers, accountants and other professionals, which normally have mutual connections and collaborations to provide services to enterprises with such demands. This involves the bundling of stakeholders, and configuration of specific types of resources and capacities (such as IPO and M&A services). Reason 3: Different stakeholders face different sets of trading opportunities In recent years, Internet giants such as Google, Facebook, 360, Tencent and Baidu have all launched the open platform strategy, and welcomed software developers with good apps to join their platforms for common growth and prosperity. One of the key reasons is that these Internet giants have different opportunity sets from those of Internet startups. For a good app, it takes a long time cycle and huge costs to market it from scratch, and let users understand and trust it. But when joining hands of Google, Tencent, and Apple’s App Store, the app can come into touch with at least several hundred millions of users, and its chance of being selected and bought by users will undoubtedly increase exponentially. So far, it has been well proven that an increasing number of Internet and mobile Internet startups have achieved success by standing on the shoulders of such Internet giants. Plants versus Zombies, Draw Something and other application software have helped their developers succeed by becoming smash hits on Apple’s App Store. Therefore, when looking for stakeholders of a transaction, carefully consider what is the “opportunity” by which your resources and capacities can be best used? Is it hard to come by? Then which stakeholders have contact with this opportunity? In the case of the above China-Africa photovoltaic fund, it would be difficult for photovoltaic manufacturers alone to tap those African countries, for the trading relations of those countries are not in the opportunity set of photovoltaic manufacturers. But it is very easy for the fund to get in touch with those African countries, as the transaction is in its opportunity set. So, a stakeholder needs to attend to three factors when seeking partners to form a symbiont: different resources and capacities, different constraint sets and different

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opportunity sets. When it finds partners meeting these conditions, both sides may create greater value space by reestablishing their resources and capacities.

3.4 New Transaction Theory: Exchange, Transaction and Opportunity Cost, Transaction Pricing Of the examples cited above, some involve direct exchanges of resources and products, like Stakeholders A and B exchange resources and capacities ‘a’ and ‘b’; some are long-term transactions, like Xie Fu Chu. In fact, the transactions we refer to are in the broad sense, including both simple and one-time purchase and sales relations and continuing transactions such as short-term cooperation, mid- and long-term contracts, and equity relations. In the example cited at the beginning of the article, A and B can cooperate in setting up a company, put in their respective resources and capacities to complement each other, and obtain a common profit of 2,200 RMB which is then shared between A (1,000) and B (1,200).This is not essentially different from the simple one-time exchange mentioned at the start. Here in this section, we call one-time purchase and sales relations exchanges, but continuing transactions as transactions. The traditional transaction theory mainly studies exchanges, so we call the theory on continuing transactions as new transaction theory. In an exchange, there is usually an open market price, or established or negotiated one-time price. The precondition for both sides to reach an exchange is different valuation of the same resource or product; this is the foundation of exchanges. In a transaction however, different stakeholders cooperate with each other, form a symbiont, and have a certain resource (including capacity; the same below) or product output. The resource and capacity of each stakeholder has been transformed into output of resource and product in the symbiont trading structure. The relationship between resource/capacity input and resource/product output has changed from clear-cut correspondence in simple exchanges to fuzzy correspondence in continuing transactions. Although it is difficult to evaluate the contributions of different stakeholders to the output of a symbiont, it is still possible to agree on a contribution ratio through bargaining, which can become the highest value of transaction pricing. Also consider that the resource and capacity of a stakeholder can be used to participate in other trading structures. The stakeholder gets the selection profit, which is the opportunity cost of participation in this symbiont’s trading structure, and the lowest value of transaction pricing. Reasonable transaction pricing will be somewhere between the highest value and the lowest value. In other words, it will be no lower than the opportunity cost, but no higher than the stakeholder’s contribution to the symbiont. Take the China-Africa photovoltaic fund for example, suppose the contribution of photovoltaic manufacturers to the trading structure is 80, while the maximum profit from using their photovoltaic equipment in other trading structures is 60. Then the reasonable transaction price to be paid by the fund to photovoltaic manufacturers

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will be no lower than 60, yet no higher than 80. This price band will be acceptable to photovoltaic manufacturers. Reasonable transaction pricing is the foundation of a stable trading structure for a symbiont. After joining the symbiont, the stakeholders will continuously accumulate resources and capacities, and their selection profit will also change. The trading structure of the symbiont needs to be consistently upgraded, and transaction pricing is constantly changing. The amount of selection profit is not only influenced by stakeholders, resources and capacities, but also related to the trading mode and the attributes of resources and capacities traded. The design and pricing principles of the symbiotic trading structure is the core content of the new transaction theory, and will be examined in separate articles later.

3.5 Design Tools to Match Resources and Capacities with Stakeholders When an enterprise has decided on the ecosystem it is in, the basic list of resources and capacities becomes clear. Then, the resources and capacities of enterprises fall into three categories: (1) Those needed for future development that will be retained, accumulated and strengthened. (2) Those still lacking for future development. (3) Those not needed in future development as these resources and capacities are redundant. For the last two categories, we can list them out and seek potential stakeholders to transact with. If an enterprise wants to transact with a certain stakeholder, it can comprehensively analyze their resources and capacities. What does it have? What does it lack? What is redundant? Finally, a closed logic loop will form like the China-Africa photovoltaic fund mentioned above. By analyzing the resources and capacities each stakeholder needs and can provide, their respective selection revenue and selection cost, we can find the most suitable transaction object among the potential stakeholders. The list of resources and capacities can be shown as below: Stakeholder

Spare resources and capacities

Potential stakeholder

Focus enterprise

Resources

Stakeholder

Selection profit

Missing resources and capacities

Potential stakeholder

Resources

Stakeholder

Stakeholder

Stakeholder

… Resources

Stakeholder

Selection profit

… Resources

Stakeholder

Stakeholder

Stakeholder

…

… (continued)

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(continued) Stakeholder

Spare resources and capacities

Stakeholder

Resources

Potential stakeholder

Selection profit

…

Missing resources and capacities

Potential stakeholder

Selection profit

… Stakeholder

Resources

… …

Stakeholder …

…

…

After matching stakeholders with resources and capacities, the following stakeholder—resource and capacity transaction table is derived. Stakeholder

Resources and capacities provided

Stakeholder 1

Resources Resources …

Stakeholder 2

Resources …

…

Recipient stakeholder

Trading mode

Chapter 4

Engineering Principles for Business Model Design (II): Value Enhancement Varies with Different Trading Modes Among Stakeholders

In the last chapter, we stated that “opportunity cost varies when the same resources and capacities are owned by different stakeholders”, which centers on different stakeholders. But will the final effect of business model design be the same if transactions are conducted with the same stakeholder? Let’s look at one instance first. A technology firm owns an eco-fertilizer technology. If a fertilizer producer uses it, the cost per ton can be cut by 500 RMB, and gross profit could reach 30%. There are at least two types of business model design in terms of this technology: First, establish a factory centered on the technology to form capacity and sell fertilizers. This further involves financing design for the factory’s assets, trading structure design for various stakeholders along the fertilizer industry chain, etc. Second, cooperate with an existing fertilizer on the basis of the technology. The resource and capacity to be exchanged are relatively definite, as are the stakeholders. Here we can still have a variety of trading mode designs, which can be illustrated with three examples. First mode: completely sell the technology to the fertilizer. This is often adopted in the pharmaceuticals industry. In this trading mode, the stakeholders can obtain a one-time profit by adopting the full valuation pricing method, and it is a one-time transaction between the technology firm and the fertilizer. Second mode: charge IPR royalties for authorized use. This means dividing up the activities of technology R&D, production and sales. The fertilizer takes up production and sales, while the technology firm aims to control the whole process through R&D and receive long-term sustained income. In terms of cash flow structure, it is multipletime income. This mode was once adopted by Qualcomm in the 3G market. With a fairly comprehensive patent pool and technologies essential to 3G applications they mainly targeted big enterprises and government and were a huge success in the 3G era. Third mode: encapsulate the technology and hand it over to the fertilizer producer as a formula with the stipulations that the technology firm brand be used and the product sold through existing channels. This way the technology firm can allocate the majority of the profit (say, 70%) to the fertilizer company. The design of this kind © Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_4

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of trading mode not only divides the business links into technology R&D, formula encapsulation, production and sales, but also divides resources and capacities into brand, capital, capacity and sales capacity. The technology firm occupies the business links of technology R&D, formula encapsulation, and the brand resources, but gives the rest to the fertilizer company. Unlike the string structure in the first and second modes, this is an integrated triangular structure. The technology firm obtains sustained profits throughout the activities of technology R&D, formula encapsulation and brand authorization. Differing from the fixed income form in the second mode, it adopts the profit sharing model, which is exactly what Coca-Cola does. After producing the concentrated solution, Coca-Cola started looking for partners worldwide. The company allowed them to open bottling plants and hold stakes, but they had to promote and sell the products under CocaCola’s uniform brand and system. The producer of the concentrated solution and the bottlers are actually two companies. The concentrated solution is the Coca-Cola brand while the bottlers are the Coca-Cola Company. The three trading modes finally realize different controls and value enhancements. The first mode involves valuation of the technology and transaction with only one fertilizer producer, which generates limited transaction value. The second mode incurs huge transaction cost and is quite difficult in terms of implementation in a fragmented domestic market filled with guerrilla-like subjects. Only the third mode exercises a stronger control. If it is supported by financing means to solve the funding problems of most small and medium-sized fertilizer companies, it is likely to succeed. The transaction value is relatively high, transaction cost under control and monetary cost relatively low, while the value enhancement is the highest of the three modes. The three trading modes above embody the differences of these parameters as configuration, cash flow structure, and means of income and expenditure in the trading structure between the technology company and the fertilizer. With various changes of these parameters, their combinations result in different forms of trading modes, which then bring about different value enhancements. And this is what makes business models so fascinating.

4.1 Value Enhancement and Trading Modes Value enhancement can be explained with the equation below: Business models create certain transaction value at a certain transaction cost, and the difference between the two is value space. In addition to transaction cost, the focus company and stakeholders all have to bear monetary costs, such as overheads and raw material purchase costs. The value space minus the monetary costs is the added value realized by business models for all the stakeholders, which is the sum of the focus company’s residual income (or corporate value) and the stakeholders’ residual income.

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If a trading structure can innovate and boost transaction value, or lower transaction cost or monetary cost, or realize two or all of the three items simultaneously, value enhancement will be amplified. Simply put, a trading mode answers the question of “how” a resource and capacity is traded among a number of known stakeholders. We can have seven different parameters: fulfillment mode, configuration, role, relations, means of income and expenditure, income and expenditure sources, and cash flow structure. Add the resources and capacities of stakeholders and the value of trading structures, and all these constitute the core content of the “six-element model of the Wei-Zhu business model”. For each stakeholder, it owns a certain initial resource and capacity, which is shown as the different attributes of the transaction object in different forms. If any activity is divided into the three links of input, processing and output, then a resource is a transaction object that can be separated from activity and stakeholder, or a certain attribute of the transaction object. It is usually at the input and output links of an activity. Capacity is an efficiency and effect indicator measuring activity processing. Different ways of division of activities and property (right) allocation of input, processing and output of activities thus constitute various trading modes. The traditional exchange theory stresses value enhancement due to complete property transfer of the transaction object, and different valuations (selection revenue and selection cost) of the same transaction object by different stakeholders. The new transaction theory places emphasis on the value enhancement brought by different trading modes. This includes (but is not limited to) different ways of dividing and transferring the entire property of the transaction object, and division and configuration of resources, capacities and stakeholders for dividing up and transferring the transaction object. These trading modes (fulfillment mode, configuration, role, relations, means of income and expenditure, income and expenditure sources, and cash flow structure), when given different values, will generate different value enhancements.

4.2 Fulfillment of Trading Modes Traditional management theories emphasize and analyze who are your stakeholders and what their demands are, while not much is said about the ways of meeting

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the demands. However, the fact is that even for the same stakeholder and the same demand, adopting different fulfillment modes may lead to different value enhancements. For instance, a large equipment assembly plant needs to achieve full-set manufacturing of the supply chain with a parts manufacturer. In the traditional trading mode, after the assembly plant selects a site and builds a plant, the parts manufacturer builds a factory near the assembly plant for the convenience of full-set manufacturing. But the parts manufacturer feels like they are getting the short end of deal. If their factory is built near the assembly plant to specifically help achieve full-set manufacturing, the parts price will be held down and to the parts manufacturer will have to sign an unequal contract. Also, to provide the same service to other assembly plants, the parts manufacturer needs to select a site equally accessible to multiple assembly plants, which means higher logistics costs. How will they resolve this issue? The assembly plant’s analysis is that a parts manufacturer owns resources and capacities such as workshops, equipment, a management team, working capital and technology. The current fulfillment mode is to configure all these to the parts manufacturer. Suppose workshops are configured to the assembly plant while equipment, management team, working capital and technology are configured to the parts manufacturer. Will this work as a new trading mode? Specifically, the assembly plant builds workshops, and rents them to the parts manufacturer which provides the necessary equipment, working capital and technology, establishes a management team, and takes charge of operation. The parts manufacturer can now move and bring their equipment and management team along at any time, without worrying about being bullied by the assembly plant in pricing. In regards to the assembly plant, it shows their sincerity for cooperation, which is instrumental to a long-term and steady partnership. Even if the parts manufacturer moves away, it is relatively easier to get another one. It also suffices to configure new equipment, management team, working capital and technology (there is a oneto-many relationship between the assembly plant and parts manufacturers, so it is easier to change for other parts manufacturers).In this way, the transaction cost drops substantially and value enhancement is achieved.

4.3 Configuration of Trading Modes Configuration refers to a network topology structure composed of stakeholders and their connections. Certain different trading structures are shown in varied configurations and form different value enhancements. – Bilateral platforms A bilateral platform usually connects two types of stakeholders, with the platform enterprise performing the functions of collecting information, formulating transaction rules and promoting transactions. Taobao, Facebook and iTunes, with which we

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are most familiar, are all bilateral platforms. In terms of configuration, they feature a trading mode of many-to-many relations at both ends and concentration in the middle. The figure below shows the configuration of Google with only the preliminary basic structure considered and extensions such as AdSense, Gmail and Android left out, even though the configuration is the same. The left represents large numbers of Internet users, who request searches, and Google give feedback on relevant web pages with its Page Rank algorithm. The advertisers show their products and then pay advertising fees by clicks. And Google as a link to both sides displays the advertisements related to users’ search contents on the right of the search pages.

Such a configuration reduces the search costs between advertisers and users. With the Page Rank algorithm as its core technology, Google provides it to users free of charge, and accumulates vast numbers of users, which as a result, greatly boosts the value of the “eyeball economy” for advertisements. – Unilateral platforms A unilateral platform means a enterprise which transforms individual links with separate elements and capacities or combinations of links (to the extent of the economy of scope) into a business entity with itself at the core (to the extent of economy of scale), and provides a platform with complementary combinations of resources and capacities for the entity. The sum of the platform and the business entity is called a unilateral platform business model. In terms of configuration, a unilateral platform is a one-to-many and platform-to-entity trading mode with a standard interface. Traditional laundries usually adopt the “direct sales + franchise” model, under which individual stores purchase equipment, collect clothes from customers and wash them. The model raises relatively high requirements for stores, and will run into the following bottlenecks:

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First, inadequate capacity utilization rate. The area of each store is basically around 100-200 square meters. Except for those located at the junction of a number of residential communities, most of them will find it hard to make full use of capacity. Second, shortage of outstanding store managers. Stores need to deal with a number of services including collection, washing, delivery and distribution, which requires certain staffing levels and high-caliber store managers. The short supply of outstanding store managers is a big bottleneck. Third, scarcity of well-performing stores and expensive rent. Due to fierce competition at retail terminals in recent years, the rents of stores at prime locations in communities have been surging radically. Fourth, other difficulties include rising costs for laborers, scattered cash flows and environmental protection issues. As a result, the “direct sales + franchise” model has a standard one-to-many interface on the surface, but it is a relatively simple interface, with weak relations between the HQ and stores, and obsessed with such problems of “weak HQ and strong stores” and has an insufficient ability to control. As proved by practice, it is difficult for laundries adopting the “direct sales + franchise” model to grow further. A company has divided the business activities of laundries based on the design of unilateral platforms, and created a new “special 4+1” business model. The company divides relevant business activities into: collecting, washing, centrally delivering and distributing clothes; assigns collecting and distributing clothes to community-based stores (laundry collectors); and centralizes clothes washing in one location. Delivering clothes to one central location becomes the transaction interface between the washing center and laundry stores. Each afternoon, the pickup and delivery vehicle goes to 4 laundry collection sites to deliver the clean clothes that were collected the day before, and collect those to be washed the next day. This has basically solved the problems above. First, 1 washing center is equipped with 4 laundry collectors for proper capacity matching. Second, the washing center makes investment in community-based operations and lowers the requirements for store managers. Without the collection link, it can manage with more concentration and efficiency. Third, laundry collectors don’t need a large area, so the threshold for investment and site selection is lowered. Ten square meters is enough for a laundry collector, which can be managed by a retiree or housewife. Fourth, laundry collectors can hire local employees, reducing recruitment difficulty and labor costs. Fifth, interconnected cards realize cash flow centralization. Sixth, it is highly replicable. After adopting this “special 4+1” model, the company has experienced robust growth, and opened over 300 washing centers in one year. This model is still in constant upgrading. The same chain stores form the configuration of a unilateral platform through reallocation of activities between the HQ and stores, and bring about relatively great value enhancement.

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– Configuration innovation of a shoe-sole maker: from string to triangle A shoe sole maker used to adopt the string-shape trading mode. It sold soles to a shoe maker. The shoe maker consolidated the soles into the shoe design and manufactured shoes, which were then sold to brand owners like Nike, and entered the system of Nike and others. This is a typical parts-for-OEM model, with relatively low value but steady revenue. Risks all depend on the relations with the shoe maker.

After accumulating shoe design capacity, and business networks upstream and downstream, the sole maker sought transformation and shifted to a triangular trading mode. As shown in the figure below: the sole maker undertakes activities such as shoe design, sole design and sole production, organizes the supply chain for the production and sales of shoes, provides shoe design plans to shoe makers and shoe brands, signs contracts, supplies high-quality soles, and offers guidance, support and rebate subsidies to sales channels, stringing the entire value chain.

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The triangle configuration allows the sole maker to enhance its control capacity, and obtain more value enhancement compared to the string configuration. In fact, Intel has been adopting this trading mode for its CPUs, and has firmly controlled the PC industry value chain with “Intel inside”.

4.4 Roles of Trading Modes Roles mean the functions of stakeholders owning specific resources and capacities in a trading structure. In other words, by judging the resource and capacity put in, we can define the role of a stakeholder in a business model. In business model design, appropriate role design will encourage stakeholders to make best use of their resources and capacities to realize value enhancement. Opening chain stores requires the growth of store managers. If a store manager earns 100,000 RMB this year, much more than the 60,000 RMB earned as an average employee, and the salary rises to 150,000 RMB in the next year, they will be quite happy. But if the salary hovers around 200,000 RMB for the next couple of years, his/her passion and initiative will drop drastically. As the years pass, the store manager will amass personal wealth, social relations and management capacity. If these accumulated resources and capacities can be designed into the future business model system to continuously strengthen the original cycle, then a business model can be consistently upgraded. Therefore, it is important to design the role of the store manager in the future trading structure, and encourage them to continuously put their growing resources and capacities such as personal wealth, social relations and management capacity in the entire business model. A chain enterprise designs its business model in this way: divide a store’s bundle of rights into management right, dividend right and investment right, with the first two assigned to the store manager, and the last to public investors (including the store manager). The investment rights need to be purchased with capital. Through gradual accumulation, these investment rights can be converted to rights to buy original shares if the chain enterprise goes public. In this case, the personal wealth of the store manager can be constantly invested in a number of stores; while the HQ can use the money to open more stores and expand its scale. Regarding the personal social relations and management capacity of the store manager, the enterprise adopts the “multilayer and small chain” model. When the store manager can successfully manage one store, he/she can be promoted to a higherlevel position to manage a number of stores, and further promoted if his/her management capacity is well proven. Furthermore, stores fall into community stores and flagship stores, which have different requirements for store managers, and can be properly handled during the evolution of the business model. The trading mode design constantly utilizes the accumulated personal wealth, social relations and management capacity of store managers and reinforces them into the whole chain system, properly arranging the career path of store managers,

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and provides endogenous growth as a driving force for the continued upgrading of the chain enterprise. The initial role of store managers is sales; but through the accumulation of such resources and capacities as personal wealth, social relations and management capacity, the potential role of store managers has widened in scope. Suppose that such a potential role is not turned into a factual role, it is then impossible to put the accumulated resources and capacities of store managers into the trading structure. Through design of the investment rights, the role of store managers gains an investor attribute, so their personal wealth is put into the trading structure. Through the multilayer and small chain design, a manager attribute is added to the role; and their social relations and management capacity are put into the trading structure. Through role design, the personal resources and capacities of store managers have been transformed into those of the entire trading structure.

4.5 Relations of Trading Modes Relations mean the governance relationships among stakeholders, and mainly describe how bundles of rights including the right of control and residual claims are allocated among stakeholders. The core principle of such allocation lies in which nature of contributions obtains which nature of revenue. Any stakeholder owns a certain resource and capacity, and contributes to the output of a symbiont by putting in this resource and capacity. If the resource and capacity works within the scope of scale, the size of input does not affect output, so the contribution is fixed. For instance, within the capacity scope, workshops are a fixed contribution relative to output. On the contrary, the greater input of this resource and capacity, the greater the output is, which makes it a variable contribution. For instance, in agricultural farming, the amount of effort exerted by farmers is a variable contribution to crop yield. Simply put, when two stakeholders conduct a transaction, the fixed contribution deserves a fixed income, while the variable contribution is the residual income (for more detailed explanations and conclusions, please refer to An Economic Perspective on Business Models). This kind of core principle is represented in different forms under varied circumstances. Here are four of them: First, some stakeholders making fixed contributions obtain equities. Equity describes the allocation relations of right of control and residual claims among different stakeholders. It exists to lower the transaction cost of allocating the income of different parties. Normally equity relates to residual income. So only when the contribution of a stakeholder is variable, will the equity method be adopted. There are all kinds of transaction costs in reality, some contributions are fixed, but still are represented as equity. First, take for example a rural hotel in a scenic spot. The local government first finds land for construction of the hotel. After the hotel is constructed and put into operation, the dividend distribution plan goes like this: the hotel management

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company takes 20%; the government takes 25% for infrastructure construction, and the remaining 55% is shared among displaced villagers based on how much land they gave up for the project. The land input of villagers is a fixed contribution after the hotel is put into operation, but it is very important in the trading structure design. Given certain policy considerations, it is reasonable for them to obtain returns on equity. Second, a stock option incentive aims to encourage the contribution of stakeholders’ roles in the trading structure. But the contribution of roles is diverse, so stock option incentives are diversified too. If some income is linked to invested capital, dividends can be allocated accordingly. If some income is linked to work contributions, these contributions will be removed when relevant manpower leaves without further dividend distribution. All this will be clearly figured out in the design phase. Huawei’s stock option incentive is an example, if an employee quits, he/she must retire from the incentive plan. Specific plans may have different designs at different stages, but linking equity to work contribution is a basic principle. Third, the right of control and residual claims need not be perfectly matched. The same shareholdings do not necessarily mean the same rights. The descendants of some foreign family enterprises own the veto power, but the majority of dividends are distributed to the management team and public shareholders. Some chain stores, in their initial development stage, also adopt the “right of control favoring the HQ and the right of dividend to stores” method. Fourth, even in terms of contribution, it is likely not to distribute dividends by the capital contribution ratio, which is mainly demonstrated by various cooperatives. These include producers’ cooperatives with dividend distribution based on supplies, consumers’ cooperatives with distribution based on sales volume, usage amount and financing volume, and even social enterprises that make no distributions at all.

4.6 Income and Expenditure Sources of Trading Modes Income and expenditure sources may mean the resources and capacities through which an enterprise derives income and incurs costs, or refers to the stakeholders generating such income and expenditures. Under some circumstances, income may be converted to cost, or vice versa; or income and cost sources are removed. All this involves innovation of trading modes. Of the conventional human resources, the four management activities of selecting, cultivating, using and retaining are normally in the responsibility of the human resources departments. The enterprises also need to pay compensation, five social insurance contributions, one housing provision fund, and performance bonus to employees. If the trading mode is transformed, it is likely to put employees into the income link. A certain chain enterprise has designed a complete and compact chain franchise system, and raises relatively high requirements for store employees. It needs to put in relatively great resources and capacities in the cultivating link to obtain competent

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employees, but this link obviously needs to be done by the HQ to achieve economy of scale. So, this chain enterprise establishes an enterprise university devoted to training employees to master the chain franchise system (employees at different levels will receive different training content and go through different processes). The trained employees are more professionally skilled than those recruited by the stores themselves, and more competent workers. Therefore, the HQ dispatches the trained employees to different stores, and charges a dispatch fee as one of its critical revenue streams. Certain major cost expenditures can also be made through trading mode design to be undertaken by other stakeholders. 7-11 has opened large quantities of curbside convenience stores, and configured a set of uniform, powerful and an intelligent supply (including manufacturer and retailer) information system for them. The system clearly shows which stores in which locations lack what particular goods, and can also offer intelligent analytical results and suggestions on how display goods to achieve a better sales. Suppliers learn the about the demand and distribution through the information system and accordingly replenish supplies, which makes it very convenient for 7–11 to transact with its suppliers. In terms of infrastructure construction, 7–11 has also exerted the suppliers’ advantages in resources and capacities by dividing the same resource and capacity to multiple suppliers and jointly bearing input and reaping revenue. For instance, a number of suppliers jointly invest in and establish a common distribution center, which is then jointly used and run by them. Upon completion of construction, the suppliers entrust the distribution business and the right of management to the common distribution center. 7–11, after obtaining consent through negotiation, includes the suppliers into its information system based on the concentrated establishment of local stores and its information network. In addition, 7-11 also provides the online ordering system and automatic sorting system to help the distribution center realize systematic operation and high efficiency. In the traditional trading structure design, the distribution center is counted as a cost of the chain enterprise’s HQ. But through joint investment and construction by the suppliers, the cost expenditure is actually lowered. This has allowed 7–11 to become asset-light and more focused on building up the core information system to grow and accumulate information capacity.

4.7 Means of Income and Expenditure of Trading Modes Means of income and expenditure come in all types. For instance, by the very nature of income, there is fixed income, residual income, and shared income. By charging form, there are admission, road toll, parking, fuel charge and sharing fees. In the combination mode, there is product mix pricing, consumer group pricing, time combination

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pricing, customer pricing and auction. We can come up with lots of different instances for means of income and expenditures by looking at time combinations. Some resources and capacities can be paralleled in terms of time, and others can be divided up in terms of service time. All of them may bring about new trading opportunities and boost value. Resources and capacities paralleled in time, means that stakeholders are allowed to transact in more things in the same time frame. Take a chain hairdressing center for example, if it manages to raise the amount of consumption per unit time within a certain time in a fixed area that will translate to higher value enhancement. One way is to provide higher-priced services; the other is to superpose services that can be paralleled in time. Having hair permed, watching advertisements and going screenshopping can be carried out simultaneously. In this case, the hairdressing center can launch superposed services to boost the output per unit time. If these resources and capacities are mutually complementary, that will be more ideal. For instance, within the same time frame, The Lord of Rings is screened in movie theatres; while merchandise relating to the movie is sold outside, along with other marketing activities. The superposition of these activities will boost the output per unit time. In addition, the same resource and capacity can also be divided up and allocated to a number of stakeholders in terms of service time. It is best if they have relatively common interests to ensure relatively lower transaction costs. Take for example, an agricultural machinery cooperative where the input of machinery can be compensated based on service time. Suppose this cooperative wants to purchase a fertilizer distributor worth 100,000 francs. Its members only need to bear 30% of the cost equally among themselves (i.e. 30,000 francs), with the rest of the 70% advanced by concessional loans and government subsidies. So how much shall each member pay? It’s very simple. Suppose the cooperative has 5 members, respectively undertaking to use the machine for 20, 15, 30, 20 and 15 h each year. Then the total service time of the machine is 100 h. If the charge is 300 francs per hour, the 5 members have to pay 6000, 4500, 9000, 6000 and 4500 francs respectively. Therefore, any farm owner can own the right of using agricultural machinery at less than one tenth of the cost. Generally speaking, the members of a cooperative far exceed five persons, which means that farm owners pay even lower costs. Such a division of time can either boost transaction value or lower transaction cost, and finally realize greater value enhancement.

4.8 Cash Flow Structure of Trading Modes The same sum of earnings, gained or expended in different time frames will embody different cash flow structures. The design of financial solutions is derived from the cash flow structure of enterprises, and there is plenty of room for cash flow structure design.

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For instance, we can design an innovative trading mode for hospitals. A hospital can be divided into fixed assets (including buildings, equipment, and pharmacy), management team (such as president and the administrative team), expert team (doctors), and service team. Of these resources and capacities, the input of fixed assets is a fixed contribution, which can generate a fixed income. The management team and the service team are variable contributions but no determinant factors to the output of the hospital. A corresponding income can be obtained by service time. But the expert team is a key engine of the hospital’s profit, and will get the residual income. To put it differently, a hospital developer can organize a design institute and a building contractor to build hospital buildings, purchase medical equipment and equip the pharmacy. The building contractor settles payment by project phases. Hospital management and service teams can be brought in, adopting the property management model and charging by time. The expert team of doctors then moves into the hospital, sets up offices, pay rents for the use of fixed assets, service fees to the service team, and gets residual income from diagnosis and treatment. In this way, the income and contributions of all the stakeholders are matched up, and relatively reasonable. Part of this income is expended first and gained later as in the buildings. Some is expended and gained in the same phase like the management and service teams. Other is steady fixed income like building and equipment leasing, and some is unstable risk return such as income for the expert team. Theoretically, all can be divided up among different stakeholders to match up with their contributions and financial design.

4.9 Extensions of Trading Modes: Division and Reorganization, Selection Profit, etc. Different trading modes actually show the differences in the value of the seven parameters: fulfillment mode, configuration, role, relations, means of income and expenditure, income and expenditure sources, and cash flow structure. Plus the resources and capacities of stakeholders and the value of trading structures, all constitute the core content of the “six-element model of the Wei-Zhu business model”. During the formation of these parameters, an important idea is to divide up transaction objects, resources and capacities, and combine them with different stakeholders to establish different trading modes. The division may involve resources and capacities (like the trading mode design for the assembly plant and the parts manufacturer, and structural design for the hospital), business activities (like the “special 4+1” model of the laundry), management links (like the dispatch of trained employees by the chain HQ to its stores), bundles of rights (like the design of the continuous incentive scheme for store managers), and time (like the agricultural machinery cooperative). Dividing up is a critical means to generate parameters.

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After division, it is necessary to regroup stakeholders aiming to combine stakeholders with the divided parts to maximize the enhancement of total value. For each stakeholder, different ways of division form different trading modes and lead to different selection profits. For the trading mode to be ultimately selected, as long as its selection profit exceeds that of not participating in a transaction (opportunity cost), the transaction is possible. For any stakeholder, the income obtained shall not exceed its contribution to the trading structure. Between opportunity cost and contribution is reasonable pricing. Obviously, pricing is already included in trading modes. From a different angle, A needs to consider two opportunity costs before deciding whether to transact with B. First, what is the highest income for A if it puts its resources and capacity in other trading structures besides the transaction with B (that is the opportunity cost for A). Second, what is the highest income for B if it chooses to transact with another stakeholder (which contributes the same quality and quantity of resources and capacity) instead of A, which is the opportunity cost of B. The selection profit from any resource and capacity varies with different stakeholders. First of all, this profit involves a mutual matching between resource/capacity and stakeholder, which is the core idea of the previous chapter. Then it depends on the trading mode of the resource and capacity. Different trading modes are like different energy development technologies, and can generate different energy even when faced with the same situation. As stakeholders adopt different trading modes, value enhancement varies and this is precisely why we are discussing trading modes.

Chapter 5

Engineering Principles for Business Model Design (II): Value Enhancement Varies with Different Attributes of the Transaction Object in the Same Trading Modes

In the previous two chapters, we’ve elaborated on the two points of “opportunity cost varying when the same resources and capacities are owned by different stakeholders” and “value enhancement varies with different trading modes among stakeholders”, which focuses on different stakeholders and trading modes. But is value enhancement the same when using the same transaction object? Transactions among stakeholders, in effect, represent pricing of a certain attribute of the transaction object. The reason why property developers bid for land lies in the anticipated pricing of a plot where residential properties and stores could be built in the future. An enterprise recruiting a sales expert is pricing his selling capacity. A technology firm buying up a specific patent is pricing the potential value the patent may generate in the future. Even for the same transaction object, different attributes of the transaction definitely lead to completely different pricing and value enhancement. For the same plot of land, whether it is used for commercial or industrial purposes, determines the different attributes of a transaction, which then will generate different value. For the same person, whether he/she is recruited to serve as sales director or marketing director will create different value. For the same patent, whether it is bought to apply to high-tech enterprise applications, for redevelopment or resale (separate sale or bundled sale), or conversion into a product, involves the transaction of different attributes, which will bring absolutely different value enhancement. A lot of new business model design originates from the creative pricing of attributes. The so-called pricing not only indicates the scale of prices, but actually reflects four definite aspects: Direction-specific: The reflection of value flow specifically involves from which stakeholders income is obtained, to which stakeholder’s costs are paid, and what costs are paid by other stakeholders. Nature-specific: Income and expenditure priced by time. The amount of usage or value as in an energy management contract (EMC).

© Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_5

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Quantity-specific: Take time-based pricing for example, whether it is 100 RMB per day or 500 RMB per month involves different quantification, but is of the same nature. Time-specific: For the same amount of income, whether it’s paid in advance, by installments or in phases will lead to difference in the cash flow structure of an enterprise due to different payment times, which will directly affect its corporate value. However, pricing in the traditional sense refers to “quantification”, or the scale of prices when income and expenditure sources, and means of income and expenditure are definite. This is the essential difference between business model-based pricing and traditional pricing. Different pricing modes including the direction-nature-quantitytime-specific approaches will finally result in different benefits to stakeholders. How to realize value space through the creative pricing of attributes is the core issue of attribute-based transactions.

5.1 How Attributes Create Value Space: From the Full Life Cycle of Customers to Attribute-Based Creative Pricing In the past, business design paid a lot of attention to meeting the full life cycle demands of customers. The main focus was on increasing this value to enhance value space: customer scale (more customers), customer value (higher price paid by each customer), and extension of consumption time by customers (more time for the sale of products or services), among others. The potential precondition is to provide the same transaction attribute to customers, which may be a type of experience or function. In business design nowadays, it is important to expand our perspectives and base value enhancement more on the creative pricing of transaction attributes. Entrepreneurs who are aware of this, will find an open door leading them into a brand-new world of discovering new tradable attributes in an “all-too-familiar” transaction object, designing business models based on such new attributes and fully pricing them. Jumping out of the “too-familiar-to-be-unique” dead zone is of critical importance. A transaction object has many attributes. A good question to ask your self is, “What is the attribute you have been trading in the most valuable?” Say that an agricultural technology company owns a drip irrigation technology which can save water and electricity and play a significant role in dry areas. The company has always been focused on the field crop market which needs water supplies, and accumulated industry-leading brand equity for water-saving irrigation However, profits have stagnated and they are actually struggling for further development. So, what might be the problem? To find a solution, list out all the tradable attributes of the drip irrigation technology: saving labor costs and fertilizers, increasing output, saving pesticides, water

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and electricity, and curbing salinization of soil. Starting with any one of these attributes, we could work out a brand-new business model. Actually, of the many merits of drip irrigation, the most critical and direct for the target customers (farmers) of the enterprise is “increasing output”, with the rest being added value only. But if they center on the transaction attribute of increasing output, farmers certainly need to calculate input and output. They also need to find answers to questions like, “What’s the yield of wheat per mu? What’s the incremental yield? How much equipment is in place? Is the input-output ratio viable?” and so on. After calculation, the value of wheat yield per mu is below 1,000 RMB. If the output increases by 30%, the earning generated by equipment is less than 300 RMB, but the depreciation of the equipment could be over 200 RMB. That’s why it doesn’t quite appeal to the farmers. The input-output ratio of other field crops remains at this level. In other words, the enterprise has chosen the wrong target market all these years. The reason is it has failed to identify the most appropriate transaction attribute among the merits of drip irrigation. Once the right transaction attribute is located, everything else will fall into place. The features of the correct target market will become clear: high added value, large scale (the optimal scale for drip irrigation is above 100 mu), and a price free from local market influence. Staple crops like corn or forestry crops will be the most suitable target market. Conversely, as a transaction object has so many attributes, is the one you give up really valueless? When we define a transaction object, we are actually selecting its transaction attribute. When selecting a certain attribute, we are sure to give up on other transaction attributes. It is imperative to remain aware of the abandoned attribute. For example, whenever it comes to the concept of garbage, we define it as dumped, discarded, dirty and messy. Yet in the environmental protection and waste recycling sectors, there exists new business design that turns garbage into wealth. The value lies in the redevelopment of its transaction attributes. By tapping into the multiple transaction attributes of garbage, Terracycle has created a distinctive social benefit model. Founded in 2001 as a small company, Terracycle got the support of over 50 giants in their respective industries, including Starbucks, Target, Mars and Kellogg’s. Terracycle engages in the creative business of turning garbage into wealth. To put it simply, they design garbage into creative products, like turning sweet wrappers into pencil cases, or restaurant food scraps into fertilizers. Upon completion of design, the products are handed over to manufacturers for mass production, and then put on sale in chain supermarkets including Wal-Mart and Target. Presently, there are more than 200 product categories, ranging from audio equipment, to furniture, photo frames, fashion clothes, and clocks. In addition, it also provides the enterprises carrying the products with the transaction attribute of corporate social responsibility advertising and revenue generation (garbage-supplying companies can get 5–7% of net sales from the garbage). Also they create opportunities for public-minded people to participate in environmental protection. A new business model is designed based on the garbage’s original attribute of being dumped. Reasonable pricing of the new attributes is the value source for Terracycle.

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Is it really impossible to price the attributes everybody thinks should not be priced? If priced, can they bring new value enhancement? No contract is sound and complete. The contract provisions for a transaction object only represent the pricing of some attributes. The unpriced part is likely to be overused. For instance, if vehicle maintenance behavior is not priced in a vehicle maintenance warranty, the car owner might neglect maintenance and over use the insurance. But it is also likely that the unpriced part is subject to secondary pricing and obtains residual value. By paying attention to existing unpriced attributes and applying creative pricing, we can get new value space. For instance, data for transaction processes and social behaviors was not priced in the past. In the Internet era with big data technology development, the pricing of these attributes is likely to be enhanced and many new industries created. During traditional business times, I bought a product which was pretty good, so I recommended it to my friends, or posted an article praising it online. My actions were all free of charge and not priced. In fact, this is all valuable information. My praise or criticism online just reflects my preference, or the preference of the community I’m in. My recommendation may turn a friend who is originally not a target customer into one. Whether my opinions are respected will decide whether I will become a loyal follower of this brand. As long as there is value and the transaction cost is low enough, these attributes should be reasonably priced to create new value enhancement. As a matter of fact, lots of new business models are built on the pricing of such attributes. Google prices the content we pay close attention to through advertisers. Facebook prices praise and comments exchanged between friends. In the future, WeChat’s circles of friends may price forwards and recommendations between our friends, at its product launches, Xiaomi may price the competition among and degree of mania of its fans; supply chain financing prices the transaction relations between the upstream and downstream of industry chains. The conventional business design focuses more on the pricing of customers’ full life cycle, by centering on a single transaction attribute of products or services. Neotype business design considers more valuable transaction attributes, and those abandoned or yet unpriced, to see if there is any probability for value enhancement. Creative pricing of these attributes is the source of corporate value. What’s more important, we not only have to consider the pricing of products and services, but also the pricing of interactive information among relevant stakeholders. The continuous evolution of mobile Internet technology provides interactive information among users that will increasingly create enormous value. Moreover, big data technologies make information processing costs increasingly lower. The various types of attributes and information displayed in the transaction process will become increasingly important. While these aspects are most capable of creating value under modern technological conditions, they are usually ignored during the pricing of transaction attributes. Google, Facebook, WeChat and Xiaomi have all achieved huge value enhancement by fully tapping into the transaction information, social networking information and process data among users. Then, what are those transaction attributes and what is their nature? For this, we need to look into the nature of transaction.

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5.2 What Is Transaction?—A Look at Transaction Attributes Using the New Transaction Theory The traditional transaction theory pays attention to the same transaction object, which is evaluated differently by different stakeholders, and thus can create value through exchanges. For instance, I like apples, you like pears, but I have a pear and you an apple that we can exchange which will lead to mutual satisfaction. The new transaction theory expands our understanding of transactions, taking into account both simple exchanges between transaction objects, and the new transaction value generated from A combination of transaction objects. For example, a property developer has strong development capacity and its local partner has land and government resources. The transaction is not simply about the local partner selling the land parcel and government resources to the developer (it is also hard to directly conclude the transaction). Instead, through full cooperation, both parties combine their property development capacity with land and government resources, develop properties and stores, and then divide up and share their value. All transactions involve three parts: transaction subjects (stakeholders, such as individuals, enterprises/organizations, government departments, and financial institutions), transaction objects (raw materials, equipment, products and service capabilities, etc.), and the relations between transaction subjects and transaction objects (ownership, control, approachable, given up, etc.). In the following example, the property developer and its local partner are the transaction subjects, and the transaction objects refer to property development capacity, land and government resources. Of which, the property developer owns development capacity; its local partner owns the land, and has “approachable” relations with government resources. The so-called transaction, in effect, redefines the relations between the transaction subjects and the transaction objects. Such redefinition of relations could be infinitely fragmented and aggregated, motivated by the infinite fragmentation and aggregation of attributes. Business models represent the trading structure of stakeholders, so stakeholders are the core subjects of transactions, or the transaction subjects defined above. When discussing a transaction subject, we’re concerned about its attributes including resources, capacities and interests, all of which define the role of the transaction subject. Among these attributes, resources such as land, capital, machinery and equipment are static, and normally can be separated from transaction subjects. When a parcel of land is transferred from one transaction subject to another, its value will not change much as long as it is used for similar purposes. Capacities are dynamic, such as investment capacity, opportunity judgment capacity and R&D capacity, and difficult to be separated from transaction subjects in general. The size of investment capacity is linked to a specific transaction subject, so it is difficult to simply transfer the capacity to another transaction subject. In other words, if a capacity is the transaction object (as the capacity and the transaction subject owning it are closely related), finding the right way to let the transaction

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subject fully exert its capacity is a key design link which determines whether the transaction can be effectively implemented. Interests can be simply divided into individual interests and collective interests. Regardless of their types, interests are not singular, but come in bundles, such as positions, money, honors and ideals. Generally speaking, a transaction subject is not simply an individual person, but a set of people. There are the interests of individuals and groups (possibly at several levels) in a transaction subject and the collective interests of the transaction subject as a whole. Good business model design aims to stay in line with the interests of individuals and groups, and as many as possible of the collective interests, while minimizing resistance and opposition. Of the three attributes of a transaction subject, resources and capacities are actually related to transaction objects, and therefore their attributes as well. The relations between transaction subjects and resources/capacities have defined the potential value creation capacity, which is likely to be enhanced through redefinition of relations (between transaction subjects and objects). This is where transactions originate. The process of redefining such relations will certainly affect the reconstruction of interests inside a transaction subject. If the value creation direction is consistent with the direction of interests, a transaction may be concluded and if not, it is difficult to conclude a transaction. To put it another way, there are actually four attributes concerning transaction objects: resource, capacity, attribution and interest. Among which, resources/capacities are related to transaction objects (and to transaction subjects as well by means of attribution). Interests are related to transaction subjects, and attribution is related to both transaction subjects and transaction objects.

Differing from the traditional transaction theory which focuses on exchanges only, the new transaction theory takes attributes into consideration and attaches great importance to the creation of new value enhancement when attributes (resource, capacity, attribution and interest) are combined. Sometimes it is necessary to break the restriction of time and space to combine these attributes, which may incur certain transaction costs. However, as long as the value created is higher than the costs, the business design is still profitable. The combination of the creativity attribute of geniuses in civil society with the commercial implementation attribute of global

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markets can generate vast value enhancement. The Honeybee Network has figured out a marvelous business model by just doing so. There is a professor named Gupta in India, who founded a non-profit organization called the Honeybee Network in 1988. Over more than twenty years, the website has recorded over 100,000 inventions, some of which will definitely leave you amazed. For instance, a farmer made a coffee machine by adding steam pipes and valves to a pressure cooker that can make espresso coffee and costs under $10. Gupta designed a G2G model for Honeybee Network, meaning from Grassroots to Global. “Grassroots” has creative ideals but lacks highly-efficient and working markets, while “Global” has vast markets but loses out in the creative idea category as compared with some geniuses in society as a whole. What the Honeybee Network does is combine them together. The website recruits a large number of volunteer members, including individuals like professors, scientists, research enthusiasts, and journalists, and institutions like universities and non-profit organizations. It stages two large events every year, each lasting for a week, and gets around 100–200 members to participate. These members will visit villages on foot to collect the creative ideas invented by farmers. The gathered inventions and ideas will then be stored in the Honeybee Network database in a specific format, and can be browsed as long as users log on to the website. The contact information of inventors is also saved so that interested parties can contact them directly. The Honeybee Network helps farmers to commercialize their inventions and ideas and create wealth. The site will even ask scientists to improve on some really good ideas to better market them. In addition, the site also helps farmers apply for patents or write business plans. For instance, a farmer invented a 10-horsepower tractor, which cost much less and was very easy to operate. A mainstream tractor in the market had at least 24 horsepower and cost around 5,000 USD, which many farmers could not afford individually. Through a cooperative organization, Honeybee Network licensed a factory to manufacture and sell the tractors invented by the farmer, who in turn obtained the license fee and sales commission of around 3,000 USD. Honeybee Network also supports inventors in asking questions online to scientists and professors all over the world about the problems encountered during the invention process to help improve their inventions. G2G, from grassroots to global and from global to grassroots, makes these interactions increasingly efficient and frequent. In the eyes of entrepreneurs with a perspective on transaction attributes, this world is highly fragmented, where any transaction object and its attributes can be infinitely fragmented, and highly aggregated at the same time. The fragmented transaction objects and transaction attributes can be aggregated again according to ideal business design and new standards. There are so many transaction objects in rural areas. Even if attention is paid to farmers, how many transaction attributes are there about them? If divided up, these attributes will be fragmented. If we pay attention to creative ideas and consider how to assemble this wisdom to create huge value, we can aggregate these fragments by designing an intensive bilateral market network platform, and create conditions for transactions. Other designs targeting volunteers,

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scientists and global markets all rest on the level of sensitivity about these transaction attributes, and keen perception of the possibility of fragmentation and aggregation. Here is a detailed explanation for this: First, resources, capacities, attribution and interests all can be fragmented. For instance, interests can be divided into individual interests, group interests, and collective interests. Second, when different attributes are correlated and aggregated, the value creation capacity differs. Take a piece of land for example, its value is different when it is put in the hands of a farmer compared to a property developer. Third, different resources, capacities, interests and attribution between transaction subjects and transaction objects beget different value. If a transaction subject owns a capacity but its interest is not properly reflected, it will exert its capacity at a low level, instead of unleashing the true value of the capacity. Therefore, it is important to configure the appropriate resources, capacities and interests to the right attribution relationship. It is summed up as follows: Fragment resources and capacities, and aggregate them again by the maximum value creation capacity. Design a new attribution relationship based on the new aggregation mode. Fragment interests and redesign the interest structure according to the requirements for maximum value creation. In doing so, we can work out new business models.

5.3 How to Fragment Attributes: Static Composition, Relations Among Components and Value to Others; Dynamic Implicit and Explicit Attributes, Stock and Flows, etc. Transaction attributes can be fragmented along two paths: static and dynamic. Static means to analyze transaction attributes at a specific point of time, without considering changes in the timeline. Statically, a transaction attribute can be analyzed and divided in terms of composition, relations among components, and value to others. Take a store for example. It can be divided into location, property (ownership, right of management, right of lease, etc.), equipment, staff (store manager, finance personnel, salespeople, distribution personnel, etc.), space and so on by composition. The store can be analyzed in terms of the relations between equipment and space, between the store manager and finance personnel, between location and property, between the rights of the lease and the store manager by relations among components; or it can be analyzed in terms of the value of location to competitors or consumers, and the value of staff in community stores compared to the staff of megastores. In analyzing the value to others, we need not only consider the value of components to others, but also the value of relations among components to others. For instance, interactions between store staff and consumers may extend to information based on

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location and time distribution. Such information is believed to be very valuable to many search websites, e-commerce platforms and social networking sites, and can provide value to corporate headquarters and also sold to third parties. By collecting a series of data on product display, staffing, location, sales information and the promotional activities of its stores, a sports brand has reached many valuable conclusions from data including: which product display will generate higher sales on what shelf; which products can be sold more easily during what times; what the difference in sales is between rainy and sunny days; what sales method is more suitable to which customer group; what the differences if these conclusions are applied to curbside stores, stores in shopping malls and community stores, and so on. More specifically, by collecting the data of online shopping malls and physical stores, the headquarters can also find out which products are often sold in connection with each other; what influence the comments of customers have on the purchases of their friends; etc. Using these data conclusions to guide operations in its franchised stores, the headquarters have boosted the sales of each store by 20%. By analyzing the components of stores and the relations among these components, the headquarters have drawn data conclusions and explored the value of the data to its stores, thereby promoting the growth of these stores. The input of this data collection, mining and application is economical to the headquarters. It has economy of scale, but will not be the same for all stores. By enhancing its capacity through this exclusive value, the headquarters has strengthened control over its stores, and brought the relations between stores and headquarters closer. Dynamic means considering the changes in attributes over time, which can be categorized as implicit and explicit, stocks and flows, etc. In other words, over time, implicit attributes can be changed to explicit ones, or vice versa. Or stocks can be changed to flows, and vice versa. For example, before becoming famous, a singer has a very low explicit value attribute, but his/her implicit value attribute might be quite high. But of course there is risk between implicit and explicit attributes, which represents uncertainty. If a transaction is conducted by his/her explicit value attribute, the value will be too low. If priced by implicit value attribute, the high price tag might scare away buyers. Through business design, an approach similar to VC-IPO phased financing may solve this problem by reasonably pricing the attributes of implicit and explicit value. Octone Records was successful with traditional record labels by allocating risks by phase. Octone is a small record company with only 16 employees. However, according to a report by Fortune, in a period of less than ten years, they released 9 albums, 3 of which went platinum with sales of at least 1 million CDs. When compared with the renowned record labels that have no trouble signing several hundred artists, Octone’s performance is a wonder indeed. So how did Octone make it? No doubt, it requires a lot of marketing resources and capital, among other factors, to make a band into a superstar, and this involves great risk. With rising fame, the

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band may bring in more revenue, but subsequent capital input is still higher. Of course, since the band has built a high profile, the associated risk is relatively lower. Octone worked out a two-stage business design: the first stage was mainly controlled by Octone. It signed a contract with a band when they were still unknown and spent money on marketing. When the band’s fan base grew, and they attained a certain level of popularity (say, when its record distribution exceeded 75,000 CDs), the second stage began. Octone and a large record company then established a 50– 50% joint venture. The band in its growth phase was transferred to the joint venture, while all the costs of running the band were paid by the large record company, with the profit generated shared on a 50/50 basis. For the large record company, it does not seem cost-effective to bear all the costs of the band while only getting a 50% profit, but why did it still choose to cooperate with Octone? The answer is that the early-stage investment in the band involved huge risks, but the several hundred artists signed by the large record company might end up with very few becoming big names. By establishing a joint venture with Octone, large record labels obtained artists already commanding popularity, which translated into a higher safety margin and less risky revenue. For Octone, cooperation with the giant companies can lower its subsequent capital input, and giants usually have better resources in terms of marketing, distribution channels, et al. It made viable arrangements for the future development of artists instead of watching them go to another label. In fact, Octone is more like a venture capital firm for artists, while large record companies are similar to the private equity institutions focused on Pre-IPOs. Through such phased allocation of transaction risks, both Octone and large record companies got what they needed. Stocks and flows can be converted in the same manner. Stocks mean the total scale at a specific point of time, while flows mean the scale flow graph at each time point along a timeline. The key to design of many business models lies in aligning the mismatch between the attributes of stocks and flows, or deliberately achieving this mismatch. For instance, owning equipment is a stock attribute, but not a true attribute of transaction. The transaction attribute needed by a factory is the flow attribute of capacity. For a factory to obtain the flow attribute to reduce its one-time purchases, financial leasing can be adopted to let the factory get the flow attribute. Conversely, to make the factory subject to path dependence, we may lower the threshold, let the equipment in the factory form stocks as strategic real estate and prevent competitors from entering. What Tetra Pak does is similar to this. Dairy giants compete with each other fiercely, and Tetra Pak got into the plants of these giant companies through a favorable 80/20 equipment investment plan. As customers pay, Tetra Pak will install its equipment for them. In the next four years, they can be exempted from making the remaining equipment payments as long as they order a specific quantity of Tetra Pak’s packaging materials. In this way, customers can expand their markets or invest in other projects with 80% of the capital, which successfully shortens the capital turnover cycle. Meanwhile, this “bundling” model

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enables Tetra Pak to quickly grow its market share, become the first investment option for all milk producers, and successfully shut out competitors. At the same time, through its patent on “barcode filling machines”, Tetra Pak made it impossible to use the ‘packaging materials’ from other brands on its equipment as the barcode on its packaging materials contains the information for finished products. For example when the filling machine works, it needs this information to properly fill the container and determine product category. In this way, customers have formed “path dependence” on Tetra Pak’s packaging paper, and it costs a lot to change to another supplier. The equipment stocks of Tetra Pak hence constitute the strategic real estate of its business model, which makes it difficult for plants to replace equipment and for competitors to enter the market. The price of milk filling machines has surged to tens of million dollars. To replace all the equipment, dairy producers could run the risk of bankruptcy. Although plants need the flow attribute, Tetra Pak has deliberately designed this mismatch to build its strategic real estate by providing the stock attribute, and finally achieved huge value enhancement. Through the static path (composition, relations among components, and value to others, etc.) and the dynamic path (implicit and explicit, stocks and flows, etc.), we can expand the transaction attributes of an transaction object, realize value rediscovery, or value re-creation.

5.4 How to Agglomerate Attributes: Superposition, Concomitance, Complementation, Multiplier and Exponential By explaining the new transaction theory, we come to realize that the value of fragmenting attributes lies in the fact that a combination of attributes can create new value space. Analyzing the relationship of attributes is of great value. There are many possibilities in the relations between attributes, and here we will cite just five of them: superposition, concomitance, complementation, multiplier, and exponential. Superposition means two attributes are in an additive relationship. For example, you have 4 million RMB, and I have 6 million RMB. Put them together, and we can make a 10 million RMB investment. A lot of M&As involve mergers with markets. In 2005 when Focus Media acquired Framed and then Target Media in 2006, its advertising positions increased substantially. For the three companies, the advertising position attribute among them can be superposed. Such superposition can also involve the different attributes of the same transaction object, for example, customers can be designers, salespeople and media. This can looked at as a typical model of new business design in the mobile Internet era. Concomitance means two attributes have the feature of occurring simultaneously along with superposition in terms of time. Here comes the possibility that one is

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free of charge while the other is charged for. The cross-subsidy new profit model is sought after by many Internet companies. For instance, search behavior has at least two attributes: one is the information customers hope to get, and the other is the attention businesses want to get. These two attributes become concomitant due to search behavior, and are generated at the same point of time, so they can be priced separately. The information customers hope to get is free, while the attention businesses want is charged for. Complementation means two attributes, when combined, can produce a “1+1>2” effect, though not a multiplied effect. For example, under the service-oriented model, each IBM sales team has at least 4 people: 1 salesman, 1 service specialist, 1 software specialist, and 1 researcher. Inside IBM, this is called “four-in-one”. The team will track the whole service project process of customers (including plan, build, manage and run). Their combination is a complementary relationship, with a “1+1+1+1>4” effect. Multiplier means two attributes, when combined, are in a zoom-in (or zoomout) relationship. For instance, an investment manager has an outstanding investment capability. Then he meets an entrepreneur who is willing to offer him a fund of 1 billion RMB. Outstanding investment capability and funding scale (or good fundraising capability) is a pair of multiplying attributes. For stakeholders with investment capability and fundraising capability, it is of critical importance that they find each other. One party can bring multiplied value to the other. This is why many capable people are looking for high level platforms, because these platforms can amply their capabilities into systematic energy and create greater value enhancement. Exponential means when two attributes are combined, the value created can surge in magnitude. For instance, 100 people have social networking behavior online. When these two attributes are put together, exponential value enhancement will occur, which would be unimaginable compared to the value generated individually by each of the 100 people. This is also why Facebook and Xiaomi become so wildly popular. In the mobile Internet era, the attributes of location and staying online all the time are superposed, which can materially boost the exponential effect of the social networking attribute. This is why many sharp investment veterans are bullish about the mobile Internet (Weibo, WeChat, intelligent terminals, etc.) rather than just the Internet. On the basis of their transaction attributes, enterprises seek the attributes that can be connected with their own in a superposed, concomitant, complementary, multiplied or exponential manner to trace back to stakeholders. This is a feasible approach to business model design. Nevertheless, it is unnecessary to trade in all of these attributes and it is workable to trade in part of one attribute of a transaction object. The joint development of P&G is trading in part of the transaction attribute of intelligence, and it had a remarkable effect. In 2000, Alan G. Lafley was appointed CEO of P&G, and his first task after taking the helm was overhauling the R&D department. Lafley proposed the concept of “open-ended innovation”, renamed “Research & Develop” to “Connect Develop”, and created a website resembling a creative fair, where requirements for solutions are

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released in hopes of getting responses. Lafley expected to get over 50% of innovation from the outside by 2010, which actually was realized as early as in 2006. In 2007, P&G established a “C+D” English site, where R&D personnel all over the world could submit solutions and get replies within eight weeks. One and half years into its rollout, the site received over 3,700 innovation plans from around the world. From 2004 to 2008, R&D input of the company kept increasing, but its inputto-sales ratio dropped from 3.1 to 2.6%. Open-ended innovation turned out to be a huge success. P&G once conducted an internal survey, only to find that it invested heavily in R&D but only 10% of its patents were used on products. As a result, the “C+D” site was also responsible for selling the company’s patents, which also generated handsome profits. Such joint development has connected the intelligence attribute of individuals with the commercial implementation attribute of P&G in a multiplying way. Transactions only involved the part of time spent online in contact with P&G’s site, instead of fulltime recruitment for intelligence. Many existing intellectual capital platforms such as Gerson Lehrman Group and zhubajie.com, added the social networking function in a bid to connect the intelligence attribute with the commercial implementation attribute in an exponential manner, marking significant change in business experimentation.

5.5 Attribution Relationship and Interests: Reduction and Extension of Attributes, and Allocation of Residual Income Upon completion of fragmenting and agglomerating attributes, there is plenty of possibility in the creative pricing of attributes. Then it is necessary to make a wise choice among the extensive pricing possibilities according to the purpose of the business model design. A business model represents the trading structure of stakeholders, but its nature is the pricing of transaction attributes of a transaction object. The key to determining the value enhancement size of business models is determining whether it is possible to more adequately price as many attributes of a transaction object as possible. More specifically, in business model design, it is likely to reduce or extend transaction attributes based on different design objectives. For some transaction subjects, a simple attribution relationship is better. Reducing attributes aims to lower transaction cost, bargaining and implementation difficulty. For others, a multiple attribution relationship is better. Extending attributes aims to boost transaction value, and realize multiple lock-ups and diversified profits. All this makes it possible to reach agreement on common interests with the core transaction subject, and enhance value creation. By reducing, it means trading only in the attribute related to the objective of business model design, or even part of the attribute, rather than the entire transaction. It is better to be less involved in attributes unrelated to the business model design

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objective. In this way, strength can be concentrated to better facilitate the conclusion of transactions. AgFeed for example, only purchases the output value flow of live pigs, instead of seeking the overall ownership of pig farms, and leaves other value attributes to the original business owners. AgFeed is a listed company engaging in producing pig feed, and it used the proceeds raised from an IPO of over 100 million USD to purchase pig farms. Its acquisition approach is very interesting: the fixed assets of pig farms still belong to the owners of the original enterprises, with the original channels of slaughtering and marketing also retained. In essence, AgFeed has only contracted the pig farms in terms of technology and finance. It entered into two agreements with the pig farms, the live pig purchase agreement and the leasing agreement, which buys the operation rights to all the live pigs. This operating model has not only lowered the costs of acquisitions, but also greatly reduced the negotiation difficulties in the acquisition process. Since listing in 2007 and buying pig farms with raised funds, in a period of two years, AgFeed acquired over 40 pig farms. In 2009, it sold 680,000 pigs, and realized earnings from pig sales of over 100 million USD, accounting for over 60% of its total revenue, amid surging pork prices at that time. Acquisition of these pig farms has also well supported the original business of AgFeed, as feed manufacturers and pig farms are generally of a direct sales relationship. In this way, the acquired pig farms have become important customers of AgFeed. According to the data released by Forbes, the acquired pig farms must use the feed from AgFeed, and their total feed purchase volume exceeded 40% of AgFeed’s total output. Concurrently, the percentage of sales expenses in total revenue decreased from 15% in 2006 to only 2% in 2009. For AgFeed, what it sought after is not the pig farms, but the operation rights to live pigs and the feed sales so generated. In other words, the operation right itself is more valuable than ownership. For many owners of pig farms, ownership is a more sensitive issue. Without touching upon the issue of ownership, AgFeed managed to reduce its acquisition costs, obtained the support of pig farm owners more easily, and achieved its real operational objectives. So why not? In recent years, with the explosive growth of smartphones, Apple has adopted a soft integration business model. An activity involves three links: input, processing, and output. Soft integration means controlling the input and output links and handing over the processing link to partners in terms of activities. Apple only trades in the attributes it desires most with its component suppliers, agent manufacturers and app developers, without touching on any unrelated attributes, thereby forming a compact and efficient value operation chain. By extending, it means it is difficult to influence and control the key transaction object at single points, so it is necessary to form multi-point influence and control concerning several transaction attributes. Lots of package solutions and onestop purchases aim to influence customers with multiple transaction attributes, and establish multi-point connections with customers.

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In the case of Apple again, to build more connections with customers, the company has not only continuously launched new products such as the iPod, iPad, iPhone and mini iPad, but also made customers develop dependence on its music and apps through iTunes and the App Store. They realized bundling not only on individual devices, but also quick information transfer through the cloud service when users replace their devices. Users can find substitutes for any transaction attribute. However, the combination of so many transaction attributes has established an ecosystem that users are quite accustomed to. Since the migration cost will keep rising for users, migration becomes increasingly less possible. For entrepreneurs who can understand the logic behind transactions attributes, and know how to divide and link these attributes and when to reduce or extend them, it is likely that reasonable and efficient business models can be worked out to realize high enterprise value. Whether it be dividing, linking or designing, the possibilities for pricing transaction attributes are infinite. Entrepreneurs can discover the probability of more trading structures and boost confidence. They can also stay calm when pondering all the possibilities and find the most suitable and efficient business design by sticking to the realization of greater value enhancement as the guideline. The third topic about attribution relationship and interests deals with the allocation of residual income. When a stakeholder participates in a trading structure, it only contributes certain attributes, not all of them. Different attributes exert different influence on the output of a trading structure, whereas the attributes that are given up and not priced by stakeholders could generate certain income. Pricing becomes difficult possibly due to two reasons: (1) The pricing cost of the attribute is too high, so other attributes that are easily priced are traded. (2) It is impossible to price the attribute and other attributes simultaneously, so only one attribute is chosen for pricing. A reasonable interest allocation mechanism will allocate relatively more residual income to the stakeholder that has greater influence on the output of transaction. This will exceed the opportunity cost of all the attributes contributed by the stakeholder. For example, a farmer joins a farming cooperative, and has relatively great influence on the output due to his farming capacity. It is therefore necessary to give him the corresponding claims to residual income. Meanwhile, to join in the cooperation, the farmer gives up income from independent farming and other labor. He/she will gladly take part in the cooperative only when the residual income from it exceeds the sum of opportunity costs for independent farming and other labor (different attributes may not be priced simultaneously; if so, choose one attribute and price it). For another example, the investment capability of an investor is very strong and they are responsible for investment decision-making for an industrial investment fund. Given the relatively great influence of his investment capability on the output, he deserves a proportionate residual income as return. To specifically make investment decisions about the fund, the investor has to shut down other business he is doing. Though the other business is not involved in the investment trading structure, it is related to the opportunity cost for the investor. Only when the residual income

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earned exceeds the opportunity cost of the shutdown business (and other potential opportunity costs), will the investor participate in the trading structure of investment. For the attributes that are not fully priced, if they turn out very valuable to other stakeholders (and it is impossible to fully prevent these stakeholders from sharing value), then the owners of these attributes may establish an organization with other stakeholders, and turn the attributes into public attributes of the organization to boost the benefits of all the stakeholders. Through public utilization, the owner stakeholder can fully price these attributes, while other stakeholders can share the value generated by the attributes more conveniently. In other words, the existence of this organization is largely due to the necessity to use the attribute which a stakeholder cannot fully price in a public domain. Therefore, in terms of trading structure, it is important not only to remain sensitive to which transaction attributes are contributed by stakeholders (with contributions matching income), but also to track which transaction attributes are left unpriced by stakeholders (giving up pricing is related to the calculation of opportunity costs). Only in this way can we correctly evaluate the contributions and returns of stakeholders, and set up structurally stable, dynamic and sustainable business models.

Chapter 6

Engineering Design Rules for Business Model Design

In the previous chapters, we have illustrated the three engineering principles for business model design: Principle I: Opportunity cost varies when the same resources and capacities are owned by different stakeholders. Principle II: Value enhancement varies with different trading modes among stakeholders. Principles III: Value enhancement varies with different attributes of the transaction object in the same trading mode. The three principles actually all involve the combination of stakeholders and resources/capacities. By changing either one of stakeholders, resources and capacities or the trading modes between stakeholders and resources/capacities, we can realize business model design. Based on these principles, we can arrive at four more direct design rules to guide business model design. And they are: Design Rule I: Adding or reducing stakeholders can realize different value enhancement. Design Rule II: Adding or reducing the resources/capacities of stakeholders can realize different value enhancement. Design Rule III: Dividing and reorganizing the resources/capacities of stakeholders can realize different value enhancement. Design Rule IV: Reconfiguring the resources/capacities of stakeholders in different trading modes can lead to different value enhancement. In addition, we have also found that resources/capacities from different sources are unbalanced. The combination of existing resources/capacities can usually realize greater value enhancement than newly-constructed resources/capacities. This is what we call taking advantage of the existing resources rather than building up new momentum. This brings us to design rule V:

© Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_6

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Design Rule V: Fully utilizing the existing resources/capacities of stakeholders instead of constructing new combinations of resources/capacities can generate greater value enhancement. But when stakeholders and resources/capacities are brought together, if the efficiency of resources/capacities will be influenced by the subjective will of stakeholders, then whether stakeholders can obtain more claims to residual income will also affect the generation of value enhancement. So we come to design rule VI: Design Rule VI: Allocating more residual income to the stakeholder exercising greater influence on results can lead to higher value enhancement. Different from the three abstract principles, these design rules are much more specific, and each represents a single action that can directly deliver business model design. Of course, the logic behind it is more direct and plain. Here is each of them in detail.

6.1 Design Rule I: Adding or Reducing Stakeholders Can Realize Different Value Enhancement As Principle I goes, opportunity cost varies when the same resources and capacities are owned by different stakeholders. Adding or reducing stakeholders means there will changes in the allocation of resources and capacities and in value enhancement. In a given trading structure, any stakeholder exists to assume its trading role, either for boosting transaction value, or lowering transaction cost, or reducing transaction risk. Appropriately adding or reducing stakeholders may change the value, cost, and risk of a trading structure and affect the value enhancement of transactions. In Starbucks’ history of expansion and growth, its flexible design of real options has been widely recognized by many entrepreneurs. Simply put, it is an artful design which gradually shifts franchising to direct management. It is widely known that apart from standardization and uniform back-office management, another decision-making difficulty chain-store operations face is to strike a balance between franchising and direct management. Under the franchising model, business expansion is relatively easier, with less input, but the HQ gains relatively low profit. Whereas under the direct management model, there is more input and relatively greater risk. Starbucks’ approach to emerging markets is to first join the chain operations. Franchisees put in resources, and several performance criteria are set for increasing shareholdings at the same time. When performance criteria are met, Starbucks can hold shares at a premium (usually 6–8 times). When the criteria for control are met, Starbucks can have a controlling stake at a premium, and consolidate statements until it wholly owns a franchised store. Through the design of this trading structure, Starbucks can obtain the premium space of the rising performance of its stores, which is reflected in the results of the listed company. If the performance criteria are not

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met, it will not hold shares or take control. This means that the performance of these stores is not reflected in the listed company, which enables effective control of capital risk. Furthermore, as many franchised stores are likely to be invested or controlled, and consolidated into the statements of the listed company, the shares of Starbucks enjoy a fairly high probability of further appreciation in the capital market. In the past few years, its P/E ratio was constantly above 50 times. Through share exchange acquisition, Starbucks can lower its acquisition costs and cash outflows. It is worth mentioning that in the Starbucks’ trading structure design for real options, one stakeholder is added, which are its agents at different places, like Maxim’s Caterers Ltd. in Guangzhou. These agents help Starbucks open franchised stores at different places, while Starbuck’s real option design is actually transacted with its agents. Why? There are three reasons: First, Starbucks has tens of thousands of franchised stores worldwide. It will cost a lot to negotiate with these stores one by one. After the introduction of agents, a 2-tier franchising structure has taken shape, with negotiation objects and transaction costs greatly reduced. Second, local agents normally have various local resources (government connections, business resources, social connections, etc.), which has greatly facilitated the local expansion of Starbucks. Third, after owning stores for awhile, some Starbucks franchisees become attached to their stores, and are not willing to be invested or controlled. The agents however, are purely financial investors, and will not have these kinds of issues, which is another key reason why agents are brought in. In fact, in the design of many specific trading structures, it is not rare that new stakeholders are introduced to boost value enhancement. In recent years, with the loosening of the central government’s land rights definition policy in China, and enhancement of various agricultural technologies and management processes, agriculture has become a hotspot for entrepreneurship and investment. The transfer of land use rights thereby becomes a mainstream model. However, agriculture-related business models involve all kinds of stakeholders, scattered lands and large numbers of farmers. The transaction cost of the traditional land use right transfer model which requires direct negotiation with farmers is not low. For this reason, local governments have introduced a lot of new land use right transfer models and designed a 2-tier transfer system. Farmers transfer land use rights to local governments, which then transfer the same to enterprises. The design is similar to the “2-tier franchising” agent mechanism of Starbucks, and can also greatly reduce negotiation objects and transaction costs. A business model involves the combinations of stakeholders, of resources/capacities and of their trading relations. The same stakeholder, if owning different resources and capacities, will bring different value enhancement to the trading structure. The same resource and capacity, if owned by different stakeholders, will do the same. Adding or reducing stakeholders actually changes the trading relations between stakeholders and resources/capacities, so value enhancement varies in the end.

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6.2 Design Rule II: Adding or Reducing the Resources/Capacities of Stakeholders Can Realize Different Value Enhancement Each trading structure requires the combination of certain resources and capacities. According to Principle I, opportunity cost varies when the same resources and capacities are owned by different stakeholders. Adding or reducing the resources and capacities of a certain stakeholder, or allocating the same to another stakeholder, or removing the resources and capacities will lead to different value enhancement. First of all, there is reducing. Each stakeholder owns lots of resources and capacities, but a trading structure only involves part of them. Having a specific stakeholder do more work is not necessarily the most efficient trading structure arrangement. In other words, for a specific stakeholder, to put in more resources and capacities in a trading structure is not necessarily better. Often times, the so-called bottlenecks are weak links, but links that are too strong may turn out to be bottlenecks too. Because when putting in too many resources and capacities, the specific stakeholder will find it impossible to systemize and replicate its capacities, which then becomes the bottleneck of the entire structure. Take traditional training institutions for example, the biggest bottleneck for their growth and development lies in famous lecturers. A famous lecturer has to put in lots of resources and capacities, from developing original theories, lecturing, to undertaking consulting projects and negotiations. When a stakeholder has to multitask, they do not have enough energy to continuously boost efficiency which leads to low efficiency. Plus it impedes systemization and replication of resources. Since one famous lecturer can teach at most 200 days a year, it is difficult to expand the trading structure. A certain training institution experiments with a new trading structure, requiring fewer resources and capacities from lecturers. A famous lecturer only needs to develop his original theories, guide coursework design and train other lecturers. For ordinary lecturers, they are not required to have original theories or very solid theoretical competence; and coursework design is handed over to professional design companies. It is not a big issue for one famous lecturer to replicate scores of ordinary ones. So the training institution and famous lecturers can reach agreement on a profit distribution mechanism. In this way, putting in fewer resources and capacities, famous lecturers can be more devoted to their research in original theories and deliver higher course quality. For the training institution, it rids them of the restriction on the number of famous lecturers, and more time can be devoted to market expansion and more profit is allocated to famous lecturers as a result. Ordinary lecturers, in turn, grow themselves and obtain benefits as well. It is a win-win business model design. The above instance is not the only case of putting in fewer resources and capacities leading to the expansion of trading structures. In fact, the design of many business models requires a simplification perspective. Next comes adding.

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Conversely, for some stakeholders, the added resources and capacities may produce a certain synergistic effect on the existing trading structure. Then it is advisable to consider adding its resources and resources. For example, supply chain financing makes full use of the credit, information and warehousing resources at the upstream and downstream of a supply chain to improve the redevelopment of the existing resources and capacities of stakeholders at the upstream and downstream. It also helps to superpose more resources and capacities on them (such as credit endorsement, transaction data and warehousing information), without increasing too many additional costs, which fulfills the objective of industry and finance integration. The logic behind adding or reducing the resources and capacities of stakeholders originates from Principle I: Opportunity cost varies when the same resources and capacities are owned by different stakeholders. When adding resources and capacities, it is necessary to consider whether the added resources and capacities can create synergy when combined with the original resources and capacities of a stakeholder to achieve the “1+1>2” effect. In the case of reducing resources and capacities, it means simplification, uncoupling the coordinated capacities to allow key resources and capacities to be better replicated and realize the replication and expansion of business models and value enhancement.

6.3 Design Rule III: Dividing and Reorganizing the Resources/Capacities of Stakeholders Can Realize Different Value Enhancement Based on Principles I and III, value enhancement varies when the same resources and capacities are owned by different stakeholders, or the transaction object is the different resources and capacities of the same stakeholder. Separating stakeholders from their resources and capacities and regrouping them together may generate completely different value enhancement. Stakeholders can be divided from a number of angles: different levels (individual, department, enterprise, industry organization and country), different roles (investor, operator, manager, citizen, taxpayer, etc.), and different relationships (governance, trading, management etc.).The same is true with resources and capacities: functions (food, clothing, housing, travel, entertainment, etc.), degree of economy of scale and economy of scope (level of stores, branches, and head offices), and scarcity, among others. After dividing up, there are lots of choices for recombination, and different choices bring different value enhancement. Before 2000, the feed industry was long trapped in a pattern of fragmented competition due to the following reasons: First, feed is a bulky agricultural product, so logistics accounts for a large share in the total costs and the transportation radius is normally within 500 km; otherwise it is impossible to realize efficient operations.

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Second, farmers largely are individuals, so their purchases feature small quantities and deconcentration. Third, no dominant feed brand existed then. Businesses with relatively established brands basically adopted the model of building non-local plants and regional distribution for expansion. But compared with small local brands, they had no obvious advantages in the efficiency of industrial structure and could not gain advantages of scale. Some branded feed enterprises then adopted the “company + farmers” model, and provided farmers with package solutions including seedling and breeding technologies, epidemic prevention, and underwriting of their farming output, thus forming stable feed supply channels. But this model was often confronted with opportunistic farmers. When their output was low, farmers would make the company take responsibility. Some even sold on their own when market conditions were good, and sold to the company when market conditions were bad. Some even sold pigs to the company whose breeds were not provided by the company. In terms of the distribution method or the “company + farmers” model, it is impossible to achieve the optimal combination of resources/capacities and stakeholders. The first reason is that the distribution method cannot create scale which makes it impossible to exercise effective market controls over distributors. Second is that the “company + farmers” model has a certain economy of scale, and could not prevent the opportunism of farmers in terms of risk control. Later, a certain feed brand figured out a new approach. It was an evolved version of the “company + farmers” model, and involved the division and reorganization of several stakeholders and their resources and capacities. First, farmers were divided into specialized and retail. Specialized farmers were relatively big in size, experienced in farming, and could generate a positive influence in terms of market integrity and demonstration effect. The company contacted specialized farmers and made them its distributors which then sold the feed to retail farmers. In this way a farmer’s community was established. Some relatively capable and easy-to-manage retail farmers were organized into general farmers. Second, the functions of farmers were divided and reorganized: general farmers were in charge of breeding; specialized farmers for livestock cultivation and fattening; and retail farmers for slaughtering. Third, big slaughterhouses and pork sales channels were organized to serve the farmer’s community, thereby forming a closed-loop chain. Fourth, in areas where the conditions for forming a farmers community were not ripe, veterinary institutions and agricultural materials sales channels of a certain scale were developed to participate in distribution, with part of the financing function provided through distribution information to boost overall control. At the same time, like the farmer’s community, big slaughterhouses and pork sales channels were organized together. In doing so, the feed company with its economy of scale increasing, achieved substantial development, and became an important force in the feed market. In contrast with the original model, the feed company, specialized farmers, retail

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farmers, big slaughterhouses, pork sales channels, veterinary institutions, agricultural materials sales channels and the combination of their resources and capacities were all divided up and reorganized. For instance, before business model design, the specialized farmers were in charge of farming only, normally covering the full chain. But after model design, they were in charge of farming (mainly focused on livestock cultivation and fattening) and feed distribution. This model undoubtedly turned the professional capacities, local influence and surplus capital of specialized farmers into market forces and strongly drove the regional expansion of the feed company. Therefore, the trading structure design of dividing and reorganizing stakeholders and their resources/capacities has gradually become a mainstream model in the feed market, because the model can effectively and efficiently leverage the resources and capacities of different stakeholders and optimize efficiency. The division and reorganization of stakeholders and their resources/capacities actually involves breaking up inefficient combinations of stakeholders and their resources/capacities, then recombining them based on the efficiency of the economy of scale and economy of scope, undoubtedly leads to realizing greater value enhancement.

6.4 Design Rule IV: Reconfiguring the Resources/Capacities of Stakeholders in Different Trading Modes Can Lead to Different Value Enhancement According to Principle II, value enhancement varies with the change in trading modes, whereas based on Principle I, opportunity cost varies when the same resources and capacities are owned by different stakeholders. This is how we arrived at this design rule: Reconfiguring the resources/capacities of stakeholders in different trading modes can lead to different value enhancement. The so-called trading mode refers to three relationships: connected relations between stakeholders and resources/capacities; connected relations between stakeholders and other stakeholders (including governance relations and trading relations); and trading relations between resources/capacities and other resources/capacities. The connected relations between stakeholders and resources/capacities include control, ownership, use, investment, etc. The connected relations between stakeholders and other stakeholders include market transaction, ownership control, top-down instruction, intelligent support, collaboration, etc. The connected relations between resources/capacities and other resources/capacities include complementation, superposition, multiplier, exponential, etc. By changing the relationships above, we can change the trading modes between stakeholders and resources/capacities and trading structures, which then lead to

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different value enhancement. SolarCity’s innovation of the financial operation mode was largely due to its flexible design of a different trading mode. SolarCity provides inexpensive photovoltaic power generation services to ordinary citizens, schools, NGOs and government institutions. Solar leasing and PPA are its main business. Of which, solar leasing means SolarCity is responsible for system installation instead of directly selling its systems, while the ownership of solar equipment belongs to original enterprises. Customers obtain the right to use its equipment and pay rent on a yearly basis. PPA (Power Purchase Agreement) means: (1) A tri-party agreement is signed with business users and the power company, pursuant to which, SolarCity builds and maintains the photovoltaic system, sells electricity to the power company and charges each month by the amount of generated power. The power company purchases solar power and sells it to business users, who lease their rooftops and pay a relatively low electricity bill. (2) SolarCity directly sells solar power to customers at a low price, and customers can acquire the solar system installed on their rooftops at any time after five years. In both the leasing model and the PPA model, financial operation is the key resource/capacity required for SolarCity. As a result, they designed three different trading modes.

The three trading modes have their respective strengths and weaknesses, and can be adopted by SolarCity flexibly under different conditions. The first is partnership. This trading mode can be demonstrated by this scenario: SolarCity and a funder establish a joint venture to purchase the power stations built by SolarCity, then lease or sell them to customers under the PPA. The government subsidies go to the joint venture. Four types of economic benefits are generated from it: rental fee from customers, tax credits, tax avoidance through depreciation, and subsidies. In this mode, neither SolarCity nor the fund needs to make full capital contributions and the income of the joint venture is shared between the two, but both parties need to negotiate over income distribution. The second is subleasing. This trading mode is as follows: SolarCity signs a master lease contract with the fund; then the fund subleases to customers, and pockets most of the income. SolarCity can obtain subsidies and a rental fee. If the power stations

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still run upon expiry of the lease term agreed between the fund and its customers, the customers will still lease the power stations and pay rental fees to SolarCity. In this mode, the fund can exit easily, but SolarCity faces huge funding pressure for it has to assume capital contribution on its own. However, if its power stations over perform, it can recover the lease of power stations after expiry of the master lease contract, and obtain more residual income. The last is sale and leaseback. This trading mode is equivalent to financing: the fund provides the rental fee on a one-time basis, and leases power stations back to SolarCity, which then leases them to customers. The fund gets all the government subsidies, while SolarCity gets the difference between the master and sub lease fees, as well as an option to buy up the power stations upon expiry of the master lease contract. In this trading mode, the fund contributes all the capital but also gets all the government subsidies, then leases power stations back to SolarCity without being in charge of management. SolarCity does need to offer any capital, but the price for buying the power stations is usually high upon expiry of the lease term. In the three trading modes, SolarCity assumes different funding pressure and risks, as well as varied income. In effect, among these three financial operation models, there are no big changes in the stakeholders and resources/capacities. What has changed is the trading mode between them, which in turn, leads to different value enhancement. Design Rule IV changes are: connected relations between stakeholders and their resources/capacities; connected relations between stakeholders and other stakeholders (including governance relations and trading relations); and trading relations between resources/capacities and other resources/capacities. Any trading relations involve the combination of existing transaction value, transaction cost and transaction risk. Any change in the trading relations actually breaks up the combination of transaction value, transaction cost and transaction risk, and finally makes a difference in value enhancement. Take SolarCity for example, it is confronted with uncertainty about the income of power stations and the capital risk of large-scale investment. The related stakeholders are the fund, SolarCity, government and customers. Relevant resources/capacities include solar power plants, capital, subsidies and the ability to predict earnings. The different trading modes actually represent the combination of all or part of the fund’s capital strength and SolarCity’s ability to predict earnings. The different results are based on the combination of uncertainty about earnings and investment scales. The value enhancement varies accordingly.

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6.5 Design Rule V: Make Full Use of Existing Stakeholders Resources/Capacities to Generate Greater Value Enhancement, with no Need to Build New Resources/Capacities Combinations Fully utilize the existing resources/capacities of stakeholders instead of constructing new combinations of resources/capacities. It is easier to take advantage of existing resources and not build a new momentum. For a business model and better design thinking take advantage of existing resources. There is no need to build up new momentum. Use the existing resources/capacities of stakeholders. Many stakeholders have amassed plentiful resources/capacities. It could be useless or of little value under traditional business models, but t is possible to find new value in these existing resources/capacities through business model design. After activating them, there is a huge value enhancement. Shenzhen Voxtech Co., Ltd. (Voxtech) is the headphone manufacturer mentioned earlier. They are masters at taking advantage of existing resources. From being a private contract manufacturer of headphones, they grew into a notable company. Here is their trading structure:

Since Voxtech purchases parts from suppliers and makes branded headphones as a contractor and then the brands sell the products to end users through their channels, without having the core technology, Voxtech is trapped in the red ocean. Then they entered a new niche market for military headphones. Due to their military headphone technology, Voxtech has relative strength. Gross profit for military headphones is relatively high, and operating income is tens of millions of RMB per year. It remains one of the key markets for Voxtech. During its time mostly in the military market, Voxtech hits upon the new opportunity of introducing military osteoconductive headphones into the civilian market. Military headphones only need to convey very simple information like instructions to move forward. But civil headphones require better tonal quality, which involves

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great difficulties in technology conversion. Voxtech made a technological breakthrough and applied for a patent. How will they get it on the market? They adopted the approach of taking advantage of the existing resources rather than building up new momentum. First, it entered the huge American sports headphone market that has over 100 million users. In addition, the United States is good at protecting intellectual property rights. Second, Voxtech made good use of the Consumer Electronics Show (CES) held in the US. They attended the CES, and displayed products which are characteristic, unique and influential. Over 80 American media outlets including USA Today and Wired gave them news coverage. The Wall Street Journal even granted a technology innovation award in the consumer electronic category for 2012. Without costing anything for advertising, Voxtech achieved a remarkable marketing effect. Third, it leveraged the mainstream channels in the US. By signing contracts with Best Buy, Petra, Fry’s and Amazon, Voxtech made its way into 80% of the sales channels in the US, and leveraged the existing resources of these channels. Last, it has cooperated with its American partner. By granting convertible shares, Voxtech found a CEO with extensive connections and brand operation experience named Bruce Marc Borenstein, who also used to be president of the Consumer Electronics Association’s accessories division. Bruce is familiar with the American market and responsible for brand operation, product sales and channel expansion.

Note The purple boxes indicate key innovation links. According to the latest news, Voxtech has established cooperation with Apple to sell products in Apple’s global retail stores, thus becoming a major partner of Apple in the osteoconductive headphone sector. By looking at the development history of Voxtech, we can see it has adopted the tactic of taking advantage of the existing resources rather than building up new

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momentum for target customers, technology R&D path, marketing and publicity, sales channels and selection of partners. They also utilized well the existing resources of relevant stakeholders, not only completing its own business model design, but also creating new value for all the other stakeholders, and making the trading structure more stable.

6.6 Design Rule VI: Allocating More Residual Income to the Stakeholder and Exercising Greater Influence on Results Can Lead to Higher Value Enhancement Stakeholders exercise influence on the trading results through the resources/capacities they put in which essentially reflects the differences of the resources/capacities put in. A stakeholder can obtain two types of income: fixed income and residual income. Fixed income means there is no direct relationship between income and the output of a transaction. For instance, a commercial property developer charges rents on a shopping mall. The output of the transaction (the revenue of the shopping mall) has no material influence on the rent income of the property developer who obtains a fixed income. On the contrary, residual income means there is a relatively direct relationship between income and output in a transaction, such as equity income and dividend income, which are linked to output. More output equals higher residual income. In a given trading structure, different stakeholders put different resources/capacities in, and make different contributions to the trading result. This way stakeholders exercise different influences on trading results. If a stakeholder has relatively great influence on the trading result, it is advisable to allocate more residual income to stimulate them to put in more resources/capacities and boost value enhancement. If this rule is not obeyed, those that shall be incentivized fail to be incentivized, while those incentivized are unable to enhance the trading result. Such a mismatch will lead to failure in trading structure design. The story of CSPN is just a case in point.1 CSPN, also known as China Sports Programs Network, was established under the promotion of China Global Media Co., Ltd., in alliance with the sports channels of Jiangsu, Shandong, Liaoning, Xinjiang, Jiangxi, Inner Mongolia and Hubei. As a TV channel, its major activity links can be divided into four parts: purchasing programs, producing programs, broadcasting programs and running advertisements. Each local TV station had its own production team, local broadcast channels and advertisement marketing team, and local stations had commanding advantages in allocating resources and capacities for the last three links. In terms of purchasing programs, China Global Media Co., Ltd. could consolidate financial resources as an 1 The case was published in Issue 6th 2010 of PKU Business Review (with texts rewritten), with the title of Trading Structure Design is the Key to Strategic Alliances, written by Wei Wei.

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alliance and had certain advantages which were not significant. So in terms of profit model design, China Global Media Co., Ltd. should get a fixed income or a small portion of the profit, whereas the local stations obtain the residual income or a large portion of the profit. But what was the truth? CSPN uniformly accepted and arranged for advertising placements, provided program resources for the local TV stations, and set the annual fixed income to be shared based on various indicators. CSPN possessed the claims to the residual income, program copyrights, and the right to gains on multiple sales of copyrights. The local TV stations provided production teams for CSPN, with travel expenses at its expense, but the local stations controlled and managed these teams. Under this profit model, the resource and capacity advantages of local TV stations were not fully embodied; while China Global Media Co., Ltd., lacking in resources and capacities, got the residual income. Those that were capable didn’t fully exert their roles while the incapable were in control of everything. As a result, with competition rising in 2008, CSPN was trapped and in trouble for a long time. In fact, in the trading structure design of CSPN, the wrong could be put right, with more residual income allocated to the stakeholders that have the greatest influence on the trading result. This involves straightening out the interest relationship and the vesting of power with the local TV stations. China Global Media Co., Ltd. had two options: (1) Step back as a management team and relegate ownership to local stations. (2) Cultivate or establish resources/capacities instead of relying on local stations, still grasping the ownership, and conduct market transactions with local stations. If China Global Media Co., Ltd. gives up ownership, then the local TV stations can establish an ownership cooperative. The cooperative could come in two forms: purchase cooperative and supplier cooperative. A purchase cooperative means the local TV stations hand the power to purchase sports events resources to CSPN, then produce programs and run advertisements on their own. The daily operation and management of CSPN can be put in the hands of China Global Media Co., Ltd., and these resources can also be sold to other video channels. The right of control over CSPN and the claims to residual income are jointly owned by the local TV stations, and allocated according to their purchase ratios of events resources. This involves no management or balancing of the production teams of local stations, so the internal transaction cost will be greatly lowered.

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A supplier cooperative means that the local TV stations serve as the suppliers of CSPN’s advertising resources, while the daily operation and management of CSPN is in the charge of China Global Media Co., Ltd. These program resources can also be sold to other video channels. The right of control over CSPN and the claims to residual income are jointly owned by the local TV stations, and allocated according to their respective advertising supply ratios. The local TV stations’ support of CSPN’s capital and production teams can be purchased at market prices. As they all have their own advertising departments, local stations can remove advertisements suitable to be broadcast on sports channels to CSPN. Of course the calculation methods for advertisement contributions vary as to whether the advertisements are broadcast by individual TV stations or jointly. In this trading structure, advertising connections accumulated by the local TV stations can be fully used.

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If CSPN still wants to retain the ownership, they will establish a resource/capacity bank of resources purchase, program production, advertising sales and broadcasting (these can be bought if owned by local stations in China). Sales to the local stations fall into two categories. One is centralized sales as copyright sales. CSPN sells produced programs to local stations including other video channels.

The other is decentralized sales. CSPN and the local sports stations could cooperate in a chain store model. Some local sports stations could engage in direct operation, and hand all the channel resources to CSPN for a fixed income, with CSPN getting the residual income and right of control. Some local stations may choose franchising, and CSPN is responsible for resources and management support. Local stations that operate get the residual income. Lastly, for some franchised local stations, CSPN can franchise its program resources and management system as a package for them to use.

The trading structures raise different requirements for market dominance and risk assumption. China Global Media Co., Ltd. needs to have a correct, accurate and comprehensive evaluation of its market dominance and future development trends before choosing trading structures, or figuring out new ones.

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The case of China Global Media Co., Ltd. is an example of finding which stakeholder can exercise greater influence on the trading result. Obviously, in this case, the local TV stations command the advantages from funding for resource purchases and access to advertising resources. If it is impossible to allocate more residual income to the local stations, China Global Media Co., Ltd. needs to cultivate or combine relevant resources and capacities on its own. Otherwise, the trading structure is misleading, and the so-called strategic alliance is not worth much. Many trading structures, at the design stage, are not materially flawed in their embryonic form, but full of loopholes during operation. Often times, claims to the residual income of transactions are not reasonable or appropriately allocated to the suitable stakeholder. Of course, the design of residual income and fixed income and their relationships with the output of a trading structure are also subject to influence from many other factors. These include the nature of contribution, willingness to invest, transaction value, transaction cost and transaction risk. There is a simple illustration with two figures.2 Please refer to another book entitled, A Perspective Approach to Profit Models by the same authors for more details.

2 Please

see Chapter III of, A Perspective Approach to Profit Models (China Machine Press; June 2012); Authors: Lin Guiping, Wei Wei and Zhu Wuxiang.

Shared income

Low

High

High

Low

High

High

Low

High

High

Low

Fixed income

Residual income

Shared income

Fixed income

Residual income

Residual income

Fixed income

Shared income

Residual income

Fixed income

High

High

Shared income

Preliminary Transaction Configuration of Party B

Competitive Competitive Preliminary Advantages of Party A Advantages of Party B Transaction Configuration of Party A

Low

Low

Low

High

High

High

Transaction Cost

Fixed income

Residual income

Shared income

High fixed income + low shared income

Low fixed income + high shared income

Shared income

Final Transaction Configuration of Party A

Residual income

Fixed income

Shared income

Low fixed income + high shared income

High fixed income + low shared income

Shared income

Final Transaction Configuration of Party B

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6.7 Conclusion: Make Stakeholders, Resources and Capacities Play Proper Roles What is a business model? It refers to a trading structure composed of a group of stakeholders owning respective resources and capacities. In this trading structure, each stakeholder contributes resources and capacities to realize a higher value creation than if not participating in the trading structure. Each stakeholder gets a certain income, which will be not lower than the opportunity cost of not participating in the trading structure. It is also not higher than its contribution to value creation in the trading structure. Business model design is not only about value allocation, but more about value creation. The goal is to make more income from stakeholders participating in a trading structure higher than what they would lose from not participating. To realize greater value creation, business model design should make stakeholders (and their resources and capacities) play their proper roles and follow the general trend. Making every component play its proper role means that: First, the combination of stakeholders and resources/capacities reaches the boundaries of economy of scale and economy of scope. Second, the matching between stakeholders and resources/capacities can bring into play their comparative advantages and respective potential. Third, stakeholders obtain value allocation in line with their contributions to incentivize them to put in resources and capacities. Fourth, the income of a stakeholder shall be not lower than the opportunity cost of not participating in a trading structure so that they will not leave the trading structure. Of course, during the design of a specific trading structure, it is difficult to satisfy all these four conditions, or even any of them. The conditions tell us though, where to focus and where to work hard to attain. As long as trading structure design is oriented towards meeting these conditions, the overall business model efficiency will grow increasingly better.

Chapter 7

Business Model-Based Financial Accounting

A business model refers to a trading structure of stakeholders, as well as a trading structure of activity systems. When it comes to business models, we not only need to consider the governance relations between stakeholders and activity systems (which stakeholder occupies which activity systems and which activity system belongs to which stakeholder), but also study the influence of different trading modes on the trading structure. Many cross-boundary innovative business models derive from adding, reducing, dividing and then regrouping the original stakeholders and activity systems. Cross-boundary thinking on new business models needs a new frame of reference for transaction pricing,1 which requires us to adopt new financial accounting methods based business models. Specifically, we need to accurately calculate the input and output of each stakeholder and activity link to realize real financial accounting. In this chapter, we will center on business model-based financial accounting to truly reflect the structural efficiency of enterprise business models. As for business model-oriented transaction pricing, we’ll deal with it in detail in another book later.

1 So-called

transaction pricing not only involves the amount of pricing (quantity-specific), but also the nature (profit model such as fixed income, residual income and shared income), timing (cash flow structure, prepayment or postpayment, one-time payment or payment by installments), and direction (profit sources, collecting charges from whom, and whom to make payments to). © Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_7

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7.1 How to Conduct Transaction Pricing for the Construction, Implementation and Reconstruction of Business Models—A Defined Uniform Financial Accounting System In some industries, there are always certain basic business models that work through years of development. In the retail industry for example, there are three mainstream business models. The first business model is fixed rent, and its focus enterprises are usually property suppliers (or operators). Suppose there is a focus enterprise which is a property supplier. The focus enterprise leases properties to retail networks and other stakeholders of all forms (such as shopping malls, supermarkets, community stores, counters and stores) on a long-term basis, and provides in full or in part operational support ranging from warehousing system, to information center, distribution center to the management & operation center, based on the needs of retail networks. The property supplier obtains a fixed rent income, while the sales revenue and profit of retail networks have no influence on its income in a specific period. The fixed rent model is widely applied to Shopping Malls, Red Star Macalline, and Wanda Commercial Properties, among others, in tier-1 and tier-2 cities (Fig. 7.1). The second business model is the price difference model, and its focus enterprises are normally retail network terminals. Suppose a focus enterprise is a retail network. The retail network purchases commodities from manufacturers/brand dealers, and then sells them to consumers. During this process, it needs to operate and manage or cooperate in operating and

Fig. 7.1 Fixed Rent Model: Business Model of Property Suppliers (in the bold circle)

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Fig. 7.2 Price Difference Model: Business Model of Retail Networks (in the bold box)

Fig. 7.3 Income Sharing Model: Business Model of Retail Networks and Manufacturers/Brand Dealers (in the bold box)

managing the purchase center, warehousing system, information center, distribution center, management and operation center, and other functional stakeholders. The retail network bears the cost of purchasing commodities and obtains income from selling commodities. The price difference in between is its profit. This is called the price difference model that is widely applied to all kinds of department stores and supermarkets, and usually shown as purchases and sales (Fig. 7.2). The third business model is the income sharing model, and its focus enterprises are normally retail networks and suppliers. Suppose a retail network and a manufacturer/brand dealer are the focus enterprises. Commodities are distributed by the manufacturer/brand dealer to the retail network. It differs from the price difference model in that the selling and operating activities of the retail terminal, which are jointly undertaken by the manufacturer/brand dealer and the retail network. Both parties share the sales revenue or profit on a pro rata basis. The income sharing model is extensively applied to department stores and supermarkets, and usually shown as joint marketing and joint operation (Fig. 7.3). A lot of enterprises have adopted different business models at different stages of development. For instance, Gome and Suning, at different stages, once adopted these business models as fixed rent, income sharing, fixed income + shared income, and price difference.

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But for some enterprises, their comprehensive business models contain various sub-models. Take the sales counters in Rainbow Department Stores for example. Some adopt the fixed income model, some the price difference model, while others use the income sharing model. All of them co-exist in harmony. Then the operation of these different models involves the issue of reasonable transaction pricing, but the precondition of pricing is an accounting benchmark. Only when a relatively fair and accurate financial accounting system is determined can a relatively reasonable pricing be derived. The final structure of a business model can be defined to form a closed loop. This financial accounting system is business model accounting, namely, financial accounting based on activities and stakeholders.

7.2 Activity-Based Analysis of Variable Factors and Financial Accounting Business model accounting means a financial accounting system comprising analysis of resource occupation, revenue and cost, and variable factors with activity links and stakeholders at the core. Financial accounting is thereby deduced and aimed to assist with operational decision making and business model design. Conventional accounting methods are product-oriented based on accounting items, allocated raw materials and working hours according to products to arrive at product pricing. This accounting system is suitable for the traditional industrial age, for product categories then were relatively fewer, and the relationships among products, machines and labor were relatively simple. In modern enterprise practice however, conventional financial accounting has run into great challenges: first, for each product category, the combination of its activity links could be fundamentally different under different technology and management systems. Since the variable factors of revenue and cost are closely related to activities, if we fail to trace back to the activity links, the cost and revenue accounting of products might be misleading. Next, the basic unit of business model innovation and design is the activity link and the stakeholders associated with it. If the basic accounting unit is not centered on activities and stakeholders, it is impossible to derive reasonable transaction pricing. For this reason, we bring in business model accounting. First of all, it is necessary to introduce several concepts and their relationships: accounting object, activity and resource. The accounting object is output, normally including products, customers, services, and business units. Activity means the business activities (other than management activities; the same as below) enterprises need to participate in to join a trading structure. For the convenience of accounting, sometimes it may refer to a set of activities. Resource means the economic factors to be consumed to complete activities, usually including labor, raw materials and equipment.

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The steps for business model accounting can be summarized as: from resources, to activities, then to accounting objects. Specifically, there are the following three steps: First, identify each activity and the resources needed to be consumed As previously mentioned, the business model refers to a trading structure of stakeholders, as well as a trading structure of activity systems at the same time. Crossboundary innovation of business models essentially involves division and reorganization of stakeholders and activity systems. Therefore, our financial accounting system will also be based on stakeholders and activity systems, which are the basic units of business model design. They can be divided into activity links of different granularity sizes based on analysis targets. As shown below, the activity of purchasing can be divided into business negotiation, purchase, supplier management and other links. Warehousing can be divided into warehouse-in management, daily goods management, and warehouse-out management; logistics into packaging and distribution.

Then we can analyze the resources consumed by each activity. For instance, purchasing is further divided into business negotiation, purchase and supplier management, among which, business negotiation and supplier management need to consume labor while purchase consumes both labor and raw materials. Second, ascribe resources to activities, then analyze their value/cost attributes and variable factors When stakeholders and activity systems are involved in a transaction, the output is called transaction value. The cost falls into two parts: transaction cost and monetary cost. Of which, transaction cost refers to the cost related to structure while monetary cost refers to the cost related to transaction direction. Take purchases for example, the search cost for selecting suppliers, labor expenses, bargaining cost for business negotiations and travel expenses are all related to the purchasing action. There are no direct relationships between purchases and liquor, mooncakes, or fire extinguishers, which involve structural costs. So these expenses are transaction costs. However, the

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costs of commodities and goods are related to transaction direction, and indicate the prices of liquor, mooncakes and fire extinguishers; so they are monetary costs. Transaction value is output, while transaction cost and monetary cost are input. The difference between the two is the net output of stakeholders and activity systems. With value ranging between 0 and 1; the nearer it is to 1, the higher the efficiency; the nearer it is to 0, the lower the efficiency. Input–output efficiency can be represented using the equation below: Input−output efficiency of a stakeholder (activity link) Transaction cost + monetary cost = 1− Transaction value We might as well start with analyzing the input and output of the purchase link.

Purchase link

Purchasing

Business negotiation

Selecting suppliers

Activity

Transaction value Monetary cost

Commodity cost

Transaction cost

Travel expenses

Purchase transfer income

Transaction cost

Transaction cost

Bargaining cost

Transaction cost

Labor expenses

Value/Cost Attribute

Search cost

Revenue or Cost of a Symbiont

Variable cost

Variable value

Variable cost

Variable cost

Variable cost

Fixed cost

Purchase scale

Purchase scale

Number of employees

Purchase scale

Number of employees

Variable Factor

Net profit similar to that of suppliers

Labor expenses (including wages, benefits, labor insurance and training fees for sales promotion staff)

Definition

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In chronological and logical order, the purchase activity system can be divided into three links: selecting suppliers, business negotiation, and purchasing. Based on the resources consumed, it is necessary to analyze the attribute and variable factor of each activity link. Resources here refer to the costs expended during the activity execution process (i.e. the cost and expense sources supporting activities). These are shown as the various costs and expenses incurred from product or service transactions among stakeholders during a certain period of time. The typical resources in the manufacturing sector include: raw materials, auxiliary materials, fuel and power expenses, wages and benefits, depreciation expense, administrative expenses, repair charge and transportation charge. Resources directly related to an activity shall be directly credited to the activity. If a resource supports more than one activity, then it will be allocated to the corresponding activities under the variable factors of cost. Variable factors are indicators used to measure the features of activities that incur revenue or cost, and reflect the resources consumed by activities or the quantity of resources consumed by other activities. It is a basis on which the cost and revenue of an activity are calculated, can reveal the reason for executing an activity, and the size of resources consumed by the activity. For instance, selecting suppliers involves two types of costs: search cost belongs to transaction cost and fixed cost. Labor expenses belong to transaction cost and variable cost. The variable factor in labor expenses is the number of employees, meaning the amount of expenses of this link is related to the number of employees: the more the employees, the higher the labor expenses (including wages, benefits, labor insurance and training fees for sales promotion staff). Business negotiation involves two types of costs: bargaining cost belongs to transaction cost and variable cost, and is related to the purchase scale. Travel expenses belong to transaction cost and variable cost, and are related to the number of employees. The above-said labor and travel are the resources activities need to consume, and their variable factors are related to the resources consumed. Purchasing obtains transaction value, which is purchasing income. Different enterprises stipulate different rules on purchasing income. Some directly position purchasing as the cost center, that is to say, cost is defined as income; some others define a fixed price for the next link, similar to the price difference model, like how much is a ton of coal worth. In the case of Kazuo Inamori’s amoeba, it is similar to the shared income model. Specific operations are like this: the production department hands over products to the sales department to sell. The sales department sets a price for products, and a certain portion of the selling price (say, 10%) is the commission for the sales department. For instance, if the production cost of the production department is 70 RMB, the sales commission ratio agreed between the sales department and the production department is 10%. The sales price set by the sales department is 100 RMB, so the sales department gets a commission of 10 RMB, and the production department gets a profit of 20 RMB (100–100 × 10%–70 = 20). With this model,

7.2 Activity-Based Analysis of Variable Factors …

127

both the production department and the sales department get the shared revenue, create value and share risks together. Purchasing income is apparently related to the purchase scale. It costs to make purchases, which refers to commodity cost (monetary cost and variable cost), and is related to the purchase scale. The input–output efficiency of the purchasing link can be shown as below: Input-output efficiencyPurchasing link = 1 − = 1−

Transaction cost + monetary cost Transaction value

“Search cost for selecting suppliers & labor expenses + “Purchasing income” bargaining cost for business negotiation & travel expenses + “Purchasing income” cost of purchased commodities” “Purchasing income”

Obviously, in identifying activities and resources consumed, we need to note there are four types of activities, based on different variable factors: Unit-level activities, whose variable factor is related to the activities of each unit. Relevant input usually includes direct materials, and direct labor. Batch-level activities have a variable factor that is related to the activities of each batch. Relevant inputs usually include batch inspection, and batch sorting of materials. Product-level activities, whose variable factor is related to the supporting activities for different products. Relevant input usually includes product design, engineering change orders, and emergency processing. Equipment-level activities, whose variable factor is related to the supporting activities for all products on the whole. Relevant inputs usually include security guards, factory management, depreciation, corporate tax and insurance. Third, allocate activity links to the related accounting objects (usually stakeholders) and form the input/output of stakeholders From the angle of stakeholders, it is necessary to analyze which activity links they’ve participated in and combine these links with input/output. For example, there are two activity links between a supplier and a retailer, which can be seen below:

Purchasing

Logistics transportation

Purchase link

Distribution

Between supplier and retailer

Business

Sorting and packing

Link transfer

Purchasing

Business negotiation

Selecting suppliers

Activity

Transaction cost

Transaction cost

Transfer cost Labor cost

Transaction value

Transfer income

Fixed cost

Variable cost

Variable value

Monetary cost Variable cost

Production cost

Variable value

Variable cost

Transaction value

Transaction cost

Travel expenses

Variable cost

Variable cost

Fixed cost

Transfer income

Transaction cost

Transaction cost

Labor expenses

Bargaining cost

Transaction cost

Search cost

Revenue or cost of Value/Cost Attribute a Symbiont

Quantity of goods

Quantity of goods

Purchase scale

Purchase scale

Number of employees

Purchase scale

Number of employees

Variable Factor

(continued)

Net profit similar to that of suppliers

Labor expenses (including the wages, benefits, labor insurance and training fees for sales promotion staff)

128 7 Business Model-Based Financial Accounting

(continued)

Business

Logistics/transportation

Activity

Monetary cost Variable cost Monetary cost Variable cost Transaction cost

Repair charge Vehicle depreciation Labor expenses

Variable cost

Monetary cost Variable cost

Fuel charge

Variable cost

Transaction cost

Car rental

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Packing expenses

Monetary cost Variable cost

Variable Factor

Revenue or cost of Value/Cost Attribute a Symbiont

From the manufacturer to the warehouse of the retailer

7.2 Activity-Based Analysis of Variable Factors … 129

130

7 Business Model-Based Financial Accounting

Each activity link and stakeholder involves input and output. By analyzing the factors related to the input and output of an activity link or stakeholder, we can price it relatively independently. Finally, attribute the accounting content to the related accounting items to form three statements – income statement, statement of assets and liabilities, and cash flow statement At this stage, we can fully work out the relationships of the three. They are stakeholders (accounting objects), activities and resources. Stakeholders own resources, which support activities; stakeholders assume roles of a business model by taking part in activities. We can also list out the detailed resources consumed and the output of activities and stakeholders to analyze their input and output, as shown in the table below:

Stakeholder 5

Stakeholder 4

Stakeholder 3

Stakeholder 2

Stakeholder 1

Resource 16

Resource 15

Resource 14

Resource 13

Resource 12

Resource 11

Resource 10

Resource 9

Resource 8

Resource 7

Resource 6

Resource 5

Resource 4

Resource 3

Resource 2

Resource 1

Activity 1

Activity 2

Activity 3

Activity 4

Activity 5

Activity 6

Activity 7

Activity 8

Activity 9

7.2 Activity-Based Analysis of Variable Factors … 131

132

7 Business Model-Based Financial Accounting

Now we can produce three accounting statements: income statement, statement of assets and liabilities, and cash flow statement, which will be dealt with in detail later on.

7.3 Business Model Accounting: Steps and Instances from the Perspective of Symbionts As business model design is mostly based on cross-boundary innovation that demolishes enterprise boundaries, it is necessary to find a wider perspective as the frame of reference for design-oriented business model accounting, which points to symbionts. Starting with a symbiont, we can have a uniform frame of reference. Step I: Based on different business models, describe the common stakeholders and activity links, and identify different business models in symbionts Take the retail industry for example, no matter if the fixed rent or price difference model is adopted, the set of its stakeholders and activity systems is basically consistent. So we can put its symbiont in the diagram below and see a full set of stakeholders and activity systems.

7.3 Business Model Accounting: Steps …

133

As you can see, a complete retail symbiont includes stakeholders such as manufacturers, brand dealers, third-party logistics provider, warehousing system, information center, management & operation center, distribution center, retail network, property supplier and consumers. The activity links among them include purchasing, logistics distribution, information, financial & operations management back-office, property leasing, and sales. With a general picture of the symbiont, we can identify three different business models more easily. The first one is fixed rent. Stakeholders related to the focus enterprise include warehousing system, information center, management and operation center and property supplier.

The second one is price difference.

134

7 Business Model-Based Financial Accounting

Stakeholders related to the focus enterprise include purchasing center, warehousing system, information center, distribution center, management & operation center, third-party logistics provider, property supplier, retail network (including shopping malls, supermarkets, community stores, and counters/stores). The activity links among them include purchasing, logistics distribution, information processing, financial & operations management back-office support, and long-term leasing. The third one is shared income.

7.3 Business Model Accounting: Steps …

135

Stakeholders related to the focus enterprise include manufacturers, brand dealers, warehousing system, information center, distribution center, management & operation center, and retail network (including shopping malls, supermarkets, community stores, and counters/stores). The activity links among them include purchasing, information processing, and financial and operations management back-office support. Step II: Analyze the business process, value, or cost and variable factor for each stakeholder and activity link The stakeholder and activity link stated here shall be approached from the perspective of a symbiont in the full set. As the income of the previous link is the cost of the next link (except for the sales link), sometimes transaction value can be calculated only at the sales link, with only costs stated for other links. Input–output analysis for an activity system can be further broken down to each activity link, as detailed below:

Activity

Purchasing

Logistics transportation

Purchase link

Distribution

Sorting and packing

Purchasing

Business negotiation

Selecting suppliers

Between supplier and retailer

Total Transaction Value of a Symbiont

Activity System

Transaction cost Monetary cost

Labor cost Packing expenses

Monetary cost

Transaction cost

Travel expenses Commodity cost

Transaction cost

Transaction cost

Labor expenses

Bargaining cost

Transaction cost

Search cost

Variable cost

Fixed cost

Variable cost

Variable cost

Variable cost

Variable cost

Fixed cost

Revenue or cost of Value/Cost Attribute a Symbiont

Quantity of goods

Purchase scale

Number of employees

Purchase scale

Number of employees

Variable Factor

(continued)

Net profit similar to that of suppliers

Labor expenses (including the wages, benefits, labor insurance and training fees for sales promotion staff)

Definition

136 7 Business Model-Based Financial Accounting

Distribution

(continued)

Monetary cost Transaction cost

Vehicle depreciation Labor expenses

Logistics distribution

Logistics/transportation

Sorting & picking

Car rental

Transaction cost

Monetary cost

Monetary cost

Transport vehicle

Packing expenses

Monetary cost

Repair charge

Transaction cost

Monetary cost

Fuel charge

Labor expenses

Transaction cost

Car rental

Logistics/transportation

Variable cost

Variable cost

Fixed cost

Variable cost

Variable cost

Fixed cost

Variable cost

Variable cost

Variable cost

Revenue or cost of Value/Cost Attribute a Symbiont

Activity

Between retailer and retail network

Total Transaction Value of a Symbiont

Activity System

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Variable Factor

(continued)

From the manufacturer to the warehouse or store of the retailer

From the manufacturer to the warehouse of the retailer

Definition

7.3 Business Model Accounting: Steps … 137

Back-office management

(continued)

Warehousing

Inside retailer

Total Transaction Value of a Symbiont

Activity System

Fixed cost Fixed cost

Monetary cost

Labor expenses

Commodity Monetary cost depletion expenses

Fixed cost

Monetary cost

Variable cost

Fixed cost

Fixed cost

Variable cost

Variable cost

Fixed cost

Variable cost

Cargo handling fees

Monetary cost

Monetary cost

Transaction cost

Labor expenses

Labor expenses

Monetary cost

Vehicle depreciation

Monetary cost

Monetary cost

Transport vehicle

Inspection fee

Monetary cost

Repair charge

Area

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Monetary cost

Fuel charge

Variable cost

Variable Factor

Revenue or cost of Value/Cost Attribute a Symbiont

Daily goods management Warehouse rental expenses

Inspection, sorting and warehouse receiving

Activity

(continued)

Definition

138 7 Business Model-Based Financial Accounting

Back-office management

(continued)

Back-office management

Financial management

Fixed cost Fixed cost

Monetary cost

System maintenance fee

Software expenses Monetary cost

Fixed cost

Monetary cost

Administrative expenses

Fixed cost

Fixed cost

Monetary cost

Monetary cost

System maintenance fee

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Labor expenses

Monetary cost

Monetary cost

Inspection fee

Office software expenses

Monetary cost

Freight and charges Monetary cost

Monetary cost

Monetary cost

Labor expenses

Amortization of low value consumables

Revenue or cost of Value/Cost Attribute a Symbiont

Information management Labor expenses

Warehouse-out processing

Activity

Between retailer and retail network

Back-office management

Total Transaction Value of a Symbiont

Activity System

Variable Factor

(continued)

Definition

7.3 Business Model Accounting: Steps … 139

(continued)

Fixed cost

Transaction cost Transaction cost Monetary cost Monetary cost Monetary cost

Labor expenses Sales rebates Admission fee Anniversary celebration fee Advertising fees

Brand building

Transaction cost/monetary cost

Promotion expenses

Marketing planning

Fixed cost

Variable cost

Variable cost

Variable cost

Fixed cost

Fixed cost/variable cost

Fixed cost

Labor expenses Training expenses Monetary cost

Monetary cost

Fixed cost

Software expenses Monetary cost

Fixed cost Fixed cost

Monetary cost Monetary cost

System maintenance fee

Equipment depreciation

Revenue or cost of Value/Cost Attribute a Symbiont

Staff training

Logistics information management

Activity

Between retail network and property supplier

Total Transaction Value of a Symbiont

Activity System

Number of merchants

Number of merchants

Promotion income

Activity frequency

Variable Factor

(continued)

Definition

140 7 Business Model-Based Financial Accounting

Retail network back-office management

Back-office management

(continued)

Monetary cost

Property fees

Warehousing

Internal management

Shelf management

Construction of retail stores

Labor expenses

Monetary cost

Monetary cost

Fixed cost

Fixed cost

Variable cost

Model machine Monetary cost and sample inputs Labor expenses

Variable cost

Monetary cost

Decoration expenses

Service charges paid to financial institutions

Inside retail network

Fixed cost

Interest expenses Transaction and fees for cost construction loans

Financing

Transaction cost

Fixed cost

Construction input

Fixed cost

Variable cost

Variable cost

Variable cost

Housing construction

Monetary cost

Monetary cost

Utilities

–

Transaction cost

Rent

Revenue or cost of Value/Cost Attribute a Symbiont

–

Activity

Inputs of property supplier/property builder

Leasing

Total Transaction Value of a Symbiont

Activity System

Definition

(continued)

Number/area of stores

Number/area of stores

Area

Area

Area

Variable Factor

7.3 Business Model Accounting: Steps … 141

Sales

Sales

(continued)

Activity

–

Promotional activities

Warehouse out processing

Sales

Back-office management

Between retail network and consumers

Sales

Between retail network and consumers

Total Transaction Value of a Symbiont

Activity System

Monetary cost

Amortization of low value consumables

Monetary cost

Giveaway expenses

Monetary cost

Transaction cost

Promotion and advertising fees

Labor expenses

Transaction cost

Staff expenses

Transaction value

Fixed cost

Fixed cost

Variable cost

Variable cost

Fixed cost

Fixed cost

Sales revenue

Fixed cost

Monetary cost

Commodity Monetary cost depletion expenses

Utilities

Revenue or cost of Value/Cost Attribute a Symbiont

Activity frequency

Activity frequency

Variable Factor

(continued)

Promotion expenses of retail stores for attracting consumers

Sales revenue from direct sales of retail networks to consumers

Definition

142 7 Business Model-Based Financial Accounting

(continued)

Total Transaction Value of a Symbiont

Activity System

Monetary cost Monetary cost Transaction cost

Repair charge Vehicle depreciation Labor expenses

Monetary cost Monetary cost Monetary cost Transaction cost

Software depreciation Administrative expenses Equipment depreciation Labor cost

Monetary cost

Monetary cost

Fuel charge

Financial settlement and System information management maintenance fee

Transaction cost

Car rental

Logistics transportation

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Variable cost

Variable cost

Variable cost

Variable cost

Variable cost

Revenue or cost of Value/Cost Attribute a Symbiont

Activity

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Variable Factor

Definition

7.3 Business Model Accounting: Steps … 143

144

7 Business Model-Based Financial Accounting

In the same manner, we can also analyze the value (or income), costs, or variable factors of stakeholders. It is worth emphasizing that we need to consider the role a stakeholder plays, and the activity links related to this role as detailed below: Total Transaction Value of a Symbiont Sales

Activity

Total Transaction Value of a Symbiont

Definition

Between retail network and consumers Sales

–

Sales revenue

Sales revenue from direct sales of retail networks to consumers

Activity

Purchasing

Logistics transportation

Purchase link

Distribution

Logistics/transportation

Sorting and packing

Purchasing

Business negotiation

Selecting suppliers

Between supplier and retailer

Business

Transaction cost

Monetary cost

Fuel charge

Monetary cost

Packing expenses Car rental

Transaction cost

Labor cost

Monetary cost

Transaction cost

Travel expenses Production cost

Transaction cost

Transaction cost

Labor expenses

Bargaining cost

Transaction cost

Search cost

Variable cost

Variable cost

Variable cost

Fixed cost

Variable cost

Variable cost

Variable cost

Variable cost

Fixed cost

Revenue or cost of Value/Cost Attribute a Symbiont

Quantity of goods

Quantity of goods

Quantity of goods

Purchase scale

Number of employees

Purchase scale

Number of employees

Variable Factor

(continued)

From the manufacturer to the warehouse of the retailer

Net profit similar to that of suppliers

Labor expenses (including the wages, benefits, labor insurance and training fees for sales promotion staff)

7.3 Business Model Accounting: Steps … 145

Back-office management

(continued)

Warehousing

Inside retailer

Business

Monetary cost

Labor expenses

Warehouse out processing

Fixed cost

Amortization of low value consumables

Monetary cost Monetary cost

Labor expenses Freight and charges

Fixed cost

Fixed cost

Fixed cost

Commodity Monetary cost depletion expenses Monetary cost

Fixed cost

Monetary cost

Labor expenses

Fixed cost

Monetary cost

Variable cost

Fixed cost

Fixed cost

Variable cost

Variable cost

Cargo handling fees

Monetary cost

Monetary cost

Transaction cost

Labor expenses

Inspection fee

Monetary cost

Vehicle depreciation

Area

Quantity of goods

Quantity of goods

Quantity of goods

Monetary cost

Repair charge

Variable cost

Variable Factor

Revenue or cost of Value/Cost Attribute a Symbiont

Daily goods management Warehouse rental expenses

Inspection, sorting and warehouse receiving

Activity

(continued)

146 7 Business Model-Based Financial Accounting

Distribution

(continued)

Monetary cost

System maintenance fee

Logistics distribution

Logistics/transportation

Sorting & picking

Between retailer and retail network

Monetary cost

Administrative expenses

Transaction cost Monetary cost Monetary cost Monetary cost Monetary cost

Fuel charge Repair charge Transport vehicle Vehicle depreciation

Monetary cost

Packing expenses Car rental

Transaction cost

Labor expenses

Monetary cost Monetary cost

Inspection fee

Information management Labor expenses

Back-office management

Variable cost

Fixed cost

Variable cost

Variable cost

Variable cost

Variable cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Revenue or cost of Value/Cost Attribute a Symbiont

Activity

Business

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Variable Factor

(continued)

From the manufacturer to the warehouse or store of the retailer

7.3 Business Model Accounting: Steps … 147

Back-office management

(continued)

Back-office management

Business

Transaction cost/monetary cost Transaction cost Transaction cost

Labor expenses Sales rebates

Monetary cost

Training expenses Promotion expenses

Monetary cost

Marketing planning

Monetary cost

Monetary cost

Equipment depreciation

Labor expenses

Monetary cost

Software expenses

Software expenses

Monetary cost

System maintenance fee

Monetary cost

Monetary cost

Administrative expenses

System maintenance fee

Monetary cost

Labor expenses

Variable cost

Fixed cost

Fixed cost/variable cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Fixed cost

Promotion income

Activity frequency

Quantity of goods

Variable cost

Labor expenses

Transaction cost

Variable Factor

Revenue or cost of Value/Cost Attribute a Symbiont

Staff training

Logistics information management

Financial management

Activity

(continued)

148 7 Business Model-Based Financial Accounting

Sales

Retail network management

(continued)

Brand building

Activity

Shelf management

Construction of retail stores

Sales

Promotional activities

Between retail network and consumers

Warehousing

Internal management

Inside retail network

Business

Transaction cost Transaction cost

Promotion and advertising fees

Variable cost

Fixed cost

Fixed cost

Commodity Monetary cost depletion expenses Staff expenses

Fixed cost

Monetary cost

Utilities

Fixed cost

Monetary cost

Fixed cost

Variable cost

Variable cost

Fixed cost

Variable cost

Labor expenses

Monetary cost

Monetary cost

Model machine and sample input Labor expenses

Monetary cost

Monetary cost

Decoration expenses

Advertising fees

Monetary cost

Anniversary celebration fee

Activity frequency

(continued)

Promotion expenses of retail stores for attracting consumers

Number/area of stores

Number/area of stores

Number of merchants

Number of merchants

Monetary cost

Admission fee

Variable cost

Variable Factor

Revenue or cost of Value/Cost Attribute a Symbiont

7.3 Business Model Accounting: Steps … 149

(continued)

Warehouse-out

Back-office management

Financial settlement and information management

Logistics transportation

Activity

Business

Monetary cost

Administrative expenses

Transaction cost

Labor expenses

Monetary cost

Monetary cost

Vehicle depreciation

Software depreciation

Monetary cost

Repair charge

Monetary cost

Monetary cost

Fuel charge

System maintenance fee

Transaction cost

Monetary cost

Amortization of low value consumables Car rental

Monetary cost

Labor expenses

Fixed cost

Fixed cost

Fixed cost

Variable cost

Variable cost

Variable cost

Variable cost

Variable cost

Fixed cost

Fixed cost

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Quantity of goods

Activity frequency

Variable cost

Giveaway expenses

Monetary cost

Variable Factor

Revenue or cost of Value/Cost Attribute a Symbiont

(continued)

150 7 Business Model-Based Financial Accounting

Back-office management

(continued)

Activity

Transaction cost

Labor cost

Monetary cost Monetary cost

Rent Utilities Property fees

–

–

Fixed cost

Interest expenses Transaction and fees for cost construction loans Service charges paid to financial institutions

Financing

Transaction cost

Fixed cost

Construction input Monetary cost

Fixed cost

Variable cost

Variable cost

Variable cost

Fixed cost

Fixed cost

Housing construction

Inputs of property supplier/property builder

Leasing

Transaction cost

Monetary cost

Equipment depreciation

Revenue or cost of Value/Cost Attribute a Symbiont

Between retail network and property supplier

Business

Area

Area

Area

Variable Factor

7.3 Business Model Accounting: Steps … 151

152

7 Business Model-Based Financial Accounting

Of course, we can work out a two-dimension table and a panorama of all the stakeholders and activity links in a symbiont. This will give a clearer understanding about which activity links, value and cost items a specific stakeholder is related to; and which specific activity link is related to which stakeholders, value and cost items.

Transaction cost

Transaction value

Consumers

Retail network

Retailers

Suppliers

Consumers

Participant stakeholders

Indicator/Activity Link

Labor expenses

Search cost

Retailers

Selecting suppliers

Travel expenses

Bargaining cost

Retailers

Retailers

Business Purchasing negotiation

Purchasing

Labor cost

Labor cost

Labor expenses

Car rental

Labor expenses

Car rental

Retailers

Logistics / transportation

Suppliers Retailers Suppliers

Sorting and packing

Logistics

Retailers

Warehousing

Retail network Retailers

Back-office information / physical management

Retail network Retailers

Financial management

Back-office Management

Retail network

Sales rebates

Labor expenses

Promotion expenses

Retailers

Staff Marketing training planning

Retail network

Property lessor / builder

Property Leasing

Staff expenses

Sales revenue

Retail network

Sales promotion

Logistics management: car rental and labor

Retail network

Back-office management

Sales

7.3 Business Model Accounting: Steps … 153

Monetary cost

Retailers

Suppliers

Property supplier

Indicator/Activity Link

Selecting suppliers

Commodity cost

Business Purchasing negotiation

Purchasing

Packing expenses

Sorting and packing

Fuel charge, repair charge, vehicle depreciation

Logistics / transportation

Logistics

Inspection, sorting and warehouse receiving: inspection fee and labor expenses

Warehousing

Labor expenses

Back-office information / physical management Financial management

Back-office Management

Staff Marketing training planning

Rent

Housing construction input

Property Leasing

Giveaway expenses

Promotion and advertising fees

Sales promotion

Financial settlement and information management: labor costs

expenses

Back-office management

Sales

154 7 Business Model-Based Financial Accounting

Retail network

Indicator/Activity Link

Selecting suppliers

Business Purchasing negotiation

Purchasing

Packing expenses

Sorting and packing

Fuel charge, repair charge, vehicle depreciation

Logistics / transportation

Logistics

Shelf management: labor expenses

Software expenses

Commodity Labor depletion

Utilities

System maintenance fee

System maintenance fee

Warehouse out: labor, freight and charges, inspection fee

Labor expenses

Administrative expenses

Daily goods management: warehouse rent, cargo handling fees, labor, commodity depletion, amortization of low value consumables

Construction of retail stores: decoration expenses, model machine / sample inputs

Back-office information / physical management

Warehousing

System maintenance

Administrativ e expenses

Labor expenses

Financial management

Back-office Management

Anniversary celebration

Admission fee

Promotion expenses

Staff Marketing training planning

Property Leasing Sales promotion

Back-office management

Sales

7.3 Business Model Accounting: Steps … 155

Consumers

Indicator/Activity Link

Selecting suppliers

Business Purchasing negotiation

Purchasing

Sorting and packing Logistics / transportation

Logistics

Warehousing

expenses

expenses

Back-office information / physical management

Advertising fees

Software expenses Equipment depreciation

fee

Staff Marketing training planning

fee

Financial management

Back-office Management

Property Leasing Sales promotion

Financial settlement and information management: system maintenance fee, software

Logistics transportation : fuel charge, repair charge, vehicle depreciation

Warehouseout: labor expenses, amortization of low value consumables

Back-office management

Sales

156 7 Business Model-Based Financial Accounting

Property supplier

Indicator/Activity Link

Selecting suppliers

Business Purchasing negotiation

Purchasing

Sorting and packing Logistics / transportation

Logistics

Warehousing

Back-office information / physical management Financial management

Back-office Management

Staff Marketing training planning

Property fees

Utilities

Housing financing costs: interest expenses and fees for construction loans, service charges paid to financial institutions

Property Leasing Sales promotion

depreciation, administrativ e expenses, equipment depreciation

Back-office management

Sales

7.3 Business Model Accounting: Steps … 157

158

7 Business Model-Based Financial Accounting

Step III: Complete the income statement, and update the statement of assets and liabilities and the cash flow statement, according to regulations on accounting items Compile the income statement still from the perspective of symbionts. For the sake of clear expression, we can separate the roles of stakeholders and then sum them up in the master table of the symbiont.

Less:

Logistics transportation link

Commodity depletion

Travel expenses

Administrative expenses

Commodity depletion

Commodity depletion

Commodity depletion

Administrative expenses

Employee Employee Employee remuneration remuneration remuneration

Back-office management: warehousing link

(Store anniversary celebration expense, sales promotion expense, and sales rebates)

Selling expenses

Employee remuneration

Sales expenses

Business tax and surcharges

Business tax and surcharges

Internal management

Sales expenses

Sales link

Business tax and surcharges

Sales revenue

Retail Network

Commodity depletion

Employee Employee Employee remuneration remuneration remuneration

Logistics distribution link

Business tax and surcharges

Retailers

Operating costs

Business tax and surcharges

Manufacturers Distributors

Operating costs

I. Total operating income

Simulation Financial Statements about a Retail Industry Interest Symbiont

Employee remuneration

Logistics transportation link

Business tax and surcharges

Property Lessor

(continued)

(Logistics (Rent transportation income) income)

Business tax and surcharges

Third-party Logistics Provider

Monetary unit: RMB

7.3 Business Model Accounting: Steps … 159

Maintenance cost

Maintenance cost

Administration cost

Maintenance cost

Cargo handling fees

Administration cost

System maintenance fee

Cargo handling fees

Amortization of low value consumables

Maintenance cost

Cargo handling fees

Transport charge

Packing expenses

Inspection fee

Vehicle depreciation

Others

Advertising and promotion expenses

System maintenance fee

Cargo handling fees

Cargo handling fees

Transport charge

Transport charge

Transport charge

Transport charge

Packing expenses

Inspection fee Inspection fee Inspection fee

Packing expenses

Packing expenses

Vehicle depreciation

Retailers

Inspection fee

Vehicle depreciation

Manufacturers Distributors

Depreciation cost

Simulation Financial Statements about a Retail Industry Interest Symbiont

(continued)

Promotion and advertising fee and giveaway expense

Administration cost

Model machine and sample input, utilities

Retail Network

Maintenance cost

Cargo handling fees

Transport charge

Packing expenses

Inspection fee

Vehicle depreciation

Third-party Logistics Provider

(continued)

Property Lessor

Monetary unit: RMB

160 7 Business Model-Based Financial Accounting

Internal management

Back-office management

Equipment depreciation Brand promotion and advertising expenses Property management cost Amortization of low value consumables

Equipment depreciation

Advertising fees

Property management cost

Amortization of low value consumables

Employee remuneration

Retail Network

Retailers

Software expenses, system maintenance fee

Manufacturers Distributors

IT cost

Business entertainment expenses

Employee remuneration

Simulation Financial Statements about a Retail Industry Interest Symbiont

(continued)

Equipment depreciation

Software expenses, system maintenance fee

Employee remuneration

Back-office management

Third-party Logistics Provider

(continued)

Property Lessor

Monetary unit: RMB

7.3 Business Model Accounting: Steps … 161

Add:

Gain from changes in fair value (loss is represented with “-”)

Asset impairment loss

Service charges to financial institutions

Interest income

Interest expenses

Financial cost

Retail Network

Financial cost

Financial cost

Training expenses

Retailers

Decoration expenses

Manufacturers Distributors

Others

Inventory loss and damage

Administrative expenses

Training expenses

Simulation Financial Statements about a Retail Industry Interest Symbiont

(continued)

Administrative expenses

Third-party Logistics Provider

(continued)

Property Lessor

Monetary unit: RMB

162 7 Business Model-Based Financial Accounting

Non-operating expenses

Less:

III. Total profit (loss is represented with “-”)

Including: Loss from disposal of non-current assets

Non-operating income

Add:

II. Operating profit (loss is represented with “-”)

Exchange gains (loss is represented with “-”)

Including: Investment income from associates and joint ventures

Investment income (loss is represented with “-”)

Simulation Financial Statements about a Retail Industry Interest Symbiont

(continued)

Manufacturers Distributors

Retailers

Retail Network

Third-party Logistics Provider

(continued)

Property Lessor

Monetary unit: RMB

7.3 Business Model Accounting: Steps … 163

Income tax expense

VII. Total comprehensive income

VI. Other comprehensive income

(II) Diluted earnings per share

(I) Basic earnings per share

V. Earnings per share:

Minority interest income

Net profit attributable to the owner of the parent company

Including: Net profit realized by the consolidated entities prior to consolidation

IV. Net profit (net loss is represented with “-”)

Less:

Simulation Financial Statements about a Retail Industry Interest Symbiont

(continued)

Manufacturers Distributors

Retailers

Retail Network

Third-party Logistics Provider

Property Lessor

Monetary unit: RMB

164 7 Business Model-Based Financial Accounting

7.3 Business Model Accounting: Steps …

165

The three business models actually differ in that different stakeholders or stakeholder roles serve as the focus enterprise. For example, if an enterprise engages in property leasing, even if it used to be a retailer, essentially it plays the role of a property lessor. For instance, the focus enterprise under the fixed rent/price difference/shared income models is the property lessor, retail network and retail network + manufacturers, respectively. The master table above actually reflects the income statement of three different business models. If broken up, it can represent the income statement of specific business models. Similarly, we can compile the statement of assets and liabilities and the cash flow statement.

7.4 Application Scenarios of Business Model Accounting Compared with conventional financial accounting, business model accounting involves business model-oriented calculation, design and decision making. There are several application scenarios concerning design and evaluation decisions. First is transaction pricing-oriented design and evaluation. As business model design involves division and reorganization of stakeholders and activity links, it is necessary to calculate their contributions to the trading structure and opportunity cost comparison between different trading structures in terms of pricing. Therefore, it is necessary to calculate the input and output of specific stakeholders and activity links. In addition, it is necessary to put different cross-boundary business models in the same symbiont to form a common reference background for pricing – a set of stakeholders and activity systems under different business models. Second, evaluate the contribution and opportunity cost of different stakeholders in a truthful and dynamic manner. In fact, we can evaluate the value and costs of stakeholders and activity systems in a dynamic manner. Under different circumstances, the influence of variable factors varies. Some links are related to labor costs while some are fixed expenses and related to technological input. With the rise of labor cost, it may be necessary to gradually replace the original links sensitive to labor cost with technological input. It is difficult to find out the real variable factor of cost if we don’t analyze the variable factor of specific activities. This makes it hard to evaluate the contribution and opportunity cost of different stakeholders in a truthful and dynamic way. Furthermore, the variable factor may vary under different circumstances. For instance, the promotion and advertising fees for physical stores are related to the number of promotional activities, and so it is a variable cost. But suppose WeChatbased marketing activities are adopted to attract customers. With a designated person in charge and fixed expenses, it becomes a fixed cost (similar to an information management system), but it also requires appropriate adjustment.

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Third, in the same business model structure, different transaction objects involve different business processes. Accordingly, the structure and features of monetary cost and transaction cost may also vary, as will the variable factor. For instance, there are two retail companies both adopting a price difference model, but one sells fridges while the other sells books. The business process for the fridge seller may include after-sales service, but the book seller doesn’t have to provide the service. Even at the distribution link, the variable factor for distributing large fridges and standardized combinations of books is different. Though both are related to batches, the number of batches differs in the two cases, and so will route planning and allocation of warehouses. Only by further breaking down the business process and analyzing the variable factor can we get in-depth and accurate results. In conclusion, the core thinking on business model accounting is to calculate and evaluate the input and output of stakeholders and activity links with them being the minimum analysis units. This will provide more truthful, accurate, complete and fairer bases for business model design, transaction pricing and management decision.

Chapter 8

Symbiont-Based Financial Analysis In the Case of the Retail Industry

In employing financial indicators to compare and analyze enterprises, we usually adopt the industry-based DuPont analysis and ratio analysis methods. Suggestions on the subsequent operation of enterprises are also based on the analysis of these indicators. However, this type of financial analysis is prone to be misleading if business models differ even in the same industry due to two reasons. First, under different business models, the same financial indicators represent different meanings. Take sales volume for example. It means the total retail value of all the goods for retail enterprises adopting the price difference model, but it refers to total rent income (lease area * rent per unit area) for those adopting the rent model. Therefore, financial indicators related to sales volume cannot be directly compared. If A’s profit margin on sales is higher than B’s, does it mean A’s operating results are definitely better than B’s? Not necessarily. A might be an average retail enterprise adopting the price difference model, while B performs well adopting the rent model. Second, given the different business models and key performance indicators (“KPIs”), it is difficult to compare the same financial indicator between different business models. For instance, for those adopting the shared income model (usually called “joint ventures” in business introduction) in the retail industry, sales-to-cost ratio, turnover of accounts receivable and turnover of accounts payable are KPIs. For those adopting the fixed rent model, these indicators are not as important. Cash turnover ratio and asset-liability ratio are more critical. If we ignore the difference in business models and simply compare financial indicators, we might end up with some plausible conclusions. For instance, A’s turnover of accounts receivable is higher than B’s, but that does not necessarily mean A’s operational efficiency is higher than B’s. The truth could be that A adopts the shared income model while B uses the rent model. So the turnover of accounts receivable is not a KPI for B, or a basis on which to evaluate operational efficiency.

© Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_8

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It is essential to distinguish which indicators are related to the entire symbiont and which ones to the specific business models of enterprises before we can compare the operational efficiency of different symbionts and business models. Only by taking a symbiont-based approach to analyze the difference in business models and financials can we come to valuable conclusions.

8.1 What Can Be Seen from the Description of General Financial Indicators and Business Models? It’s Necessary to Form a Symbiont-Based Perspective There are large numbers of listed companies adopting different models and engaging in varied businesses in the retail industry. As a matter of fact, it is difficult to reach analysis conclusions with reference value through comparison of financial indicators. As we are discussing financial analysis from a business model-based perspective, we may as well lock in on business, select similar business segments, and then analyze financial indicators under different business models. We will now look at Yonghui Superstores and Renrenle, both of which are listed companies, and analyze their business model efficiency with financial indicators. Both companies sell a variety of product categories, so for an example we will just compare their fresh products for better direct comparison. Yonghui and Renrenle are typical representatives of the domestic supermarket industry, and are among the few listed supermarket operators with cross-region/province businesses. Overall, both are retail enterprises and principally engaged in food, daily necessities, fresh cooked food, garments, and other commodities, but they vary hugely in profitability. As the 2012 statistics show, Yonghui’s gross margin and net margin were 16.5% and 2.0%, with ROE and ROA at 11.8% and 7.6% respectively; whereas Renrenle’s gross margin and net margin were 10.2% and −0.7%, with ROE and ROA at −2.7% and −1.5% respectively. Judging from the above indicators, it is easy to see that Yonghui performs better than Renrenle. But is it true that Yonghui beats Renrenle? Or does it mean Yonghui outdid the Renrenle in certain aspects while the Renrenle has more advantages in other aspects? What practical suggestions can we offer on their business models? For this end, we need to start by analyzing their business modes. Yonghui takes the typical price difference model, while Renrenle adopts a business model combining shared income and fixed income. In 2012, the gross margin of Yonghui’s fresh products business reached 12.37%, while that of Renrenle was 5.95%. Fresh products processing contributed 46% and 18% to the revenues of Yonghui and Renrenle respectively. Based on the six-element Wei-Zhu business model, the business model comparison of Yonghui and Renrenle is detailed below:

8.1 What Can Be Seen from the Description …

169

Table: Differences based on the Six Elements of Business Models. Yonghui

Renrenle

Positioning

Provides consumers with the best purchasing experience by centering on sales of fresh products

Promotes the sales of commodities with high gross margins by increasing traffic with fresh products

Business system

Established buyer teams to actively participate in the trade of fresh products, gets deeply involved in the supply chain, cooperates with agricultural bases and big farming concerns, and connects agriculture with supermarkets

Cooperates with suppliers, selects suitable suppliers everywhere, and outsources main purchase and sale links to suppliers

Profit model

Buy out operations, obtains residual income, and undertakes trading risks

Shares revenue or obtain fixed rents by means of outsourcing, joint operation or leasing, without undertaking trading risks

Key resources and capacities Retail technology and management techniques for fresh agricultural products; and high requirements for capabilities in terms of the whole supply chain of fresh agricultural products

Investment attraction and organization capabilities of suppliers; and relatively low requirements for understanding and operational capability for fresh products

Cash flow structure

With cash inflows from sales of commodities, prompt payment is required for upstream suppliers

With cash inflows from sales of commodities, a payment period may be granted to upstream suppliers

Enterprise value

Revenue and net profit for 2013 was 30.5 billion RMB and 721 million RMB. Current market capitalization is 21 billion RMB

Revenue and net profit for 2013 was 12.7 billion RMB and 23 million RMB. Current market capitalization is 3.8 billion RMB

Under Yonghui’s model of running the fresh products business, it directly manages and controls the entire supply chain process from purchasing, to warehousing management, display, marketing and sales (Fig. 8.1). Given the fact that fresh products feature many intermediate links, high expenses and high attrition rate, the purchasing link is of critical importance. There is a lot of room for optimization. For this very reason, Yonghui has established specialized big buyer teams and adopted both uniform purchases nationwide and direct regional purchases. Nationwide purchases are from bases and done remotely, while the direct purchases are from local farmers and regional wholesale markets. Yonghui sets the prices of fresh products (including fruits, vegetables, grains, meat, poultry, and eggs) generally lower than those of other supermarkets for the

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Fig. 8.1 System diagram for fresh products business of Yonghui

same type of products. The price difference is around 10%. Pricing fresh products lower part of Yonghui’s business model, and a key reason why its performance is higher than comparable companies. In addition to low prices, Yonghui has a wide variety of fresh products. For instance, ordinary supermarkets only have 1–2 varieties (usually no more than 3–4) for one product category. Yonghui normally displays 3–4, or even more of major product categories. People like the larger numbers of choices, and it is a key factor in attracting them and meeting diverse customer demands. In contrast with Yonghui, Renrenle mainly adopts the outsourcing mode. They introduce different fresh product companies in different regions, and get shared income at preset commission rates or fixed rents by leasing premises. These different business models have determined different distribution of resources and capacities in the symbionts of Renrenle and Yonghui. Yonghui’s has the purchasing capacity, supplier resources, management capacity, and sales capacity etc. At Renrenle these attributes are owned by their suppliers.

8.1 What Can Be Seen from the Description …

171

Renrenle has outsourced purchasing, warehousing, logistics and sales all to its suppliers, and is only responsible for back-office management. For Renrenle, the capacity of finding suitable suppliers in different regions is highly important. Renrenle uses fresh products as a “loss leader” to attract customers and increase traffic. They gain profit from promoting the sales of other categories with high gross margins. Yonghui focuses on the sales of fresh products and aims to provide consumers with the best shopping experience. Its operation management and resource capacities are built on the fresh products business. By cooperating with local suppliers, Renrenle selects suitable ones and outsources purchasing and sales to them. It is mainly responsible for providing business venues, collecting money, cleaning and other services. However, Yonghui needs to establish specialized buyer teams, actively participates in the purchase and sales of fresh products, and gets deeply involved in the supply chain of fresh agricultural products. It has established cooperation with upstream agricultural bases and large farms, and procurement cooperation with specialized suppliers including Lontrue and First Food. This has helped to realize interconnection between agriculture and supermarkets/wholesalers, and formed a special symbiont of interests. In its business model design, Yonghui adopts the buyout model, profits from purchase and sales price differences, obtains residual income from purchasing fresh products from upstream suppliers and then selling them through self-operation and management. It takes the risks of lackluster sales and running out of commodities. Renrenle adopts joint operations and mainly profits from intermediary fees, has no inventory risk, and almost stays out of specific management and sales efforts. Yonghui’s revenue for 2013 was 30.5 billion RMB and net profit was 721 million RMB. Current market capitalization is 21 billion RMB. Renrenle’s revenue for 2013 was 12.7 billion RMB and net profit was 23 million RMB. Current market capitalization is 3.8 billion RMB. We can tell a huge difference between the two from their market capitalization, due to different business models. Obviously, owing to its competitive advantages in the fresh products business, Yonghui has achieved

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rapid growth and also obtained the recognition of investors in the market. Yonghui’s revenue is 2.4 times that of Renrenle and its market capitalization is 5.5 times higher. Such a huge difference has proved the power of different business models. Listing the key financial indicators and describing the business models of target enterprises have two critical steps. These basic facts can pave the way for subsequent comparison and analysis. But we also need to explain why their indicators show such differences and whether there are new measures for selection regarding the design of business models in the future. It is far from enough to just present these indicators and the facts about business models. We also need a broader and more systematic perspective like a symbiont-based perspective.

8.2 Four Steps About Financial Analysis of Symbionts Financial analysis from a symbiont-based perspective involves four steps: (1) Build a value panorama: define interest boundaries, and construct a symbiont of interests. (2) Discover value links: revenue and cost breakdown model for the symbiont of interests. (3) Establish a KPI tree for financial analysis of the symbiont of interests. (4) Compare and analyze the financial indicator performance of different enterprises under specific business models. Step I: Build a value panorama: define interest boundaries, and construct a symbiont of interests—symbiont class, symbiont objects and symbiont instances In comparing different enterprises, we need a common background. In the context of business models, the common background is symbiontic. Under a symbiont background, it is easy to compare and analyze different business models. There are plenty of stakeholders in the retail industry, such as manufacturers, brand dealers, purchasing centers, property suppliers, shopping malls and retail stores, which take up different activity links. When these different stakeholders and activity links are connected in different ways, they form different business models. Three concepts are introduced here: symbiont class, symbiont object and symbiont instance. Symbiont class refers to an abstract symbiont containing a specific set of stakeholders and activity links. It is prescribed by the set of stakeholders and activity links contained in it, as an abstract collection. The different sub-sets of stakeholders, activities and their connection modes in a symbiont class form symbiont objects, which are the sub-set of a symbiont class. In theory, the abstract union of all symbiont objects constitutes a symbiont class. Symbiont instances mean the business

8.2 Four Steps About Financial Analysis of Symbionts

173

model expressions of specific values given to the stakeholders, activity links and their connection modes of symbiont objects. Take retail for example, retail symbionts represent a type of symbiont class, including all the possible stakeholders and activity links in the retail industry. By profit model, retail symbionts have at least three types of symbiont objects: rentbased, price difference-based, and shared income-based retail symbionts. All of these belong to the sub-set of a retail symbiont class. In rent-based retail symbionts, some are shopping malls while some others are counters and stores. Different values are given to specific stakeholders, which mean symbiont instances. For the stakeholders in it, a symbiont (be it a symbiont class, symbiont object or symbiont instance) has a closed boundary, and the relationship among them is built on interest coordination and cooperation for win-win results. Of course, if the boundary of a symbiont class is open, that will lead to a larger ecology (with competition at the center of mutual relationships). The ecologies can be divided into business sector ecology, regional ecology and industrial ecology by different features. Here it is in detail. We will look at symbiont class first—retail symbionts.

The stakeholders contained in the retail symbiont above include manufacturers, brand dealers, third-party logistics, the warehousing system, information center, purchasing center, distribution center, management and operation center, property supplier, shopping malls, supermarkets, and community stores. Activity links can be roughly divided into purchasing, distribution, back-office management, retail network management, and sales, and to be more specific, information and leasing. The above stakeholders and activity links can be allocated to the

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interior or exterior of a focus enterprise according to different management facilities, infrastructure, and technical facilities. Retail symbionts of the same type form a number of different symbiont objects based on different sub-sets of stakeholders and activity links. For example, we can list out at least four types of different symbiont objects. The first are price difference-based retail symbionts.

For this type of symbionts, the major stakeholders of a focus enterprise are the purchasing center, warehousing system, information center, distribution center, management and operation center, third-party logistics, property supplier, retail network in the form of shopping malls, supermarkets, community stores, and counters/stores. The activity links concerned are purchasing, logistics distribution, information processing, financial and operation management, back-office support and long-term leasing. The second are fixed rent-based retail symbionts. Stakeholders related to the focus enterprise include the warehousing system, information center, management and operation center and property supplier.

8.2 Four Steps About Financial Analysis of Symbionts

The third are shared income-based retail symbionts.

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The fourth is a hybrid model, meaning retail symbionts based on “fixed income + shared income”.

Finally, these symbiont objects, when assigned specific values, form symbiont instances. For example, the symbiont instances of Yonghui and Renrenle can be seen below:

8.2 Four Steps About Financial Analysis of Symbionts

177

Obviously, Yonghui is a price difference-based retail symbiont, while Renrenle is one based on fixed income + shared income. Being a price difference-based retail symbiont, Yonghui, as a symbiont instance, may have different business model efficiency if it chooses different stakeholders and activity links (like the purchasing link by buyer teams). When symbiont instances cannot be directly compared, we may try going back to the symbiont object level. Where symbiont objects cannot be directly compared, then go back further to the symbiont class. In fact, when comparing different business models, we usually compare symbiont objects in the context of a symbiont class, as shown below. While in comparing the same business model, symbiont instances in the context of symbiont objects are mostly compared. Step II: Discover value links: revenue and cost breakdown model for the symbiont of interests In the symbionts above, industry chains can be further divided based on different business links. Take the retail industry for example, the relationship between its business links and stakeholders can be analyzed as below:

Back-office management

Back-office management

Distribution

Sorting and packaging Logistics/transportation Sorting and distribution

Information management

Warehouse-out operations

Daily goods management

Goods inspection, sorting and storage in warehouses

Logistics/transportation

Back-office management

Staff training

Logistics information management

Financial management

Between retailers and the retail network

Back-office management

Warehousing

Inside retailers

Logistics distribution

Between retailers and the retail network

Logistics transportation

Distribution

Purchasing

Business negotiation

Selection of suppliers

Manufacturing

Purchasing

Production

Purchasing

Business link

Value chain

Suppliers

Retailers

Retail network

Logistics provider

(continued)

Property leasing

178 8 Symbiont-Based Financial Analysis

Sales

Sales

Back-office management of the retail network

Back-office management

(continued) Business link Brand building

Marketing strategy

Shelf management

Construction of retail stores

Warehouse-out operations

Back-office management Financial settlement and information management

Logistics transportation

Promotional activities

Sales

Between the retail network and consumers

Sales

Between the retail network and consumers

Warehousing

Internal management

Inside the retail network

Financing

Housing construction

Input of property providers/property builders

Leasing

Between the retail network and property providers

Value chain

Suppliers

Retailers

Retail network

Logistics provider

Property leasing

8.2 Four Steps About Financial Analysis of Symbionts 179

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Next, based on revenue/cost breakdown for the symbiont of interests, all cost/revenue items are related to relevant stakeholders and financial items. Then a two-dimensional revenue/cost breakdown table can be produced. Part of the revenue/cost breakdown table is shown below:

Purchase link

Purchasing

Between supplier and retailer

Total Transaction Value Created by the Symbiont

Value Chain

Purchasing

Business negotiation

Selecting suppliers

Activity

Suppliers

Retailers

Travel expenses

Commodity cost

Retailers/suppliers

Retailers

Labor expenses

Bargaining cost

Retailers

Participant stakeholders

Search cost

Revenue or Cost of the Symbiont

Transaction cost

Transaction cost

Cost Attribute

Supply cost of manufacturers

Travel expenses for purchasing personnel

Monetary cost

Transaction cost

Profit from the principal Transaction cost operations of manufacturers

Remuneration of purchasing personnel (salary, welfare and social insurance)

Purchasing expenses/remuneration of employees

Financial Item

Variable cost

Variable cost

Variable cost

Variable cost

Fixed cost

Purchase scale

Number of employees

Purchase scale

Number of employees

Variable Factor

Net profit similar to that of suppliers

Labor expenses (including the wages, benefits, labor insurance and training fees for sales promotion staff)

Definition

8.2 Four Steps About Financial Analysis of Symbionts 181

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In the revenue/cost breakdown table by business links, financial items and relevant key factors are all listed. The former can relate to the items of financial statements while the latter helps us to understand the factors associated with these indicators and pave the way for subsequent analysis. For instance, the key factor for business negotiation and purchasing is purchase scale; while the key factor of labor cost and travel expenses is the number of employees. When the purchase scale increases, it has relatively large impact on business negotiation and purchasing cost, and limited impact (relatively low indirect impact) on labor cost and travel expenses. Pay continuous attention to the business distribution of focus enterprises. Then analyze the efficiency of all business links, identify KPIs, compare and analyze the KPIs and we can derive the financial indicators analysis system for the same symbiont under different business models. Step III: Establish a KPI tree for financial analysis of the symbiont of interests According to Step I, for the same symbiont, different business models in effect refer to the size of sub-sets of stakeholders and business links. Then according to Step II, we can analyze the revenue and cost of different activity links using the activity link-based costing method. Based on Step I and Step II, we can list the financial analysis indicators of different business models. First and foremost are the financial indicators of the entire symbiont. In the figure below, the items marked in yellow are critical financial indicators, including tier-1 indicator ROE (return on equity). Using the DuPont analysis method, we can continuously break them down to single-store profitability (ratio of revenue to actual business area), investment payback period/rate of return, and inventory turnover.

8.2 Four Steps About Financial Analysis of Symbionts

183

But these indicators are general indicators for a symbiont class. In the case of specific symbiont objects, the meaning and importance of such indicators will vary. Take a fixed rent-based retail symbiont for example; its key financial indicators are shown below:

Obviously, these indicators and the indicators for the entire retail symbiont class are different. For instance, sales revenue ratio by category and gross profit are key indicators for the retail symbiont class, for they are closely related to the profitability of all the retail symbionts. However, they are not as important for fixed rent-based symbiont objects, which mainly profit from rents instead of sales price differences. As a result, the key indicators of a symbiont class run counter to those of symbiont objects. In other words, greater value for a symbiont class does not necessarily mean focus enterprises have greater value in symbiont objects. Value maximization for symbionts (in the same symbiont class) and value maximization for focus enterprises (for different symbiont objects) are two separate propositions. It is essential to note this point in analyzing the logic of business models. Putting together the financial indicators of a symbiont class and symbiont objects, we can get a more direct and clearer comparison. Take the financial indicators of a fixed rent-based symbiont object for example. We can see there are two types of financial indicators: indicators in line with symbionts and indicators of focus enterprises.

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In the figure above, indicators marked in yellow have the same meaning for focus enterprises and symbionts. For example, expansion capacity means the same for both the symbiont and the focus enterprise. But those marked in black refer to the indicators of the focus enterprise only, and may only relate to part of the symbiont; or the symbiont only relates to part of the indicators. The sales growth rate is an example, as it is different for fixed rent-based symbiont objects and for the entire retail symbiont class. The sales growth rate of the entire retail symbiont class is related to three factors: single-store profit, investment payback period, and expansion capacity. But for fixed rent-based symbiont objects, sales volume only relates to the rents in a symbiont; while the sales growth rate is only related to investment payback period and expansion capacity. Other indicators can be distinguished in similar ways. In fact, in the case of other symbiont objects, symbionts and focus enterprises may also have different performance indicators. For price difference-based symbiont objects, their KPIs are set out below:

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It is obvious that these indicators are different from the KPIs of the retail symbiont class, especially in terms of inventory turnover and logistics cost:

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The KPIs of the shared income model are:

The differences from the retail symbiont class are:

Obviously, in terms of back-office management expenses, accounts receivables and accounts payables, shared income-based symbiont objects differ from the retail

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symbiont class, as the former involve reconciliation, information sharing and other activities. On this basis, we can start comparing the efficiency of different business models. Step IV: Compare and analyze the financial performance of different enterprises Different symbiont objects mean different KPIs and relate to different key resources and capacities, but we will compare the value creation capacity of symbionts and the bargaining power of stakeholders. However, different symbiont instances of the same symbiont object have the same KPIs and relate to the same key resources and capacities. The difference lies in the value of KPIs, or the size of key resources and capacities. Obviously, in order to compare and analyze the financial performance of different enterprises, it is necessary to determine first whether or not the two enterprises adopt the same model. If they use the same model, it that means there are different symbiontic instances for the same symbiont object. Comparison will then be made at the symbiont object level. For instance, price difference-based symbiont objects have basically the same KPI system, and we can directly compare them by indicator.

Take Yonghui for example, its key financial indicators are analyzed as below:

3rd-tier key resources & capacities

2nd-tier KPIs

1st-tier overall indicator

28.54

Garments

Strategic choice making, and bargaining power

18.02

Food and supplies

Site selection and selling capacities

11559

Ratio of revenue to actual business area

Gross margin by category %

Store and capital resources

27.00

40.20

39.40

Growth rate of stores %

Sales growth rate

Revenue structure

10.67%

ROE

Fresh 12.95 products processing

KPIs of Yonghui

Asset turnover

0.81

0.81

0.81

6.65

5.48

4.83

7.98

3.54

2.01

Bargaining Logistics Internal Site power and network control and selection management resources management capacity capacity execution capacities

71.76

82.28

87.35

Selling capacity

9.43

3.39

3.39

5.97

Turnover of accounts payable

Management Bargaining and selling power capacities

7.54

Purchasing Logistics Back-office Leasing Sales Inventory efficiency % efficiency management efficiency efficiency turnover % efficiency % % %

Sales-to-cost ratio

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8.2 Four Steps About Financial Analysis of Symbionts

189

By using the same price difference model with similar business activities, we can arrive at financial indicators based on the table above. Then make comparisons by indicator, and compare various key resources and capacities, such as strategic choice making, bargaining power, site selection capacity, and selling capacity. Likewise, we can analyze the KPIs of the rent model as below:

We can measure the performance indicators of focus enterprises under the fixed rent model in three tiers:

The KPIs of the shared income model are shown below:

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The performance indicators of focus enterprises in the shared income model can be measured in three tiers:

If different business models are adopted we will compare different symbiont objects in the background of the same symbiont class, using two steps. First, analyze the strength of key indicators of the entire symbiont.

Take the retail symbiont class for example, for greater value creation, the key indicators are:

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It is necessary to seek breakthroughs in terms of sales revenue ratio by category, gross profit, single-store profitability, investment payback period, and expansion capacity. Second, compare the strength of different stakeholders inside a symbiont.

For instance, single-store profitability may depend on the coordination capacity of the headquarters, or the operation capacity of store managers. If the former has greater impact on single-store profitability, higher weighting shall be allocated to it. The precondition for discussing this issue is that business models should be determined (with symbiont objects remaining unchanged), so it is the difference in the quantity of pricing. For instance, in the fixed rent model: whether it is 1,000 or 1,200 RMB per month, or in the shared income model: whether it is 30% or 40%. This difference along with the nature of pricing (which doesn’t mean the rent-based symbiont object will become a shared income-based symbiont object) that counts. The ideal scenario would be that the focus enterprise could promote the expansion of the entire symbiont’s value, and obtain a good bargaining position in the symbiont. However, in reality, these two are usually opposite to each other. The value maximization for symbionts and value maximization for focus enterprises are two propositions. Strong symbionts do not necessarily mean strong focus enterprises, which leaves plenty of room for improvement in terms of business models.

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8.3 Divergence Between Strong Symbionts and Strong Focus Enterprises: Inner Driving Force and Evolution Path for Business Models As stated in the section above, strong symbionts do not necessarily mean strong focus enterprises. This contradiction in effect provides an inner driving force for the evolution of business models. Key resources and capacities of symbionts and focus enterprises can be evaluated in four ways as shown below. Strong symbionts do not necessarily make strong focus enterprises. Only when there are key resources and capacities in favor of the focus enterprises in symbionts will these focus enterprises become stronger.

Through this two-dimensional table, we can analyze the evolutionary path of many business models. Instance 1: Suppose a focus enterprise in the price difference model is initially located in the (strong, weak) area. The focus enterprise is very strong itself, but suppliers in the symbiont are relatively scattered and not conducive to reducing purchasing costs by the focus enterprise. Just like at Yonghui, since their suppliers of fresh products are scattered farmers, they must have a large purchasing team. In these cases, we can increase the concentration of upstream suppliers by selecting large agricultural bases or fostering large farms, so that the symbiont and the focus enterprise can both be enhanced and enter the (strong, strong) area.

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Instance 2: A brief evolutionary history of the shared income business model in the household appliance industry. Phase 1: When Gome and Suning, two major distributors of household appliances, were newly established, their own brand effect was still weak. But the suppliers in the symbiont commanded more advantages in terms of brand effect and had a stronger bargaining power. The focus enterprises and the symbiont were located in the (weak, strong) area. Phase 2: The distributors increased the number of stores rapidly with external capital, and established their own brand effect and finally had key resources and capacities equivalent to those of the suppliers in the symbiont. The focus enterprises and the symbiont entered the (strong, strong) area. Phase 3: When the store resources and brand effect of the distributors reached certain levels, the brand influence of the suppliers in the symbiont weakened and they lacked other sales channels, the bargaining power of the focus enterprises grew substantially, so they entered the (strong, weak) area. Phase 4: As external new channels develop continuously, or the suppliers in the symbiont build their own sales channels they can rely less on the focus enterprises and boost their bargaining power. As a result, the original focus enterprises and the symbiont they are in enter the (weak, weak) area.

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Focus enterprises need to change or enhance the allocation of their own resources and capacities based on the changes to the key resources and capacities of stakeholders inside and outside the symbiont; or make due adjustments by changing business models to maintain a constantly strong position. Obviously, neither Gome nor Suning made full preparations in this regard. Instance 3: Ways to make the fixed rent model stronger. Suppose a shopping mall in the fixed rent model had ordinary brand effect and site selection at the initial time of establishment. It is difficult to attract tenants that have relatively strong brand influence, so the symbiont is in the (weak, weak) area. But when the shopping mall boosts its awareness through advertising and other marketing methods, and large residential communities are established around it, the number of customers will increase, and some large brand owners will move in. Then the focus enterprise and its symbiont enter the (strong, strong) area.

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8.4 How to Improve Business Models: The Two-Dimensional Comparison Model The cost and revenue of various business links are attributed to different internal and external stakeholders to analyze their contributions to the efficiency of the entire symbiont. In the two figures below, BM refers to the focus enterprise in different business models, and SH means the stakeholder involved in different business models. The vertical axis indicates the efficiency of stakeholders, which reflects the capacity size, model efficiency and roles (activities engaged in) of relevant stakeholders in different models. Stakeholders include internal and external stakeholders. By enhancing capacity, changing the strategy or business model of stakeholders, or replacing stakeholders, we can boost the overall efficiency of focus enterprises. By reforming or improving the vertical axis, we have actually changed the symbiont objects (like from rent-based symbiont objects to price difference-based ones). If change is made at the symbiont class level, it mainly targets stakeholders. Change may involve the four circumstances below: First, enhance the capacities of stakeholders, cultivate and match resources, for example, boost the supply chain management capacity and financial management capacity of partners. Second, change the strategies of stakeholders. For example, let raw material purchases from suppliers shift from large-scale but low-gross-profit markets to highgross-profit and small markets, or change from purchasing general merchandise to fresh products. Third, replace stakeholders for better partners, for example, property developers choose partners with ampler capital and richer social resources. Fourth, change the business model of stakeholders For example, JD.com has established its own logistics operations from the previous cooperation model. Apple has changed its application software department into an App development team to cooperate with outsiders. The models of their stakeholders are quite different from traditional models.

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The horizontal axis indicates the efficiency of focus enterprises. Efficiency of focus enterprises involves three levels, including the evaluation of their strategy, model and capacity. Focus enterprises can enhance efficiency by boosting capacities, changing strategies and designing models. Change and improvement of the horizontal axis is based on the precondition that the basic structure of business models should be certain (with the same symbiont object, like price difference). Changes mainly target focus enterprises, as detailed in at least three instances:

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First, enhance the capacity of focus enterprises. This means focus enterprises boost their key resources and capacities when strategies and models are determined. For example, boost the purchasing efficiency, inventory turnover and turnover of accounts payable among price difference-based symbiont objects. Second, change the strategy of focus enterprises. For example, change product portfolios and increase product portfolios with high gross profits for price differencebased symbiont objects. Third, change the business model of focus enterprises. An example is the retail sector which can increase the online stakeholders, form O2O and expand the sales base (which are still price difference-based symbiont objects). When the overall value creation capacity of a symbiont is certain, changes in the strength of stakeholders will cause changes in the transaction mode, and this affects value distribution inside the symbiont. Michael Porter’s Five Forces Model can be used to analyze the strength changes of different stakeholders in a symbiont to determine the reasonableness of value distribution inside the symbiont. We need to note that the precondition for the Five Forces Model is that the basic structure of business models is certain (for the same symbiont object). Given the defined structure, value distribution mainly affects the amount of price, rather than the nature of price (which has been previously explained in detail). The Five Forces Model is a static model that targets a relatively steady industrial structure in a period of time. Therefore, it is not very suitable for fastchanging industries, which require a more dynamic analysis framework. This is what we need to be aware of when applying the Five Forces Model.

Note: 1. Symbiont n represents the symbiont of enterprise in different business models. 2. SH represents the stakeholders involved in different business models, in which ISH refers to internal stakeholder and ISHn represents the internal stakeholder engaged in business link n. Similarly, ESH stands for external stakeholder and ESHn represents the external stakeholder engaged in business link n. 3. The height of the square of each stakeholder indicates the efficiency degree of each business link.

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More value can be obtained from the symbiont by expanding the capacities of stakeholders of the focus enterprise. The value usually requires cost input, but as long as the value capture capacity is higher than cost input, it is beneficial to expand capacity. Take the fresh products business of Yonghui and Renrenle for example, stakeholders include suppliers, purchasing personnel, business owners, and salespeople. For Yonghui, suppliers are farmers purchasing personnel are buyer teams, and salespeople are seller teams. For Renrenle, both purchasing personnel and salespeople are suppliers. In the two-dimensional diagram, relevant stakeholders are indicated as follows: SH1: Suppliers of fresh products (external) SH2: Farmers + procurement operation team for fresh products SH3: Logistics SH4: Property suppliers SH5: Back-office management + operation SH6: Advertisers SH7: Salespeople (internal)

From the two-dimensional diagram above, we can clearly see the difference in overall efficiency between the Yonghui symbiont and the Renrenle symbiont. The horizontal axis represents the efficiency of symbiont of the focus enterprises. It is farther to the right which reflects higher efficiency. The vertical axis represents the efficiency of main business links in a symbiont. The higher of the business link square on the vertical axis means higher efficiency of stakeholders in this business link. In terms of back-office management and operation, the efficiency contribution of stakeholders of Yonghui and Renrenle is basically the same. In terms of logistics and advertising, Renrenle’s stakeholders contribute more to efficiency than Yonghui’s. In terms of property supplies (SH4), Yonghui’s property suppliers contribute more to efficiency than Renrenle’s. The efficiency contribution of Yonghui’s internal salespeople (SH8) is higher than Renrenle’s external salespeople (SH7). In addition, the farmers + procurement operation team combination for fresh products (SH2) contributes hugely to the efficiency of the entire Yonghui symbiont. It is far higher than Renrenle’s use of external suppliers of fresh products (SH1) for its symbiont. This is the major difference in the business models of the two. The two-dimensional diagram clearly shows that the efficiency of the Yonghui symbiont is higher than the Renrenle symbiont, and displays the efficiency of each stakeholder in each business link.

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For Renrenle to turn from (weak, strong) to (strong, strong) without changing its model, the key lies in changing and enhancing the allocation of its resources and capacities to secure a dominant position in the symbiont of interests. It can be done in the following ways: 1. Bring in large brand owners, raise the awareness of the supermarket and increase traffic through marketing and promotion means. Also increase premium proprietary brands, and strengthen commodity operation capacity to enhance commodity differentiation. 2. Improve or boost the key resources and capacities of suppliers by raising the profitability of suppliers; such as stepping up training on suppliers’ selling capacity, introducing incentive mechanisms to form positive competition among suppliers (offering rebates on preset sales, or lowering profit sharing ratio), seeking large national suppliers for cooperation, and lowering the dispersity of suppliers. 3. Strengthen management of logistics, warehousing, replenishment and sales of fresh products, improve process-/software-based and standardized management, and introduce big data and the internet of things for management. In addition, when large suppliers are brought in, joint development can be adopted to reduce input by the supermarket. If it wants to boost competitive advantages by changing the business model, Renrenle needs to rebuild the resources and capacities of the symbiont’s stakeholders. By comparing the distribution of resources and capacities between the price difference model and shared income + fixed rent model, we can see the two models have quite different requirements for resources and capacities of focus enterprises. The price difference model has higher resource and capacity requirements on focus enterprises. If Renrenle wants to shift from the shared income + fixed rent model to the price difference model, it needs to acquire relevant resources and capacities. These include selling capacity, category management capacity, purchasing capacity, and customer resources. How to acquire these resources and capacities and the difficulty degree of doing so becomes the key issue.

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Selling capacity: Renrenle can recruit some experienced salespeople, or directly internalize the sales personnel of some stores (turn external stakeholders to internal stakeholders) It is necessary to put in place an appropriate incentive mechanism, otherwise this may lead to relatively high staff turnover in a short period. Category management capacity and customer resources: It takes a relatively long time to accumulate such capacity and resources. Category management capacity directly determines the appeal of commodities and will affect the profitability of stores. Purchasing capacity: Renrenle may turn its suppliers of fresh products from external stakeholders to internal stakeholders, and cultivate its own buyer teams. But this requires strong management and training teams and takes a relatively long time.

Chapter 9

Unilateral Platform Model

Many sectors are said to have a natural ceiling of scale, which prevents them from growing bigger, such as management consulting firms, law firms, design companies, agricultural farmers and livestock farmers. They share some features, like being subject to the influence of professional skills or individual efforts; hard to supervise or manage; low staffing scale that is the most efficient, etc. Their business models normally fall into two categories: scattered individual businesses or workshops and loosely-organized cooperatives or partnerships. Purely incorporated business models are not well received among these industries. Is it true that these sectors with a low ceiling of scale are off-limits to fully incorporated business models? Is there a business model that can consolidate the sectors into a united, intensive, and efficient company with a high ceiling of scale? Let’s start with the famous Hong Kong’s Li & Fung Group.

9.1 Unilateral Platform for International Trade: Li & Fung Group International trade is widely believed to be a low-ceiling sector for the following reasons: (1) It cannot form economies of scope or gain strength if there are too few links. (2) The difficulty in external services and internal management will multiply if there are too many links, which is counter-productive, yet single links cannot form economies of scale for low efficiency. (3) As service teams are much closer to customers, they have greater influence, and internal control becomes difficult. The scale of specialization is restricted, which bottlenecks business growth. As a well-known Hong Kong company with ten business-chain links, Li & Fung Group trades in an extensive range of product categories. It has hundreds of professional sales and service teams, which set it apart from global competitors. Harvard Business Review has selected the company for case studies many times. © Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2_9

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In 2010, Li & Fung’s revenue from trade, logistics and distribution reached 15.93 billion USD. With 27,000 employees and over 2,000 customers worldwide, the company runs businesses in over 40 economies with its global purchasing network of 15,000 suppliers. Li & Fung’s business model for trade, logistics and distribution can be summarized as having the ability to integrate the resources of labor-intensive consumer goods in areas with manufacturing advantages like cheap labor (with a concentration in Southeast Asia), provide services ranging from design to product delivery, and profit from the massive array of consumer goods going to US and European customers, given the international differences in labor costs and productivity. The company charges a 6–12% commission on all orders. Li & Fung mainly purchases exported garments, textiles, and labor-intensive consumables such as decorative items, furniture and promotional items. These are produced in areas with low manufacturing costs. Its customers include Gymboree, Abercrombie & Fitch, Toys ‘R’ Us, Disney, Avon, Rebook, Coca Cola, Esprit and Debenhams, among others. In addition to intermediary services for suppliers and customers, Li & Fung provides various combinations of value-added services in the export trade supply chain. This includes market research, product design & development, raw material purchasing, factory selection, product delivery, and financing. These services cover 10 out of the 15 manufacturing activities including product design, commodity development, raw material purchasing, factory selection, production planning, delivery arrangement, transport, customs duty payment, local distribution and general agent functions which helps customers to lower purchase costs, shorten delivery time, and maximize added value for products. Li & Fung purchases products from factories with specialized division of work, instead of investing in them and exercises control through production capacity. It normally occupies 30–70% of a suppliers’ capacity, because when its orders account for over 70% of a supplier’s capacity, the supplier will be dependent on Li & Fung and lose its competitiveness. When its orders account for less than 30% of capacity, Li & Fung cannot amass enough influence as a key client. By controlling capacity within this range, Li & Fung can maximize cooperation efficiency while maintaining flexibility. Customers may be involved in the ten supply chains of Li & Fung based on the endowments of their own value chains. Li & Fung will readily provide relevant services according to actual customer requirements. For example, if a customer is good at product design and commodity development, Li & Fung will provide the other eight links of services including assembly, raw material purchasing, and factory selection et cetera. Currently, Li & Fung has several hundred division-level sales and service teams. Each team generally has 20 members, including a manager, trade staff (product manager, senior purchaser, purchaser and assistant purchaser), QC staff (QC manager, QC director, senior QC specialist and QC specialist), and shipping staff. Each team has a business scale of between 20 million and 50 million USD. When it exceeds 50 million USD, the team will be split into two. Each team is responsible for at least one or as many as ten business links based on the business links

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of customers, and aims to build the optimum supply chain for each order to provide the most flexible and competitive products to customers. The income of managers of these business divisions principally comes from commissions linked to performance. In fact, for these division-like teams, Li & Fung has constructed a unilateral specialized platform with economies of scale that provides services such as branding, financial support, business information system, administrative human resources, and other infrastructure. The business entities (division-like teams) on the platform are responsible for sales and customer services, with their composition hitting the boundaries of economies of scale. Each team is responsible for multiple business links, the combination of which creates economies of scope. The platform and the business entities form synergies and economies of scope.

9.2 Create New Economies of Scale and Scope: Platform Enterprise and Business Entities on the Unilateral Platform A unilateral platform aims to transform each link with independent elemental capacities or groups of links (to the extent of reaching the economy of scope boundary) into self-centered business entities (to the extent of reaching the economy of scale boundary), and provide them complementary combinations of resources and capacities. The sum of the platform enterprise and these business entities is called the unilateral platform business model. Now it is necessary to first explain what it means by economy of scale boundary and economy of scope boundary. Economy of scale occurs when an enterprise increases the input of an element such as capital, personnel and equipment, and its economic benefit per unit element input increases. Diseconomy of scale occurs when an enterprise continues to increase the input of an element, but its economic benefit per unit element input begins to decrease. There is a critical point for maximum economic benefit in terms of unit input, which can be called the economy of scale boundary for input of this element. For example, a sales team grows from 1 to 10 persons, and its per capita profit increases. This is economy of scale. If they keep expanding staffing size, per capita profit will begin to drop. This is diseconomy of scale. Ten employees represent the critical point in this case, which creates the ‘economy of scale boundary’. Economy of scope occurs when the economic benefit per unit input of an element (such as capital, personnel and equipment) increases when an enterprise’s business scope (products and activity links) expands. Diseconomy of scope occurs when the economic benefits begin to decrease when the enterprise’s business scope continues to grow. There is also a critical point in business scope with the maximum economic benefit per unit input, which is called the economy of scope boundary. For example, economy of scope occurs when the economic benefit (such as ROA and per capita net profit) per

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unit input keeps increasing as an enterprise expands its business links from one (raw material purchasing) to three (design and development, raw material purchasing, and production). Diseconomy of scope occurs when the economic benefit begins to decrease when the enterprise continues to expand business links to cover channel distribution (four links in total). In this case, the critical point—3 links, is the economy of scope boundary. As we see later in this text, these links may indicate any one or several combinations of divided business activities (purchasing, production and sales) and resources (capital, manpower, technology and management), or the economy of scope yielded by multiple businesses (including products and customers). Each industry or link has a relatively stable economy of scale (or scope) boundary. For example, law firms and other knowledge-intensive companies with high requirements on personal capabilities are usually small or medium in size. In many cases, a partnership law firm is established by several experienced lawyers who then hire law school graduates as assistants. After the young lawyers become experienced, they can either request to become new partners in the law firm and share its residual income or start their own business if the first option is not feasible. Therefore, the economy of scale boundary of the litigation industry is small. When the boundary is crossed, a law firm has to be split into two independent units. As a result, a law firm is unlikely to create very much residual income (as compared with a capitaldriven model). Lawyers must be versatile in terms of marketing, handling cases, and providing services. Resource input is all encompassing with capital, connections and manpower. Compared with modern capital-driven enterprises with specialized division of work, these versatile partnerships feature a moderate per capita output. All around growth of individual capabilities comes along with a comprehensive drop in per capita output, and paints an embarrassing but real picture of these types of knowledge-intensive enterprises. For the same industry, the economy of scale boundary varies for business entities, when business activities or functions are allocated differently between the platform enterprise and these entities. For example, if the platform enterprise undertakes most centralized activities while the business entities only assume a simple business function, the economy of scale boundary of these entities may be relatively small. If they undertake relatively more activities, their economy of scale boundary may be relatively larger. Platform enterprises can restrict and manage, or support and stimulate business entities. When the economy of scale boundary for business entities is too large, it will weaken the platform enterprise’s centrifugal force to the business entities. The relationship between them is similar to that of a star and its orbiting planets. Generally, a star is many times larger than the planets. When a planet is close to the size of the star, it is likely to escape the star’s gravitational pull. In addition to the economies of scale and scope, we need to take into account the following two points regarding the relationship between the platform enterprise and business entities to stabilize the trading structure of the unilateral platform: (1) Activities or functions must be reasonably allocated between the platform enterprise and business entities to differentiate their economy of scale boundaries (with the former having a larger boundary). (2) The platform enterprise must upgrade its infrastructure,

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technology and management or re-allocate activities or functions when business entities upgrade theirs to ensure that the platform enterprise’s economy of scale boundary remains larger than that of the entities. This way the unilateral platform structure can become more stable and sustainable. A unilateral platform has the following advantages: Can turn businesses with small economy of scale boundaries into individual and decentralized entities, and consolidated businesses with large economy of scale boundaries (or economies of scale) into one united and centralized platform. Moreover, a platform enterprise and business units can partner with each other according to their economy of scope boundaries to make the whole platform form a larger economy of scope, and realize the co-existence of business links with different economy of scale/scope boundaries in one system. Take Li & Fung Group for example, in the traditional trade business model, a service team has a low ceiling of scale. Despite the fact that the combination of different service links can create a large economy of scope boundary, individual links have no economies of scale or the ability to check on each other. This makes it difficult to form a relatively large scale. By establishing a unilateral platform, Li & Fung allows its service teams and the market to form a relatively large business scale, and form economies of scope among multiple service links by engaging in the links. The market scale is big enough to not only support all the individual links, but also realize economies of scale. As a result, Li & Fung has benefited from economies of scale and scope, far greater than those of traditional international trade services companies, and substantially lifted the ceiling of total scale that constrains the international trade service industry. Notably, the so-called economy of scale/scope boundaries are based on and subject to certain fundamental facilities, technologies and management of the platform. For instance, if fundamental facilities and technologies are unchanged, the more standardized and specialized the links are, the more facile and standard is the communication interface among the links. The economy of scale/scope boundaries will be expanded accordingly when fundamental facilities, technologies and management are improved and upgraded. An agricultural company obtains the use rights to several parcels of land and invests in modern agricultural infrastructure including planting technologies, seedlings, fertilizers and management standards, thus establishing a unilateral platform. Suppose 100 mu is a planting unit and 1,000 mu a management unit. Farmers are only responsible for the planting link, and gain from commissions with a base amount. Their income is greatly enhanced as compared with the traditional model. The bottleneck is also broken that constrains the scale of agricultural organizations and income of farmers in the traditional small peasant economy. In contrast with the traditional model, a farmer can manage ten times as big a plot of land, due to technology and infrastructure upgrading. On the other hand, this is attributed to the simplification, specialization and standardization of the link farmers engage in, which then results in enhanced management. In this case, the economy of scale boundary is enlarged with the upgrading of technologies, facilities and management.

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We need to clarify the differences between two types of economies of scale. For a unilateral platform, the first type involves the above-mentioned business entities. For example, the scale of Li & Fung’s sales teams is the most appropriate when the sales reach 50 million USD, which reaches, but stays within the economy of scale boundary. The other type of economy of scale involves the entire unilateral platform that aggregates the platform enterprise and business entities. For example, a farmer could only plant on a 10 mu plot of land in the past. However, an agricultural company established via a unilateral platform now can plant on much larger areas of farmland (several million mu in some cases), which boosts the overall scale exponentially and realizes higher levels of economy of scale. The overall economy of scale (the second type) is the result of achieving the economy of scale boundary for business entities, the economy of scope boundary for combinations of business entities, and the economy of scale boundary for the business links of the platform enterprise. The two types of economies of scale are not in conflict. In addition, economies of scale and scope may form within the same business entity at the same time. A business entity may refer to a specialized single link, or integrated multiple links. In the case of an integrated business entity, the combination of multiple links must yield economy of scope; while the business entity that integrates combinations of links also forms economy of scale. Unilateral platforms are worthy of our attention, as a business model that can effectively address the ceiling of scale, substantially expand enterprise boundaries and enhance the overall economy of scale.

9.3 Division, Reorganization and Transaction Value/Transaction Cost/Transaction Risk For a unilateral platform to have a centralized platform enterprise and decentralized business entities, it will involve re-allocation of the business activities and resources in the original business ecosystem, namely, division and reorganization. Division concerns two types of objects: business activity and resources. Business activities are similar to industry value chains. For example, breeding can be divided into feed and livestock supply, breeding and sales. Resources for livestock breeding include land, capital, management standards, technology and labor. Each business activity or resource and their combination can become an independent business entity. A home appliance manufacturer establishes a chain store. The manager of each store is only responsible for customer development and retention, while logistics delivery, payment collection, installation and after-sales services are provided by the unilateral platform built by the manufacturer. A chain store’s business activities can be divvied into customer attraction, sales, delivery, and after-sales services.

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Resources include capital, site, management standards and manpower. Chain stores on the unilateral platform are only responsible for links with a relatively small economy of scale boundary such as customer attraction, execution, and manpower, while the platform enterprise is responsible for links with a relatively large economy of scale boundary. This mode can give play to the respective advantages of the platform enterprise and business entities to substantially increase operating efficiency and profits. In comparison, stores run by other home appliance manufacturers undertake business activities such as sales, logistics and after-sales services; and put in resources such as capital, sites and manpower. On the surface, the chain stores appear to get sales commissions at least twice as much as in the above instance. However, their actual revenue might be even lower due to the lack of scale and scope economies and the weak competitiveness of the entire chain store system. The division and reorganization of links expand the evolution and development of enterprises, and construct a new business model (compared with the traditional enterprise organization). The earliest basic economic units of society were individual businesses in the handicrafts and agricultural sectors that feature low levels of division of work and specialization. With technological development and the division of work, the activity links of these businesses are divided and reorganized. A vertical value chain (including purchase, production and sales) and a horizontal infrastructure value chain (including manpower, capital, strategy and technology) are combined to form enterprise organization. Its appearance has substantially boosted the size of basic social economic units and the profit generated per unit input of resources. The greatest contribution of the unilateral platform model lies in the further expansion of this division and reorganization, not only in terms of business activities and resources, but also external stakeholders, which are internalized under the model. Compared with traditional enterprise organizations, a unilateral platform that integrates a platform enterprise and business entities is called business model organization. The unilateral platform is largely traditional in terms of end customers. The profound revolution in the business model mainly centers on integrating previously scattered stakeholders in the form of a platform in terms of internal organization. For both the platform enterprise and business entities, the unilateral platform model greatly expands its transaction objects by aggregating the value space in the previously scattered transaction objects and realizes higher levels of economy of scale, which is the source of transaction value of unilateral platforms. Division and reorganization (including operations upon reconstruction) incur certain transaction costs. A feasible unilateral platform must generate greater transaction value than costs throughout the design process that includes platform construction and operation. The transaction value created by some unilateral platforms may be lower than transaction costs during construction, but higher during operation. A unilateral platform is feasible when the overall transaction value exceeds the total transaction costs in the whole process.

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To enhance creation of transaction value, the platform shall substantially expand the transaction objects of the platform enterprise and business entities, and aggregate the scattered value space of such transaction objects to achieve greater economies of scale. Overall economies of scale are created when business entities reach the economy of scale boundary; the combination of the platform enterprise and business entities reaches the economy of scope boundary; and the platform enterprise’s links reach the economy of scale boundary. This means that a unilateral platform could start with expanding the scale or scope economy boundary. A class-1 design institute in a remote area previously adopted the traditional model, undertaking all the business links from taking orders, to designing plans and graphics, publishing drawings and other services. They had per capita revenue of just over 200,000 RMB per year. Fortunately, they were located in a remote area and had relatively lower operating costs, otherwise there would be almost no net profit. Then the institute restructured its business model, and established a unilateral platform to recruit independent designers nationwide, including Class-A design teams in first-tier cities such as Beijing, Shanghai and Guangzhou, and those in second- and third-tier cities. The cooperation and transaction structure was rebuilt according to their respective resources. For example, the platform provided resources such as sales and graphic design to high-profile design teams with strong design solution capabilities in Beijing, Shanghai and Guangzhou. It also provided branding, drawing, and publishing services to teams with strong marketing capabilities. For teams with strong design capabilities, the platform provided sales, drawing, and publishing services. This way the platform enabled each business entity to reach its economy of scale boundary. Moreover, the economy of scale integrated multiple links of business entities. Each team can be either integrated (involving multiple business links such as sales, design and drawing) or specialization. Teams can be combined seamlessly according to their business needs to form a business entity and realize economies of scale to further enhance transaction value. For these business teams, the design institute constructed a unilateral platform that provided branding, sales, drawing, publishing (can be provided by grouped teams), business process standards, and administrative and human resources. Greater economies of scale were realized as the unilateral platform was composed of the design institute as the platform enterprise and design teams as the business entities. Through business model restructuring per capita profit increased to nearly 300,000 RMB. By feasible division of business links and establishing a standard transaction interface, the unilateral platform model can effectively lower transaction costs. Some business activities and resources cannot be divided under current technological conditions or management levels. For example, the process of handling a lawsuit may involve numerous meetings between the client and lawyers and court room arguments. These activities are recorded, but should not be assigned to different teams to maintain consistency, which would result in lower efficiency and higher transaction costs.

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The standard transaction interface after business model restructuring enables the centralized platform enterprise to apply the unified transaction process to deal with different and decentralized business entities. This simplifies the transaction process and raises transaction efficiency. In other words, a clear transaction interface must be developed between the platform enterprise and business entities to control the transaction content and minimize costs. Notably, the creation of greater transaction value and reduction of transaction costs are based on current technological conditions or management levels. For instance, Li & Fung can now use an Internet-based information system to optimize its supply chain and enable all links to acquire and process information faster for a swift response to market changes. This is technologically conducive to the construction of Li & Fung’s unilateral platform, and could not be done in the past. Here is another example: IBM has been superb in customer archive management. When a customer meets IBM for the second time to discuss a project, the IBM team (different from the first one) can easily access customer archives containing every detail of the first discussion. In fact, the lawsuit mentioned earlier could also be divided given such an outstanding management level. In the future, this just might become standard procedure. As compared with individual businesses or loosely-organized cooperatives, the unilateral platform can better control business entities and reduce transaction risks in addition to transaction value and costs, which no doubt is another value of unilateral platforms. A breeding company partners up with local investors to build a pig pen with 20 buildings as a unit. Each pig farmer is responsible for two buildings, so one unit requires ten pig farmers. Rearing pigs involves five links: breeding, gestation, delivery, nursing and growing. Each pig farmer is responsible for one link only. The farmers’ income consists of a basic rate plus a performance bonus after the company has deducted feed and other costs. For example, the performance of the units used for gestation is determined by the number of pigs ready to breed. The performance of units for nursing is determined by the net increase in the weight of piglets between being moved in and moved out of the pig pen. Historical operating data indicates that the average revenue of pig farmers working under this system is two to three times higher than the average income of local pig farmers. The breeding company obviously adopts a unilateral platform model that features two key aspects: (1) The platform company gets economies of scale in terms of centralized management, including capital, feed, immunization, utilities, interior outfitting of pig pens, management process and financial accounting. The transaction value created through division and reorganization is higher than transaction costs. (2) More importantly, the platform can firmly control the market-driven individual pig farmers or semi-market-driven cooperatives. Individual pig farmers and cooperatives tend to sell pigs in the market when pork prices are high and to the breeding company when prices are low. The company gains nothing in good times but has to assume all risks in bad times. A unilateral platform can effectively control this issue.

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Therefore, even when the value (transaction value minus transaction cost) created by division and reorganization is only slightly higher or lower than the transaction costs, a unilateral platform is feasible and profitable on the whole if the platform enterprise can control transaction risks caused by scale expansion.

9.4 Pricing, Analysis and Applicable Scope of Unilateral Platforms There are two key points in the pricing of unilateral platforms. First, the income of a business entity must be linked to its output. Essentially, the income of a platform enterprise is derived from part of the total output of its business entities. However, although the transaction interface between the platform enterprise and business entities is clear, they are internally opaque, which creates monitoring and management difficulties and could discourage business entities. The best way to avoid this is to link the income of business entities to their output. For example, when rearing pigs, the performance of units for nursing is the net increase in the weight of piglets. Second, ensure that the income of business entities exceeds their opportunity costs. The first point tends to mislead readers to think that the platform enterprise must fully grasp the actual output value of the business entities, which is not true. The platform enterprise only needs to grasp the general condition and ensure a positive net profit is generated for the unilateral platform. As long as the income of business entities is higher than their opportunity costs, the unilateral platform model is feasible. For example, as the average income of pig farmers is two to three times higher than the average income of local individual farmers, the output is the measurable index that relates to actual output. The platform only needs to ensure that the normal income from the output (calculated using the index) exceeds the opportunity costs. Next is the analysis of unilateral platforms. These are a type of structured business model, and differ entirely from organizational and governance structures in conceptual meaning and extension. Organizational structures include the U structure (United Structure where management controls the structure), the H structure (holding company structure, the structure of stock holding companies), and the M structure (multidivisional structure or the business division structure). Governance structure can be divided into ownership transactions and market transactions, the main forms of which include direct sales, cooperation and franchising. The difference among them is that enterprises can choose the U, H or M structure, or the direct sales, cooperation or franchising mode flexibly according to their actual needs. The business, organizational and governance structures of a unilateral platform reflect three analysis perspectives. It is relevant now to analyze the unilateral platform, business division structure and chain operations.

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The business division structure categorizes the same type of products or customers into one business division. If a unilateral platform adopts the business division structure, one business division can include many business entities. A unilateral platform can adopt the U or H structure. Conventional chain stores are usually an independent accounting unit, and may include business links such as sales and service. The business entities of a unilateral platform only perform simple functions as they’re mainly responsible for business links. A conventional chain store is not a purely unilateral platform. If its functions are further simplified into customer attraction, sales and execution (as seen in the home appliance stores mentioned above) they can be converted to business entities on a purely unilateral platform. Obviously, the business entities on a purely unilateral platform can adopt direct sales, joint venture, or a franchising structure. Business entities are malleable. Their boundaries and sizes can be adjusted and combined dynamically, which has been fully proved in the case of Li & Fung (divided business entities with a scale of over 50 million USD into two) and in the design institute that allocated complementary resources and capacities to different business entities. Finally is the applicable scope of unilateral platforms. You might get the impression that the unilateral platform model is suitable for knowledge-intensive enterprises such as management consulting firms, law firms and design companies, or small-sized specialized businesses with a natural scale ceiling like agricultural farming and breeding enterprises. But in fact, it only depends on whether relevant division and reorganization is profitable after considering transaction value, cost and risk. A cable manufacturer in Jiangsu adopts the unilateral platform model and manufactures a wide range of special high-end cables used for railway signaling, readymade fiber optics branching, fire resistance, high-voltage cross-links, and mining. As each high-end niche market is small, the producer may not realize economies of scale and scope if it only produces one or two products. They must construct a solid internal trading structure for a large product portfolio that can reach the small economy of scale boundary of such a niche market and the large economy of scale boundary of the overall infrastructure and customer bases. To accomplish this, the cable manufacturer built independent workshops and branches for each niche market. According to the production plan for each product category, the production capacity of these workshops should be able to satisfy about 60% of the national market demand, including ready-made branch cables, fire-resistant cables, and railway signal cables. The company becomes a platform enterprise to allocate funds, purchase raw materials, develop new products, and expand markets. As each business entity’s economy of scale boundary is already calculated, the cable manufacturer can flexibly expand its product line and adjust its production capacity in response to demand fluctuations, which in turn strikes a balance between economies of scale and flexibility. This secures them a leading position in the high-end niche markets of the industry. The indication is that the unilateral platform model is applicable to any link (including business activities and resources) in any industry as long as technological

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9 Unilateral Platform Model

conditions and management levels are adequate. A unilateral platform can be built for core business entities including purchase, finance, production, capital allocation and management standards, or combinations of them to realize and boost economies of scale. The unilateral platform can vary in size based on the technological conditions and management levels of platform enterprises, which is not uncommon. There is always certain threshold for business model innovation.

9.5 Design Steps for Unilateral Platforms Here are five steps involved in designing a unilateral platform. First, discover, create, and aggregate value. A business ecosystem comprises various stakeholders at various dimensions, including business and resources Each stakeholder has a specific value. We need to discover and create new stakeholders or aggregate the value of scattered stakeholders. For example, the Class-1 design institute discussed earlier, succeeded by discovering design teams in Beijing, Shanghai, Guangzhou and also second and third-tier cities that ran independently under the traditional model and aggregated their value. Second, activities involve resource input, activity processing and output. It is important to divide the resources, business activities and output ownership of stakeholders. For instance, the business activities of the design institute can be divided into sales, plan design, graphic design and services, resources into branding, capital, manpower, technology and collaboration mechanism, output ownership into business entities and the platform enterprise. Third, regroup these business activities and resources into business entities and a platform enterprise based on their economical boundaries, and design an appropriate transaction interface. Three economical boundaries are particularly important: (1) The economy of scale boundary of individual business entities, which may represent one or more links. When integrated, these links form economies of scope, and economies of scale as a whole. (2) The economy of scope boundary of the platform enterprise and business entities integrated; and (3) the economy of scale boundary of the platform enterprise. In principle, stakeholders with small and replicable economies of scale boundaries shall become business entities, while stakeholders with relatively large economies of scale boundaries are platform enterprises. Concurrently, the transaction interface between the platform enterprise and business entities should be designed in such a way as to make the transaction process highly replicable. Fourth is to protect value space. For a unilateral platform to set up sufficient barriers, the platform enterprise shall meet at least one of the following two conditions: First, business entities can gain higher income by joining the unilateral platform than by not joining, or can reduce input costs in the same operational mode, and will not leave the platform enterprise. In other words, the comprehensive income of business entities is higher than their opportunity cost (with input and income both considered). Second, the platform enterprise can continue to expand its capacities

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and economy of scale boundaries of more business links and integrate them into the platform by upgrading infrastructure, technology and management. At the same time, it can boost the specialized capacities of business entities, but weaken their comprehensive capabilities, making them increasingly specialized and replicable. This can also continuously boost the overall capacities, scale and competitive advantages of the unilateral platform. Fifth, maximize the value of the platform enterprise. With the trading structure of a unilateral platform and the income of its business entities definite, the value of the platform enterprise largely depends on the scale growth of these business entities (quantity) and their income attributable to the platform enterprise. The first factor is conditional upon expansion speed while the second upon profit model. Take a chain store for example and suppose that it purely consists of business links and is a pure unilateral platform. Expansion speed involves the issue of how to open more stores quicker with limited resources. The profit model refers to the income allocation method between the platform enterprise and business entities (be it franchising, direct sales or cooperation (joint venture)). The correlation between these two factors lies in the fact that the franchising mode requires inputting fewer resources and makes it possible to open more stores quickly, but the platform enterprise (chain headquarters) receives relatively low income. The direct sales mode requires relatively more resource input and affects the expansion speed, but generates high income. The joint venture mode is something between the first two modes. To strike a balance between expansion speed and profitability, many chain businesses choose to open flagship stores in first-tier cities to establish the brand and get relatively high income. However, opening franchised and cooperative stores in second and third-tier cities, with lower input and income, can have a better expansion effect. Another method is gradual transformation, like the call options adopted by Starbucks. They open franchised stores from the start. If markets and joint ventures show good growth momentum, and net profit hits an agreed level, Starbucks can buy back certain stakes in its partners at a preset multiplier (say, 8–10 times) to increase its shareholdings to above 50%, and gradually turn these franchised stores into directsale stores. KFC reverses this approach by running direct-sale stores first. If any entrepreneurs want to join its business, KFC sells such stores to them on a one-off basis (for 8 million RMB in some cities several years ago) and turns these stores into franchised stores. The franchised stores still need to pay various franchising fees. Although KFC’s income is lower than the direct sale mode, the proceeds from sale of these stores can help it further expand business. There are also many other modes, which will not be discussed in detail here.

Appendix

Components of Business Models Based on Trading Structure

A.1 Issues Raised Case: Mobile1 phones are playing an increasingly important role in people’s life. They are even more valuable for people in poor regions than those in developed areas. As stated in research findings from the London Business School, an increase of 10 mobile phones per 100 people will raise a country’s GDP by 0.5 percentage points. How can a telecom operator sell mobile phones in a poor region? The practice in Bangladesh was quite creative. Muhammad Yunus set up Grameen Bank, a microfinance bank, which is committed to lending to the poor, in amounts ranging between 10 to 25 USD, and has a low ratio of bad debts. The bank has been operating successfully for over thirty years and is recognized as “the bank for the poor”, and Yunus received a Nobel Peace Prize a few years ago. Yunus owns Grameen Telephone, which is equivalent to a telecom operator. He also established Grameen Telecommunication which sells mobile phones and calling plans. Grameen Bank grants loans to women in different poor regions to enable them to open small shops and sell mobile phones. Grameen Telecom buys network access and call charges at a 50% discount off wholesale prices from the telephone company and sells them to village women at full prices. The women provide telephones and sometimes act as phone operators in villages, and charge a small commission. Grameenphone provides mobile network access to the “telephone ladies” and Grameen Telecom offers them training on the use of mobile phones and the necessary supervision. The trading structure is shown Fig. A.1. This practice has generated remarkable results. The number of telephone ladies grows rapidly every year and by 2005 in Bangladesh it had reached 150,000. This is 1 The

article was published in Commercial Times (10th Issue, 2014), and authored by Lin Guiping, Wei Wei and Zhu Wuxiang, with slight changes. © Springer Nature Singapore Pte Ltd. 2020 W. Wei et al., Approaching Business Models from an Economic Perspective II, https://doi.org/10.1007/978-981-15-7058-2

215

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Fig. A.1 Trading structure of the telephone ladies

an example of effectively concentrating scattered demands. Suppose that a telephone lady serves 100 farmers then 15 million farmers are using the mobile service. In 2005 the population was 130 million, which is undoubtedly a tremendous achievement in less than ten years. Case Study: Apparently, such an innovative solution is entirely different from those developed in traditional social sciences as strategy, marketing, organization and finance. This is why the business model is an emergent discipline that attracts increasingly more attention from the academic world. As business model innovation becomes more popular, to create a brand new discipline differentiating itself from existing ones, analyze and explain the phenomena of business model innovation, search for the logic behind business model design, refine design tools and guide innovation practices are common requirements raised by business practices and theoretical study for the academic world. All this relies on the answers to the following three questions: First, what is a business model?—definition of a business model (meaning) Second, how to describe a business model?—components of a business model (extension) Third, how to design a business model?—tools for business model innovation (application) The paper co-authored by Wei et al. (2012) clearly defined a business model as the “trading structure of stakeholders”, which answers the first question. We try to

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answer the second question by clearly defining the components of business models and specifying the conceptual extension of business models.

A.2 Literature Review: Business Model Components Related to Transaction Subject, Mode and Pricing Every discipline needs to establish a research object. In “Business Models Represent the Trading Structure of Stakeholders” (by Wei and Zhu in 2007; by Wei et al. 2012), the research object is all kinds of transactions between the focus enterprises (whose business models are studied) and various stakeholders. Therefore, a business model is comprised of at least three parts: transaction subjects (who are involved in a transaction), mode (how to transact) and pricing (revenue and expenditure). With the business model concerning trading structure and its research focused on the structure issue, in our opinion, transaction content (what is a transaction?) is about strategy rather than business model (as detailed in Sect. A.5). The components of business models summarized by many scholars can all be put into the three categories. Transaction subject Transaction subjects refer to the parties to a transaction. The stakeholders generally include external customers, suppliers, channels, partners, contract manufacturers, R&D institutions, financial institutions, independent internal departments, franchisees and direct-sale stores. Transaction subjects (stakeholders) refer to the behavioral agents with individual interests and relatively independent resources/capacities and in a transactional relationship with a focus enterprise. By conventional definition, suppliers, channels and customers are natural stakeholders. Yet some business units within an enterprise, for example, R&D and inventory management departments, if separated from it, can also be regarded as stakeholders. The most important criterion to identify a stakeholder is its relative independence, which may become an independent enterprise or business division after being split out of an enterprise. For instance, the online payment unit of Alibaba is an independent stakeholder, which finally became an independent company, called Alipay (Wei et al. 2012). Zott and Amit (2009) argue that two groups of factors are particularly critical for a business model: design elements and design themes. Design elements include activity system governance which means who and which departments manage an activity system.

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In addition, Gordijn et al. (2001, participants), Linder and Cantrell (2000, channel model), Dubosson-Torbay et al. (2002, foundation of partnerships and network) also include transaction subjects in the components of business models. Transaction mode Transaction mode means how a focus enterprise transacts with its stakeholders, such as by leasing, authorization, information processing, provision of products or services, and signing of contracts. For the same transaction content (the same strategy), the enterprise value may vary greatly if the transaction mode changes (different business models). For example, in tire transactions with transport fleets, Michelin changed from the previous one-off sales mode to the payment by mileage and full custody mode. With longer and richer experience in tire services than transport fleets, and superb detection techniques, appropriate tire control ability and comprehensive value-added service solutions, Michelin enabled tires to last longer and more efficiently. The change in transaction mode has not only brought Michelin huge returns, improved its cash flow, but also helped it establish closer relationships with customers. Many multinational transport companies now select Michelin as their primary tire partner whenever they enter a new market. Many scholars have regarded factors closely related to transaction modes as components of business models, such as “information flow structure” (Timmers 1998), “production mode”, “market mode” (Petrovic et al. 2001) and “customer interface” (transaction mode with customers, Hamel 2000). – Pricing Pricing is how value is allocated between a focus enterprise and its stakeholders chiefly the enterprise’ revenue and cost structure. Specifically, it contains the following aspects: Direction-specific. Where value flows, which specifically involves from which stakeholders income is obtained, which stakeholders costs are paid, and which costs are borne by other stakeholders. Nature-specific. Whether revenue and expenditure are valuated based on time, usage or value (e.g. EMC)? Quantity-specific. For instance, for pricing based on time, 100 RMB per day and 500 RMB per month are two quantities for the same nature. Time-specific. For the same amount of income, whether it’s paid in advance, by installments or in phases will lead to a difference in the cash flow structure of an enterprise due to different payment time and will directly affect its corporate value. Scholars have their own descriptions of pricing, which differ from each other. Some take full consideration of revenue and expenditure. For example, in a profitmaking model such as described by Johnson et al. (2008), and in the profit model by Chesbrough and Rosenbloom 2002. Others only focus on one aspect of revenue and expenditure, like the revenue model (Linder and Cantrell 2000; Petrovic et al.

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2001) and revenue sources (Timmers 1998). Some others pay attention to the pricing model like Linder and Cantrell (2000), and there are those that also care whether revenue is sustainable. For example, Brousseau and Penard (2006) think that the following components are related to pricing: cost source, revenue source, and sustainable income generation. It needs to be pointed out that although cost structure was mentioned in some literature, it was mainly analyzed from the financial angle (Chesbrough and Rosenbloom 2002; Osterwalder et al. 2005). Some business practitioners consider pricing, profit model or profit-making model equivalent to business model. Nevertheless, in our opinion, a business model also includes transaction subject and transaction mode, in addition to pricing. Pricing is part of a trading structure under a business model. Many other scholars hold similar views on this (Johnson et al. 2008). Some do not consider pricing in a business model, thinking that revenue model and business model are two completely different concepts. However, they regard revenue model as a key factor to be taken into account and a supplement to business model design (Zott and Amit 2009). – Entire trading structure Some scholars look at a business model as an entire structure. For example, in Zott and Amit (2009) business models are viewed as an activity system and divided into three elements: activity system content (which activities an enterprise shall choose), activity system structure (how these activities are linked and arranged) and activity system governance (who and which department shall manage these activities). Among these, the activity system structure is a component analyzed based on the entire trading structure. To summarize, when it comes to the components of business models, many scholars believe that transaction subject, mode and pricing are key parts of a business model. They have fully considered transaction subject, mode and pricing in the conceptual extension of business model when setting out its components.

A.3 Literature Review: Components Related to Strategy, Organization, Marketing, Operation and Finance In addition to independent research objects, the independence of a discipline also relies on the clarification of its relationships with other disciplines. Specifically, business models as a discipline, in our view, deal with trading structures in its conceptual meaning; but shall exclude the components of other disciplines by its conceptual extension. tIn reviewing the traditional literature, we’ve found that lots of scholars had included the components of many other disciplines in business models. – Strategy

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Strategy is the path to accomplishing long-term goals. Strategic positioning is aimed to establish customers and products. Many scholars focused their research on the components related to strategic positioning, such as target customers (Gordijn et al. 2001; Bonaccorsi et al. 1085; Osterwalder et al. 2005), customer relationships (Petrovic et al. 2001; Markides and Charitou 2004; Dubosson-Torbay et al. 2002), target market (Chesbrough and Rosenbloom 2002), product and/or service (Bonaccorsi et al. 2006; Horowitz 1996; Dubosson-Torbay et al. 2002; Timmers 1998). Some others looked at the components related to strategy, such as mission, legal factors, technology (Alt and Zimmerman 2001; Horowitz 1996), value chain positioning (Rappa 2001), scope, differentiation and strategic control (Stewart and Zhao 2000), sustainability (Rappa 2001; Chesbrough and Rosenbloom 2002) and global core. – Organization Organization refers to the structure of relations between people, positions and responsibilities within an enterprise. The components of a business model related to organization as studied by scholars mainly include organization form (Linder and Cantrell 2000) and organizational characteristics (Horowitz 1996). – Marketing Marketing means the process of understanding, seizing or creating and meeting customer demands. Marketing is involved in the components of business models proposed by some scholars, and mainly manifested as value proposition (Johnson et al. 2008; Chesbrough and Rosenbloom 2002; Linder and Cantrell 2000; Osterwalder et al. 2005), as a concept (opportunity description) in Applegate (2001) and customer value (Papakiriakopoulos et al. 2001). – Operation Operation is closely related to the business process of an enterprise and shown as processes such as planning, organization, implementation and control. Scholars focus on the following aspects of operation: process (Alt and Zimmerman 2001), key process (Johnson et al. 2008), coordination matters (Papakiriakopoulos et al. 2001), infrastructure management (Markides 1999), corporate governance (Donath 1999) and business process model (Linder and Cantrell 2000). – Finance Finance involves management functions such as corporate financial activities (investment, financing, working capital) and the handling of financial relations.

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Fig. A.2 Wei and Zhu six-element model

The components of business models studied by scholars include: the financial survival model (Osterwalder 2004), overall finance (Markides 1999; DubossonTorbay et al. 2002), cost structure (Chesbrough and Rosenbloom 2002; Osterwalder et al. 2005), etc. In conclusion, by the conceptual extension of a business model, the components set out by many scholars are related to other disciplines including strategy, organization, marketing, operation and finance. This could result in confusion between business model and other disciplines and unfavorably affect the independence of the business model as a discipline.

A.4 Wei and Zhu Six-Element Model: Trading Structure-Based Components of a Business Model The Wei and Zhu six-element model provides that the components of a business model include business system, positioning, profit model, key resources/capacities, cash flow structure and enterprise value (Wei and Zhu 2007). In the model, enterprise value is the result of business model, while the other five elements revolve around the definition of a trading structure of stakeholders. It fully covers transaction subject, mode and pricing, all of which are centered on the trading structure of stakeholders (conceptual meaning). However, it doesn’t involve the components of other disciplines such as strategy, organization, marketing, operation and finance, and is not a complete extension of a business model (Fig. A.2). – – – –

Transaction subject: roles of business system; Transaction mode: positioning, relationship of business systems Pricing: profit model, cash flow structure Entire trading structure: business system configuration, key resources and capacities The Wei and Zhu six-element model is described in detail:

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Fig. A.3 Apple’s business system diagram

Business system stresses the configuration, roles and relations of an entire trading structure. Positioning is focused on the approach to meeting stakeholders’ demands. The Profit model is focused on the sources and patterns of revenue and expenditure from and to transaction parties. Key resources and capacities are focused on critical resources and capacities underpinning a trading structure. Cash flow structure is focused on the proportional relationship of cash flow in a time sequence (Wei et al. 2012). Business system—which behavioral entities an enterprise selects as internal or external stakeholders A business system consists of three parts: configuration, roles and relationships. Configuration refers to the network topology of stakeholders and their connections; roles indicate stakeholders owning resources/capacities (i.e. specific strengths) and the functions they assume in relevant activities. Relationships refer to the governance relationships among stakeholders, specifically describing how the right of control and claims to residual income are allocated among stakeholders. The configuration of these three factors may affect the value enhancement capability of an entire business system. The business system configuration of Apple is displayed Fig. A.3.

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In terms of transactional role, Apple is a platform integrating hardware, software and applications. Its stakeholders include equipment manufacturers (Quanta, Hon Hai), content providers (record companies, film companies) and service providers (credit card companies, telecom operators). Governance relationship answers the question of how to divide rights in a transaction. This includes pure market transaction, pure ownership transaction, and others ranging between the two types, including long-term deeds, equity participation, control and enterprise alliance. Apple mainly engages in market transactions with these stakeholders. Positioning—the approach to meeting stakeholders’ demands by an enterprise Stakeholders are actually customers in a broad sense. They include internal customers (employees), external customers (suppliers, consumers, service providers, direct customers, indirect customers, etc.), and semi-internal customers like franchised stores, contract service providers, contract manufacturers, etc. It needs to be pointed out that in the definition of positioning, the key word is neither stakeholder nor demand, but mode .For example, to meet consumer demand for soybean milk, we can either set up a chain store to sell soybean milk (such as Yonghe King), sell soybean milk grinders for consumers to operate on their own (such as Joyoung) or open community stores to grind soybeans and sell soybean milk onsite. These are different modes of meeting the demand, hence different positioning of the business model. Profit model—sources and mode of revenue and expenditure (or charging) by stakeholder The profit model covers sources of revenue and expenditure and charging mode. There are many revenue sources for a product. For instance, the sources of revenue for a literary and artistic work can be ticket sales for a performance (a Chen Peisi Drama, the Beijing Liu Laogen Grand Stage), copyright sales (selling copyrights to broadcasting platforms, like TV stations and video websites), embedded advertising (Feng Xiaogang’s films, Zhao Benshan’s comedies), charge on actors (reality shows), and authorized development of derivative works (Disney). And there are many ways of charging, e.g. based on time, value and consumption qualification. For example, the profit models for games include disk sales (charging by consumption qualification), time card (charging by time) and props (charging by value). Key resources and capacities—important resources and capacities that underlie a trading structure The business model is the trading structure of stakeholders. The key resources and capacities are important resources and capacities that underpin a trading structure, or the resources and capacities required for a focus enterprise in order to establish the trading structure (the two definitions are essentially equivalent). Different business modes call for varied key resources and capacities in enterprises. Identical business models differ in performance due to different levels of

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key resources and capacities. In restaurants, key resources and capacities vary by levels, such as high-end restaurants, fast food chains and meal delivery shops. Highend restaurants are distinguished by environment, unit price and quality. Fast food chains pursue standardization and fast duplication of food items. FU JI Food and Catering Services, (previously very popular in the capital market) delivers meals by improving the efficiency in central kitchen management and operations. Two points need to be noted. (1) Key resources and capacities are relative to business models. Therefore, companies from different industries may need the same combination of resources and capacities as far as they share the same business model. (2) The concept emphasizes the resources and capacities a company needs in order to establish a trading structure. In this sense, it is a judgment made in the beginning rather than afterwards. For instance, before a retail chain is established, one can determine the resources and capabilities it needs, and then look for stakeholders with matched resources and capabilities for cooperation. This can facilitate configuring the whole deal structure. Cash flow structure—the structure of corporate cash inflows and outflows and cash flow form by stakeholders A good cash flow structure allows small investment at early stages and enables sustainable and stable high returns at later stages. For example, Goldwind, which is listed on the SME board of the Shenzhen Stock Exchange and the Hong Kong Stock Exchange, makes no parts by itself. Instead it develops and cultivates a vast system of parts suppliers to reduce huge investment in parts manufacturing and create an assetlight cash flow structure. As a result, its sales and profit doubled for 7 consecutive years before it went public and became a star in the capital market after the listing. Cash flow structure can also be designed. One profit model may have different cash flow structures. For example, either prepayment or monthly settlement can be adopted for mobile phone top-up cards. In the first mode, users’ money is used first and operators get sufficient cash flows in advance to finance customer services. In the second mode, the services are provided before users are charged, so operators have to use their own money to provide operational services. In the case of great input by customers at the early stage, it is no doubt that more customers can be attracted through financial instruments, payment by installment or financial leasing to reduce the threshold of one-time purchases. In the case of little and repeated input by customers, operators charge in advance while providing high quality services to release the cash flow pressure on them while maintaining or even improving customer satisfaction (Table A.1).

Alt and Zimmermann (2001)

Applegate (2001)

Bonaccorsi et al. (2006)

Brousseau and Penard (2006)

Chesbrough and Rosenbloom (2002)

1

2

3

4

5

No. Paper

Production of and transaction in products and services

Transaction Transaction Subject Mode

Profit model

Cost source, revenue source, sustainable income generation

Revenue

Revenue

Pricing

Internal value chain structure, value network

Structure

Target markets, competitive strategy

Products or services; customers

Concept (describing an opportunity); Capacity (describing a set of resources that can realize the opportunity)

Mission, legal factors, technology

Entire Trading Strategy Structure

Organization

Value proposition

Marketing Process

Operation

(continued)

Cost structure

Cost structure

Value

Finance

Table A.1 Relationships between business model components in typical literatures, trading structure-based business model components and components in other disciplines

Appendix: Components of Business Models Based on Trading Structure 225

Johnson et al. (2008)

Hamel (2000)

9

11

Gordijn et al. (2001)

8

Horowitz (1996)

Dubosson-Torbay et al. (2002)

7

10

Donath (1999)

6

No. Paper

Table A.1 (continued)

Participant

Distribution

Customer interface

Value ports, value interface, value exchange

Transaction Transaction Subject Mode

Profit-making model

Price

Pricing

Product

Customer understanding, market tactics

Customer value proposition, key resources

Product, technology

Value network Strategic resources, core strategy

Value creation Value objective, target customer

Partner foundation and network

Internal network capacity, external network capacity

Entire Trading Strategy Structure

Organizational characteristics

Organization

Customer relationships

Marketing

Key process

Corporate governance

Operation

(continued)

Finance

Finance

226 Appendix: Components of Business Models Based on Trading Structure

Mahadevan (2000)

Markides (1999)

Osterwalder et al. (2005)

Papakiriakopoulos et al. (2001)

Petrovic et al. (2001)

Rappa (2001)

13

14

15

16

17

18

Partner

Channel model

Linder and Cantrell (2000)

12

Pricing

Revenue source

Revenue flow

Resource model

Value chain positioning, sustainability

Customer relationship model

Core capacity

Value proposition, customer fragmentation, core resources

Product innovation, customer relationship

Entire Trading Strategy Structure

Revenue flow Value flow

Production Value model, model, revenue market model model

Integration competition

Logistics

Internet-based Pricing business model, relationship revenue model

Transaction Transaction Subject Mode

No. Paper

Table A.1 (continued) Marketing

Customer value

Channel, customer relationship

Organizational Value form proposition

Organization

Finance

Coordination matters

Key activity

(continued)

Cost structure

Asset model

Cost structure

Infrastructure Finance management

Business process model

Operation

Appendix: Components of Business Models Based on Trading Structure 227

Viscio and Business Pasternack (1996) unit

Wei et al. (2012)

Weill and Vitale (2001)

Zott and Amit (2009)

21

22

23

24

Positioning, business system relationship

Connection

Activity system structure

Profit model, Business cash flow system structure configuration, key resources / capacities

Value capture

Infrastructure, core capacity, key success factors

Global core

Product/service structure

Customer selection, differentiation and strategic control, scope

Entire Trading Strategy Structure

Organization

Marketing

Governance, service

Operation Profit flow

Finance

Note As different scholars have their own definitions of one concept, the same concept may have different meanings, depending on the researchers giving the definitions.

Activity system governance, activity system content

Roles of business systems

Timmers (1998)

20

Pricing

Interests of Information Revenue participants flow structure source

Stewart and Zhao (2000)

Transaction Transaction Subject Mode

19

No. Paper

Table A.1 (continued)

228 Appendix: Components of Business Models Based on Trading Structure

Appendix: Components of Business Models Based on Trading Structure

229

A.5 Business Model Efficiency and Explanation of “Transaction Content is not a Component of Business Model” As a trading structure of a focus enterprise (whose business model is studied) and its stakeholders, a good business model can always create maximum value for the focus enterprise and stakeholders. In other words, it is important to maximize the sum of the residual income of both the focus enterprise and their stakeholders (Wei and Zhu 2012). As shown in the figure below, a business model creates value space of a trading structure which is the difference between the transaction value generated and the transaction cost expended. Aside from transaction costs, the focus enterprise and its stakeholders have to bear monetary cost, e.g. overheads, and costs of raw material purchases. The value space minus monetary cost is the added value realized by the business model for all the stakeholders, which is the sum of the residual income of both the focus enterprise and its stakeholders (A.4). Value space reflects the value size of a business model. A good business model maximizes the value space given the same transaction value. Efficiency varies with business models and can be evaluated with the formula below: Transaction value − Transaction cost Transaction value Value space = Transaction value

Business model efficiency =

A business model has a proportional amplification effect on different products and customers and the multiplier is the efficiency of the business model. For instance, the franchising model has similar efficiency (= value space/transaction value), no matter if it is applied to the sale of jewelry, home appliances or fruit. Therefore, business model efficiency can be used to distinguish different types of business models.

Figure A.4 Derivation of value enhancement

230

Appendix: Components of Business Models Based on Trading Structure

For different markets (including customers and products), a business model has a constant efficiency and has a similar amplification (or multiplication) effect. An enterprise should try to apply the business model to the products and markets where more corporate value can be generated. For instance, an innovative agricultural technology, if combined with an innovative business model, can result in a 40% increase in crop yield. The yield of field crops (e.g. rice) per mu ranges between several hundred RMB to over a thousand RMB, while that of staple crops (e.g. fruits and vegetables) or forestry crops (e.g. redwood) can be10,000 RMB or even 100,000 RMB. If the business model is applied to economic or forestry crops, the corporate value generated will be far greater than when it is applied to field crops. For the same market (including customers and products), efficiency varies with business models, and so does the amplification (or multiplication) effect. Therefore, the business model with higher efficiency will be chosen. For instance, for the sale of accessories, street stalls, chain stores and Taobao stores are three different business models, which amplify the value of accessories to different extents, and ultimately, create different corporate value. Therefore, a business model is a trading structure-based efficiency multiplier; different business models represent different multiplication effects or energy levels. As the difference between markets (strategic positioning) can be indicated with transaction value, the difference between business models can be indicated with business model efficiency. Hence, the value of strategy in combination with business model can be represented by the formula below: Combined value of strategy and business model = Transaction value × Bisiness model efficiency = Transaction value Value space = Value space × Transaction value For different enterprises with limited resources and capacities, the markets (including customers and products) they can access and the business models available to them will be limited. So the best option is to find a combination of the largest market potential and maximum multiplication effect of the business model to maximize the value space. Transaction content (what the transactions are) is about the issue of strategic positioning, as well as the business model (i.e. trading structure). The independence of business models as a discipline can be better described through the exclusion of transaction content from business model components. That is why we only consider the transaction subject, transaction mode and pricing as the business model components, but exclude transaction content.

Appendix: Components of Business Models Based on Trading Structure

231

A.6 Conclusions and Research Prospects Wei et al. (2012) define the business model as the trading structure of stakeholders, clearly specify “trading structure” as the research object of the business model discipline and set the business model apart from other disciplines such as strategy, organization, marketing, operation and finance. This lays a foundation for the independence of the business model as a discipline. This book is based on the conceptual meaning of trading structure and divides the extension of business model into three aspects: transaction subject, transaction mode and pricing. Through reading other materials, we found that business model components proposed by many scholars can be classified into the three aspects above, and also included in the components of other disciplines such as strategy, organization, marketing, operation and finance. We think it necessary to exclude the components of other disciplines as they may affect the independence of business model as a discipline. Then we provide details on the trading structure-based business model components—Wei and Zhu six-element model as it demonstrates that these components revolve around the trading structure; addresses the core issues of transaction subject, mode and pricing; and excludes the components of other disciplines including strategy, organization, marketing, operation and finance. Finally, the book fully illustrates that a business model is an efficiency multiplier based on trading structures, and explains that transaction content is not a component of a business model, but an issue of strategic positioning; clarifies the boundary between business model and strategy, and further stresses the independence of the business model as a discipline. Future research may deal with the following aspects based on the components of a business model: 1. Classify business models based on components. 2. Verify whether there is a certain consistency between the components. 3. Explore the relationship between components and business performance.

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