Business models and frameworks the case of black socks

COPENHAGEN BUSINESS SCHOOL 2014

Business models & frameworks The case of Black Socks

Enrique de Luis Araque

12/8/2014

Synopsis 141286ENA1 (Araque, Enrique de Luis)

Pages: 7. Characters including spaces: 14756 Innovating Business Models CCMVV4135U

Cand. Merc. Management of Innovation and Business development; MIB

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Table of Contents

1 Introduction ............................................................................................................................................. 2

2 Problem statement ............................................................................................................................... 3

3 Delimitations ........................................................................................................................................... 4

4 Method ....................................................................................................................................................... 4

5 Theory ........................................................................................................................................................ 4

6 Case description ..................................................................................................................................... 5

7 Analysis ...................................................................................................................................................... 6

8 Conclusion ................................................................................................................................................ 8

9 References ................................................................................................................................................ 9

10 Appendix I ......................................................................................................................................... 10

11 Appendix II ........................................................................................................................................ 10

12 Appendix III ...................................................................................................................................... 11

13 Appendix IV ...................................................................................................................................... 11

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1 Introduction

In recent years the popularity of Internet has implied a tremendous opportunity for

entrepreneurs to launch their own ventures with new business models. At the same

time, this fact has threatened traditional firm’s business models. While new ways of

doing business have risen in this, decade new frameworks have also come up which

allow entrepreneurs, researchers and managers to analyse not just these new star

ups, but also any other kind of business model, BM hereafter.

By analysing the established business model of the Swiss company BlackSocks.com

under two different frameworks, the so called business model canvas proposed by

(A. e. Osterwalder 2010) and the framework (Demil 2010), the author aims at

bringing some clearness on what are the advantages and disadvantages when it

comes to analyse the success of one particular business model. The author finds

particularly interesting to get to a conclusion on what are the actual implications of

using one framework or the other. This is of extreme importance for those who are

about to assess new entrepreneurial business model. Take for instance potential

investors assessing the possibility of funding a particular start up. Also it is

important for first time entrepreneurs who are about to create, reviewing and

modify business models. Many of CBS students will soon or later face the analysis of

business models, thus the importance of getting to know and discussing different

frameworks is really high.

There are some reasons behind choosing Blacksocks.com as study case. First reason

is that Blacksocks.com was launched in 1999 and according with their official website

(Black Socks 1999) the growth of the firm has been sustainable until nowadays. After

15 years we can say that the company has already established in the market. Second

reason; Black sock’s revolutionary way of attacking the market in what it could be

seen as a mature industry, seems to be interesting to study under two different

frameworks. Finally, there is the fact that the widespread of internet has made

possible the growth and establishment of this venture. Without the popularity of

internet and all the opportunities that this fact has brought, Blacksocks.com would

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have never been possible. In this sense many new business models from both, new

start up and already established companies, have internet as a common

denominator.

2 Problem statement

Internet has provided a landscape where several entrepreneurs have seen the

perfect opportunity to launch their ventures. There are many examples of this, see

for instance how Skype disrupted the international call industry with its “Free” BM

(A. e. Osterwalder 2010). However this is not a matter for start-ups, see P&G connect

+ development open innovation platform (A. e. Osterwalder 2010) (Procter and

Gamble 2014). It seems that internet has been used in different ways when it comes

to business model design; furthermore internet is an extremely important pillar for

many BMs.

At the same time that new business models patterns arise: Long tail, multi sided

platforms, Open business models etc. (A. e. Osterwalder 2010) Researchers have

begun to pay attention to this phenomena, consequently many frameworks have

been proposed; see for instance (Chesbrough and Rosenbloom 2002) (Teece 2010)

(Demil 2010) or the so called BM canvas (A. e. Osterwalder 2010). One thing is clear,

there is no conceptual agreement about BM and there are no mutual accepted

definitions in frameworks within the literature. (Varne 2014)

Given that the numbers of star ups with new BM is increasing and the disagreement

among researchers. The author proposes to analyse the success of Black Socks’ BM

under two different frameworks, BM canvas of (A. e. Osterwalder 2010) and (Demil

2010) in order to identify advantages and disadvantages of using them to analyse

internet based BM. It seems logic to think that the author, as CBS student, will soon

or later face a situation where he is required to perform BM analysis, thus being

aware of the implications when we use one or another it might be extremely

valuable

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What are the implications of using (A. e. Osterwalder 2010) BM canvas and (Demil

2010) when it comes to analyze internet based business models?

3 Delimitations

The literature reviewed to develop this synopsis is constrained by the syllabus and

curriculum of the course “Innovating in Business model” (CBS 2014). This is positive

in the sense that, interesting and relevant frameworks have been already selected;

on the other hand it might also not include fresh literature about business model

frameworks. Due to limitations of time a data, only one case company has been

studied, this might have a direct influence on the findings and conclusion lowering

its reliability, analysing more companies that match the requirements explained in

the introduction section could be an efficient way of improvement. Finally,

methodological procedures might also have an influence on the findings; however

this will be explained in the method section.

4 Method

In order to solve the already stated research question it is used a case study method.

As it is commonly known, this is a depth study of a particular situation. Also it is

known that this method does not fully provide an answer to the research question

but it might end up in indications and interesting findings which allow further

elaboration. A common argument against case study is that such a narrow case

cannot provide results to be extrapolated to fit an entire question. On the other hand

the advantage of a case study is that it can focuses on specific interesting cases, and

also, a case study might lead to unexpected findings due to its flexibility. (

Shuttleworth 2013)

5 Theory

BM canvas is widely used by senior executives, intrapreneurs, entrepreneurs,

investors, consultants etc. (A. Osterwalder, Business model generation 2010). The

main goal of this framework is to provide a “common shared language for describing,

visualizing, assessing and changing BMs” (A. Osterwalder, Business model generation 2010)

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in this book the author defines a BM as “the rationale of how an organization creates,

deliver, and capture value”. The author claims that a BM can be best describe through 9

building blocks that depict the logic of the way firms make money, these blocks cover

four main areas of business: customer, offer, infrastructure and financial viability. (A.

e. Osterwalder 2010).

The other theoretical framework is the one proposed by (Demil 2010). It is based on

the concept that “BM refers to the articulation of firm’s activity designed to produce a

proposition of value” According to Demil, there are two different uses of BM, the static

and the transformational approach. The paper (Demil 2010) attempts to reconcile

these two approaches to find out how BM evolves looking at the dynamic created by

the interactions between its building blocks. The components of this framework are:

resources and competences, value propositions, internal and external organizations,

volume and structure of revenues, volume and structure of costs and margin. (Demil

2010)

6 Case description

Samy Liechti was a former business consultant who was once invited to a Japanese

tea ceremony with Japanese customers, as it is known, in this kind of ceremony

attenders must take off their shoes. Samy’s socks did not match and his big toe was

out of the fabric. In the eyes of his clients, his status declined automatically (Black

Socks 1999). Questions rose right after in his mind, why wasn’t the sock stocked with

matching socks? The concept is quiet simple, customers receive socks through the

letterbox at regular intervals, always the same design, it’s was called “sockscription”.

It is thought as a solution to this set of problems: no one likes buying socks, everyone

constantly need socks, no one likes sorting socks after washing, there will always be

pair for individual socks (Black Socks 1999).Customers subscribe by choosing their

favourite design and choosing the delivery interval.

The company has been able to establish in the market, after 15 years of life this

seems to be a fact as well as its steady growth. In 2000, one year after the launch, it

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accounted 8000 customers (Black Socks 1999), 4 years later in 2004 the figure had

increased until reaching 25000 from around 30 countries. In 2012 the company had

already launched other products successfully by using the same subscription system.

15 years after their launch, in June 2014 sales had increased by 50% comparing with

the previous year (Black Socks 1999)

7 Analysis

As it has been already mentioned, in this section we draw first on BM canvas in order

to illustrate the firm’s business model and then in (Demil 2010), thereby, the nine

building blocks are described one by one: Value proposition: it solves socks problem,

simplicity and convenience, customization options, quality products, and time

saving. Customer relationships: subscription, social media, customer service.

Channels: online shops mobile app. Customer segment: busy business men who find

annoying to spend time buying socks. Revenue streams: subscription. Key activities:

branding. Key resources: brand, high quality products. Key partners: suppliers,

shipping partners, web developers, payment partners. Cost structure: socks

suppliers, marketing, and shipping. (See Appendix II)

BM canvas provides a clear picture on how Black socks is able to create and deliver

value to the customer segment. It seems to be very useful when it comes to show

interested parts how the business actually works. This is an interesting take away

for entrepreneurs who seek for funds from investors who can draw on the canvas to

illustrate the functionality of the business. In this sense it works like a common

valuable language to discuss and show business models.

Furthermore, BM canvas provides three components: Customer relationships,

customer segment and channels which can be of extreme importance for start-ups. It

is well known by entrepreneurs that often, during early stages, managers try to

attack the market in a trial error process in different ways until achieving the right

one. These three components are the link between the value proposition and the

market. This is a perfect landscape for entrepreneurs to reflect over this trial error

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process and decide different Channels and Customer Relationships. Actually, BM

canvas provides a set of questions as guidelines to define these two components (i.e.

how are we reaching them now? How are our Channels integrated? Which ones work

best?) (A. e. Osterwalder 2010).

However, while the BM canvas seems to be appropriate to explain how business

creates and delivers value, it seems to be limited if we were to analyse competitive

advantage. BM canvas presents firms as an isolated actor. For instance, if we try to

answer the question, what’s the reason behind the establishment of Black Socks in

the market? Or what stops other companies to act as Black Socks and gain market

share? BM canvas show its limitations. And this is an important implication; the fact

that the canvas can explain how value is created does not imply that can explain how

firms can sustain in the market. Entrepreneurs and investors should pay particular

attention to this implication when it comes to assessing start-ups.

If we use Demil framework, brand would be placed as the main resource of the BM.

Internal and external organization component is formed by branding, marketing,

supply change, payment partners while the value proposition would be the same.

Volume and structure of revenues, and, volume and structure of costs would be

subscriptions and supplies, shipping and marketing respectively (See appendix IV).

First interesting insight is that, in this framework there is no explicit component that

links to the market... Second insight is the interrelation of the framework; this means

that modifying one component would have consequences in the other two. The

implications of this are of particular interest when assessing possibilities of

modifications in BM in order to face an eventual collapse. I.e. hypothetical change in

men fashion taste, appearance of new competitor etc. Black socks has grown

considerable in the last 15 years, in this sense, BM canvas would be better to explain

how value is created and delivered, nevertheless if a rapid change occurs in the

environment threating the BM, then, Demil’s framework, due to its interrelations

implications, offers better possibilities when it comes to think about how to

reinitiate the BM in such a way that it makes sense again.

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Also Demil’s framework shows iteration between the margin created and the

resources and competences. That link is useful to explain, in this case, how Black

Socks has been able to reinforce its business model by increasing the range of

products. Positive margins have led to more resources and competences which have

had implications in improving the offer, thereby enhancing the value proposition.

This is of extreme relevance when we are about to analyse the scalability of one

particular BM, while BM canvas explains little about how can BMs evolve, (Demil

2010) takes this possibility into consideration.

Moreover, if we were to analyse firm’s BM under the exploration exploitation

dilemma, (O'Reily and Tushman 2004) while both frameworks seem to be useful to

illustrate the exploiting aspect of Black Socks, none of them can be used to analyse

the exploration part. For instance the BM canvas of Black Socks does not tell

anything about firm’s effort to keep on exploring.

Additionally, both frameworks seem to provide a good landscape for comparisons of

BM across firms, for instance, it’s extremely valuable to compare disruptive BM with

traditional firms. I.e. Black socks vs traditional socks retailing. Finally, both

frameworks provide little connection of the BMs with the environment, according

with them; firms are able to create value individually. Hence, it is important to be

aware that, both frameworks do not explicit recognize environmental issues. Thus

BM-frameworks provide explanation about how value is created under certain

defined circumstances.

8 Conclusion

The analysis of the BM of the company Black Socks by using two different

frameworks have clarified that, BM canvas is very useful for some kind of issues like

market and customer relationship management and also that Demil is helpful to

understand interrelations between components, both frameworks are limited to

answer other questions, particularly those relating to the environment.

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9 References

Shuttleworth, Martyn. “Case Study Research Design.” Explorable. 2013. https://explorable.com/case-

study-research-design (accessed November 20th, 2014).

Black Socks. Blacksocks.com. 1999. www.blacksocks.com (accessed 11 18, 2014).

CBS. “Syllabus of elective Innovating Business Model.” Copenhagen: Copenhagen Business School, 2014.

Chesbrough, Henry, and Richard S. Rosenbloom. “The role of the business model in capturing value from

innovation: evidence from Xerox's corporation technology spinoffs.” Industrial and Corporate

Change 11, no. 3 (2002): 529-555.

Demil, B. & Lecocq, X. “Business Model Evolution: In Search Of Dynamic Consistency.” Long range planning

43 (2010): 227-246.

O'Reily, C, and M Tushman. “The Ambidextrous Organization.” Harvard Business Review, 2004.

Osterwalder, Alexander. “Business model generation.” In Seven faces of business model generation, 6-8.

United States of America: John Wiley & Sons, 2010.

Osterwalder, Alexander. “Business model generation.” In The business model canvas, 12-52. United states

of America: Wiley J. & Sons, 2010.

Osterwalder, Alexander et al. Business model generation : a handbook for visionaries, game changers, and

challengers. 1st. John Wiley & Sons, Inc, 2010.

Procter and Gamble. Connect and development. 2014. http://www.pgconnectdevelop.com/ (accessed

November 20th, 2013).

Teece, David J. “Business Models, Business strategy and Innovation.” Long range planning 43 (2010): 173-

194.

Varne, Claus. “What is a business model?” Slides session 1. Copenhagen: Copenhagen Business School, 16th

September 2014.

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10 Appendix I

11 Appendix II

(A. Osterwalder, Business model generation 2010)

Business Model Canvas for Blacksocks Source: Author

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12 Appendix III

13 Appendix IV

(Demil 2010)

Brand Branding activities Marketing Supply chain Payment partners Shipping partners

It solves socks problem. Simplicity &convenience. Customization options. Quality product. Time saving.

Suppliers Shipping Marketing Subscription

Adapted from (Demil 2010) Source: Author