Business Model Design Through Reverse Thinking

Tatsuhiko INOUE, Ph.D.

Professor, Graduate School of Commerce Waseda University

20 June. 2011

DP-11-E-001

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1. Introduction

What is the essence of competitive strategy? What is the most important thing

when formulating a competitive strategy? It is certainly not to compete head-on.

Providing the same products and services to the same customers inevitably leads to

price competition, which is unwelcome for both one’s own company and its rivals.

Of course, this may please customers and this is ideal from the perspective of

economics. However, nothing comes of selling short products that required much

effort to develop. Competitive strategy tends to be viewed as planning how to

compete, but the important thing from a management perspective is how not to

compete. Therefore, the essence of competitive strategy is in how to create

conditions for avoiding bloody battles in the long term.

What needs to be done to avoid competition? The answer is differentiation. There

are two types of differentiation: one is differentiation of products and services; and

the other is differentiation of business systems through management resources and

mechanisms for conducting business. Differentiation of products and services is

conspicuous and easily understandable for general consumers, but if they are

immediately being mimicked, the competitive advantage will not continue. In

contrast, differentiation of business systems is not normally conspicuous, but the

advantage is prolonged once established.

In these teaching materials, we consider how to design business systems that

bring about a competitive advantage. This is business proposal through reverse

thinking. It has two characteristics. The first is that although business design is

based on an analysis framework, analysis is performed to make proposals. It

includes innovations for filling the kind of gap created between analysis and

proposals. Secondly, the procedure for such business proposals is based on the

results of academic research, or established theory. It is based on several theories,

but these have been integrated to avoid inconsistencies.

Below, I have provided an easily understandable explanation using familiar

subject matter. The logical backing is explained in the notes at the end of the paper,

and you should take the time to deepen your understanding by looking at the

research cited for yourself.

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2. Source of Revenue

The secret of high revenue

Everybody knows Hideki Matsui, who plays Major League Baseball. He has had

unparalleled hitting power since high school, and was even walked five times in

succession at the Koshien high school baseball tournament. He joined the Yomiuri

Giants after graduating, and reigned supreme as slugger batting fourth. He then

became a free agent, joined the New York Yankees and was selected as MVP. As of

2010, he was active at LA Angels, and continues to be a professional baseball player

representing Japan.

It is believed that Matsui earns approximately 6.5 million dollars per year. Adults

who know of the world see this amount to be reasonable considering his

achievements. However, could you provide a proper answer to a tender-aged child

if asked “Why is he paid so much?”

There are at least two ways to provide an explanation from the perspective of

management strategy 1 . One focuses on the fact that Matsui has extremely

uncommon talent and ability. It is said that even the famed Katsuya Nomura was

astonished at Matsui’s swing speed when he first jointed the Giants. In addition to

offense, he also boasts other skills required for the highest level of baseball, such as

defense and running. Clearly, there are many power hitters in the major league. In

fact, Matsui’s strength is in his contributions to the team’s victories through hits

made when they are needed most thanks to his flexibility and adaptability. This

explanation is referred to as a resource-based view in strategy theory. This

approach involves building an advantage and increasing profitability by occupying

highly productive resources others cannot have.

Another way of explaining this focuses on the fact that Matsui chose a sport in

which it is easy to make a lot of money. Specifically, Matsui first chose a

professional sport. If he had chosen another team sport like handball or field hockey,

he would not have his current salary. Next, among professional sports, it is

probably preferable to choose one that is popular and is conducted with relative

stability through the year. Soccer may also meet these criteria, but at the present

time in Japan, professional baseball players have a higher average salary than J1

1 Aoshima and Kato (2003)

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League players. Other important aspects include longevity as a player and a second

career after retiring from playing. In this respect, baseball players have longer

playing careers than soccer players. Furthermore, in both baseball and soccer, if a

player has great achievements while playing, this opens up the doors to a second

career in coaching at ones old team or providing commentary on television and

radio.

It is unclear whether Matsui put this much thought into his choice for a career in

baseball, but it is obvious that he made the right choice. This approach explaining

revenue based upon this is referred to as positioning strategy theory.

I discussed professional baseball players, who could be considered to be sole

proprietors, in order to provide intuitive insight, but the positioning and resource

approaches also apply to normal business. Incidentally, there is debate in American

academic circles about whether the resource-based approach or the

positioning-based approach is more convincing. However, when considered with a

cool head, having a high level of ability makes it possible to maintain an

advantageous position, and ability is refined because of being in an advantageous

position. In this respect, the resource and positioning approaches provide mutual

strength as the flip sides of each other.

3. Business Concept

Analysis Framework

The P-VAR analysis framework introduced here integrates positioning strategy

theory and resource-based strategy theory made up of Position, Value proposition,

Activities and Resources. In the diagram, the market represented by a square is

combined with the business represented by an isosceles right triangle2.

Looking at the pyramid represented by an isosceles right triangle, it is made up of

three layers. The top layer is the Value proposition layer, and the middle layer is

Activity and operations for providing this value. The bottom represents the

Resources for supporting this activity. Using this pyramid, it is possible to

understand what value to provide and how.

2 Inoue(2005)

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Let us look at this in a familiar business. For example, a coffee shop provides

businessmen with the value of time and space to relax and hold meetings. The

interesting thing is that a coffee shop profits by selling coffee and food instead of

having users relax. It might be an idea to bill by the hour, but this would prevent

people from relaxing without worrying about the time.

Fig. 1 P-VAR Framework for Analysis

However, it is a problem when a customer spends hours to have a single coffee.

This reduces the turnover rate and slows sales. Coffee shops are not blatant about it,

but they use a variety of devices to encourage turnover. They use slightly

uncomfortable chairs to make people naturally want to get up after a certain

amount of time has passed, set the air conditioning temperature low and play

high-tempo music. Conversely, there is also the method of considerably raising

prices and letting people relax. Such operations are activities for making a profit

while providing value.

These activities are supported by the management resources at the bottom. In the

case of a coffee shop, physical resources such as equipment for providing coffee and

food, chairs and tables, along with capital for conducting business are essential.

However, the key to success is know-how about how to enable people to relax while

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ensuring the appropriate amount of turnover.

Considering this, you may normally just think “It’s easy to relax in that coffee

shop,” but considerable effort has gone into providing that value. Like with the tip

of an iceberg, the base supporting value is unseen and also very large. The value felt

by customers is supported by activity mechanisms and management resources that

are difficult to see from the outside. If a rival company wants to imitate the same

mechanism, it must investigate everything down to this base.

What is the meaning of the position represented by the square? This indicates

which customers a company does business with in the market and how the

company competes with or coexists with rivals. For example, if a coffee shop is

doing business to cater for middle-aged men, there is still an opportunity to do

business with young women. This is because there are limited places for female

office workers working in companies to relax and talk (they can’t relax in a coffee

shop if it is filled with middle-aged men and people from their company).

Donut shops focused on this and made urban oases for female office workers. To

please female office workers, it is essential to not only attract women, but also take

steps to ensure men aren’t drawn to the store. The first step was to make the

restrooms clean. In fact, they were told “Just make the toilets as good as a first-rate

hotel.” Efforts were also made to make the lighting in the stores brighter. This is

because the stores were avoided by women because they were too dark when

established.

Conversely, showy interior design based on red and yellow, and pop music were

adopted to repel men. The clincher was the use of scratch cards (at the time). Points

accumulated using this could be exchanged for fancy goods. However, the “cute”

goods such as pink and yellow lunchboxes are embarrassing for middle-aged men

to use. If these goods are placed in the most conspicuous parts of the store and near

the entrance, middle-aged men will find it difficult to enter.

These are the respective positions, values, activities and management resources of

traditional coffee shops and donut stores at the time they were established. They

can coexist because they provide different value to different customers. Looking at

the history of the development of the industry, coffee shops appeared first, donut

shops were created as the reverse position, and chic cafés appeared as the reverse

position of these.

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Table 1 Comparison between Coffee Shop and Donut Shop

4. Reverse Thinking

The Reverse Position

As mentioned at the beginning, companies and their rivals probably want to

avoid bloody competition. To achieve this, a company must perform unique

differentiation to coexist. It is no coincidence that coffee shops and donut shops

have reverse positions. It is because this provides benefits for both.

If that is the case, it can be seen that it is better to adopt the reverse position to

existing ones when starting a new business. In fact, looking at the history of the

development of many industries, they have developed in a process where a market

is created, followed by its reverse, and then the reverse of that. In the past, Swiss

mechanical watches were the pinnacle of accurate timepieces, but Japanese

manufacturers overturned this perception with quartz technology. Swiss

watchmakers who could no longer win in terms of accuracy achieved success

through reverse thinking by highlighting the fashion and brand aspects of their

products.

The same could be said of large motorcycles. In the past, motorcycles in America

were believed to be vehicles ridden by middle-aged men wearing black leather

jackets. In response to this, Honda popularized motorcycles by proposing the

scooter as a city commuter based on reverse thinking. However, as motorcycles

became popular, Harley-Davidson sparked innovation again based on reverse

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thinking. Instead of selling motorcycles as simple “goods,” the company provided

them as a lifestyle with a Harley. This was a shift in marketing from being “goods”

oriented to being “concept” oriented3.

Six Reverse Directions

With this history of industry development in mind, let us consider positioning

based upon reverse thinking. Reverse is not necessarily a single direction. The

reverse of forward is back and the reverse of right is left. Thinking in three

dimensions, up has a reverse direction as does down. These could be represented as

“forward & back / left & right / up & down.” By combining these 6 directions, it is

possible to achieve a variety of reverse positioning in a three dimensional space4.

In terms of competitive strategy theory, the forward direction refers to sales

channels and relationships with customers. Therefore, reverse thinking in relation

to the forward direction could be separation in the case of a vertically integrated

company. In the extreme, if products and services are delivered to different

customers, the negotiating ability and position changes, as does the ability to make

money. Even if not taken this far, there is also the option of reviewing transaction

conditions. If the commissioned sale return system is reviewed and purchase

agreements are concluded with retailers, the risk borne by the company is reduced.

The back direction represents relationships with suppliers. Therefore, reverse

thinking in relation to the back direction could be internalization and integration in

the case of a company procuring parts externally. Even if this is not audacious,

negotiation capabilities can change simply by procuring from several companies

instead of one.

The left direction represents relationships with competitors. Therefore, reverse

thinking in relation to the left direction could be cooperating with competitors to

expand the market. It is possible to conceive coexisting alongside one another by

differentiating in a separate direction to competitors.

The right direction represents relationships with partners as complementary

producers. Therefore, reverse thinking in relation to the right direction could be

improving profits by grabbing the business of complementary producers like a

certain software maker. Even if not taken to this extreme, it could mean acquiring 3 Mizuguchi(2008) 4 Brandenburger and Nalebuff (1997), Kim(), Christensen(2003)

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some of the profits of a complementary producer.5.

These 6 directions could also be compared to the spatial positioning that takes

place in war. The “forward & back/ left & right” in existing markets is like the

ground war. Companies are aware of this on an everyday basis, so it is easy to find

reverse positioning. However, in mature markets, coexistence often does not last

long. Differentiations are small and this tends to lead to bloody contests.

In contrast, the “up & down” corresponds to the air war (air strikes) and the

undersea war (attacks from submarines). The air is like a fresh new market6. It is

easy to take up one’s stand there and strike at rival companies on the ground from

above. Furthermore, undersea refers to attacks through destructive technology or

destructive business models. Technically, it is possible to trouble masters on the

ground by sparking the dilemma of innovation7.

Fig. 2 Six Direction Positioning

5. Case Study

The Multifunction Printer Business

Here I will discuss an actual case of business design based on reverse thinking. In

the late 1950s, copying machines in offices were called either the wet type or the

thermal transfer type. The prices of the units were accordingly inexpensive with

5 Brandenburger and Nalebuff(1997) 6 Kim and Mauborgne(2005) 7 Christensen(2003)

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low quality. Despite being cheap and nasty, they provided copies. To address this,

engineers at Xerox developed xerography for electrically arranging toner on paper

in order to dramatically improve copy quality8.

However, the use of this technology increases manufacturing costs considerably.

The price of copying machines increased sixfold compared to previous types, and it

was no longer possible to make money through both the main units and

consumables as in the past. One consulting company even said the xerography

business model would not work. Xerox engineers did not yield to this specious

advice. They believed that there would definitely be demand for high-quality copies,

and decided to lease copying machines by focusing their sights on governments and

large corporations. Leasing fees were kept to $95 per month, and only copies

exceeding 2,000 pages per month were billed at a rate of 4 cents per page. This

brought about a revolutionary earnings model.

However, this is a billing system that does not make money unless clients make

large numbers of copies. At the time, copying machines were not very widespread

and their uses were unclear. To address this, Xerox decided to provide consulting

services instead of products alone. The company formed a directly-operated sales

force and service organization, and developed demand by explaining how they

could be useful for conference materials. Furthermore, a service network was

established throughout the United States to provide solid support.

This is the story of Xerox’s success through reverse thinking. In retrospect, this

business design is rationally convincing, but Xerox bore considerable risk at the

time. However, they cannot make money unless clients make large numbers of

copies. The company was able to succeed because it moved forward with the belief

that there are needs for use of large quantities of high-quality copies. Eventually,

Xerox’s business grew steadily and it almost monopolized the market targeting

governments and large corporations. That is, it succeeded in cornering a segment

with high sales and a high margin.

The one to challenge this supremacy was Canon. Canon adopted the reverse

thinking to Xerox, and provided copying machines to small-medium businesses and

sole proprietors9. By conventional thinking, it was an unrewarding market in which

it would be difficult to grow a business. Actually, it was necessary to lower prices to 8 Chesbrough(2003) 9 Nonaka(1985), Sakakibara(2003)

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deal with small-medium businesses and individual users. Moreover, individual

users would not accept products unless they were more durable and did not break.

Canon set its goal as increasing quality tenfold while lowering the price to one tenth.

Furthermore, the development team was also given a variety of requirements such

as support for color in the future, reduced weight and reduced size. The difficult

thing was the need for an enormous investment to cover all individual users even if

the service network could be improved. Common sense would suggest that this is

not an issue that could be resolved.

Canon conducted careful investigations. As a result, it was discovered that most

copying problems were concentrated around the drums used for fixing toner and

transporting paper. After much thinking in a camp held to investigate the matter, a

brilliant idea was eventually found. This was the reverse thinking of making the

most important photosensitive drum disposable. This is cassette cartridge

technology. In order to enable general users to perform self-maintenance, the

developing unit, the charging unit, the photosensitive drum and consumable toner

and cleaner containers were packaged in a single cartridge that users can replace

themselves. This was designed to ensure users would replace the cartridge before

any problems occurred by making toner run out before the drum became damaged.

Through this product design, Canon was able to provide a good hands-off

solution not requiring after-sales maintenance. There was no need to train service

personnel or establish service centers. Furthermore, copying machines were already

widespread, so there was no need for consulting or direct sales. Like after-sales

service, sales could be conducted efficiently with little investment.

The above business designs adopted by Xerox and Canon are shown in the table

below using the P-VAR framework.

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Table 2 The Business Designs Adopted by Xerox and Canon

Four Views of Business Design

In this table, attention should be given to the basic assumptions indicated by

shading. To begin with, business design is based on assumptions such as “How to

win,” “What kind of needs are there,” “How to make money” and “What are

effective resources.” Such assumptions or ways of viewing things are referred to as

“paradigms” or “views”10.

Let us look at this in more detail. The first view is the competitive market view.

The competitive market view is what could be considered to be a formula for

winning and is a belief about how to win. For example, Japanese companies have

long pursued market share, and this strategy is based on the assumption of certain

logic. This is “If market share increases, the economy of scale and experience effect

will lower unit costs, enabling the profit margin to be increased.” Unfortunately,

this assumption is incomplete, and although Japanese companies have increased

their sales, their operating margin continues to decline. This belief was also applied

10 Kagono(1989)

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to copying machines. Xerox thought that it could beat the competition using its

original technology of xerography if it established a market targeting governments

and large corporations. Meanwhile, Canon thought that other companies would not

be able to catch up if the company could provide small-medium businesses and

individual users with copying machines that did not break down even if they were

a little slower.

The second view is the customer value view. The customer value view is a belief

about what kind of needs customers have and how the market is progressing. In

times of shortage, the market may demand products and services at affordable

prices and in large quantities like water. Once products have been delivered, people

will want something stylish that is different to others. In the case of copying

machines, Xerox thought there was a latent need for fast, high-quality copies. The

company conducted consulting to expose this need. In contrast, Canon thought that

once copying machines were delivered to governments and large corporations and

their uses became understood by society, it would be possible to stimulate demand

for copying machines without conducting consulting.

The third view is the earnings activity view. The earnings activity view is a belief

about how to make money through activities to gain a return on one’s investment,

and represents effective operations and principle sources of earnings. For example,

it is believed that demand for semiconductors increases in years the Olympics are

held, and that it is ideal to time capital investment to match this in order to recover

one’s investment quickly through small profits and quick returns. In the case of

copying machines, it was normal to make a profit through both the machines and

consumables, but Xerox leased the machines and introduced metered billing. In

contrast, Canon aimed to increase profits by selling their products through

distributors.

The fourth view is the management resource view. The management resource

view is a belief about what management resources are valuable, scarce and difficult

for other companies to imitate. As a general trend, the evaluation of management

resources is often carried out by comparing with the current earnings model.

Consulting companies also evaluated xerography by comparing it with the earnings

model used at the time. This method of evaluation cannot be called incorrect, but it

is not sufficient. The reason is that it is necessary to compare the value of resources

with future earnings models. In the case of xerography, it was necessary to evaluate

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the value of technological resources based on the assumption that the copying

machines would be leased and a metered billing system of 4 cents per page would

be adopted.

The basic view of a business can be obtained if the four elements above are

combined in a way that is mutually consistent. This is a business paradigm.

Business systems are based upon this business paradigm.

6. Design through Reverse Thinking

Proposals through Reverse Thinking

If the business paradigm can be clarified, business design becomes sounder. It

also provides a firm base to make proposals through reverse thinking. Finally, I will

discuss the procedure used in business design based on reverse thinking. The

procedure comprises four steps.

The first step is to select and analyze a business for comparison. Using the P-VAR

framework, the position, value provided to customers, earnings activities and

management resources are identified. The important thing is to perform analysis of

the business framework that extends to the “views” that constitute the basic

assumptions.

The thing that should be noted in this step is which business of which company is

selected. If something vague or unsuccessful is chosen, its reverse may also only

provided half-baked ideas. There is no point performing comprehensive analysis on

vague businesses described using the term “general.” If you want to spark

innovation in an industry, you should refer to the dominant business and reverse it.

If you want to propose something sharp, it is best to refer to something else that is

sharp and reverse it. In the case of copying machines, the model Xerox referred to

was the safety razor type thermal transfer type (or wet type) business model. Canon

referred to the Xerox model.

The second step is to reverse one of the P-VAR elements in the business being

analyzed. A business does not work without customers. In general, business design

should begin by reversing the position or the value provided to the customer. Xerox

reversed the existing position of low quality at a low price and focused on the

position of high quality at a high price. Canon targeted small-medium businesses

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and individual users as customers, which was the reverse of governments and large

corporations. One thing that should be noted is that when you reverse once

company’s business, another company is there. It is not always the case, but finding

a different position is generally a better way to make profit by avoiding

competition.

In addition to position and value provided to the customer, it is also possible to

view earning activities and management resources through reverse thinking. For

example, informational magazines originally obtained revenue through sales at

book stores and advertising. Recruit adopted reverse thinking and conceived a

business greatly increasing advertizing revenue by increasing the number of copies

distributed as a free paper. Similarly, resources believed to have no value may

create value when combined with other resources. I recommend drawing up as

many business designs as possible by fully mobilizing reverse thinking in six

directions.

The third step is performing business design to match the reversed element. In

this step, it is important to boldly paint the ideal form without being shackled by

feasibility. This makes it possible to clearly identify bottlenecks preventing

realization. In Xerox’s case, the problem was that the price of copying machines

would increase sixfold if high-quality copying machines using xerography were

provided. In Canon’s case, it was realized that it would be necessary to increase

quality tenfold and reduce price to one tenth in order to deal with small-medium

businesses and individual users. There are obstacles to overcome in order to realize

the ideal business.

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Fig. 3 A Proposal through Reverse Thinking

The fourth step involves constructively eliminating bottlenecks and

inconsistencies that have become evident. The important thing in this step is to not

give up easily. To begin with, launching a business that does not already exist

requires some degree of innovation. If anyone could do it, a rival would already be

running that business. In Xerox’s case, the company eliminated the bottleneck it

faced with the idea of leasing copying machines and adopting metered billing. In

Canon’s case, the problem was resolved with the idea of making the most important

drum section a disposable cartridge. If many business designs are drawn up, one of

them may eliminate a bottleneck.

The four steps above can be represented in the figure below. This procedure is

based upon Hegelian dialectic. That is, it is based on a method of knowledge

creation in which the dominant business system is the Thesis, its reverse thinking is

the Antithesis, and the inconsistencies that occur are overcome (aufheben). Not

everybody can easily come up with ideas, but there are techniques for proposing

unique businesses. If the “views” that form the basic assumptions of a business can

be drawn out, dialectic is easier than one might expect.

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7. Conclusion

Any company will value good customers that make large purchases providing

large margins. The creation of business mechanisms and accumulating resources

that exactly match their needs are rational strategies. However, there are also risks

involved when polishing operations focused on responding to the needs of

immediate customers. The business may mature and taper off. Alternatively, the

provision of more products and services than are required could detract from

profitability (when you think about it, a hungry person will pay enough money

when provided with food, but a person who is already full will not go to the trouble

of paying for a meal). It is only natural to listen to customers' needs and make an

effort to respond to them, but going too far can be a problem.

Even if this is realized and an attempt is made to change a business mechanism,

this may not be easy. Once the optimal mechanism for a customer is created, it is

difficult to change. In particular, greater success behind the business makes it more

difficult to innovate through self-denial. This is because the way basic things are

seen (the business paradigm) is different.

This provides a chink for rivals to exploit. It makes it easier to launch an

opposing business to the existing business. The reason for this is that it is difficult

for the original company to imitate a business if it is the opposite of its own.

Completely different management resources and operations are required, and this

may create inconsistencies with the business currently being operated. If the new

business based on reverse thinking is a substitute for the current business, the

existing market will be destroyed.

Looking at the history of the development of many industries, this is the reason

they have developed in a process where a market is created, followed by its reverse,

and then the reverse of that. At any rate, if history is repeating itself according to

this logic, business should be designed using this logic as an assumption. These

teaching materials were created with this idea in mind. Its effectiveness has been

proven in seminars and corporate training conducted in the past. I hope analysis

does not end in analysis, but is used as a tool for linking to proposals for tomorrow.

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References

Yaichi Aoshima and Toshihiko Kato (2003) Competitive Strategy, Tokyo: Toyokeizai

Publishing Company. (Written in Japanese)

Adam M. Brandenburger and Barry J. Nalebuff (1997) Co-opetition, Crown Business.

Henry Chesbrough (2003) Open Innovation, Harvard Business School Press.

Clayton M. Christensen (1997) The Innovator’s Dilemma, Harbard Business School

Press.

Tatsuhiko Inoue (eds.) (2006) The Logic of Profit Engine: Business Model Designing to

Capture the Value from Technological Innovation, Tokyo: Hakuto-Shobo

Publishing Company. (Written in Japanese)

Tadao Kagono, T. (1989) Organizational Epistemology, Chikura Publishing Company.

(Written in Japanese)

Chan Kim and Renee Mauborgne (2005) Blue Ocean Strategy, Harvard Business

School Pess.

Ikujiro Nonaka (1985) Corporate Evolution, Nihonkeizai Shinbunsya. (Written in

Japanese)

Kiyonori Sakakibara (2005) Profiting from Technological Innovations, Yuhikaku

Publishing Co. Ltd. (Written in Japanese)

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