Abdm4223 lecture week 4 250512 part 1

From Business Model to From Business Model to Strategic PlanStrategic Plan :

Part 1 : Business Model

From Business Model to From Business Model to Strategic PlanStrategic Plan :

Part 1 : Business Model

ABDM4233 ENTREPRENEURSHIPABDM4233 ENTREPRENEURSHIP

byStephen OngStephen Ong

Principal Lecturer (Specialist)Principal Lecturer (Specialist)Visiting Professor, Shenzhen UniversityVisiting Professor, Shenzhen University

The social enterprise Mission The social enterprise Mission statementstatement

It should be clear and succinct It should be clear and succinct It should explain:It should explain:

What the enterprise will doWhat the enterprise will do How it is entrepreneurialHow it is entrepreneurial Why it is importantWhy it is important

This should occur before planning This should occur before planning activitiesactivities A mission statement has goals and A mission statement has goals and

measures of progress towards goalmeasures of progress towards goal

EMBRACEEMBRACE VISION : VISION : Every woman and

child has an equal chance for a healthy life.

MISSION : MISSION : Advancing Maternal Advancing Maternal and Child Healthand Child Health

… … by providing by providing innovative innovative solutionssolutions to the world's most to the world's most

vulnerable populationsvulnerable populations

What a mission statement What a mission statement should specifyshould specify

What the enterprise will and will not doWhat the enterprise will and will not do How it creates and measures valueHow it creates and measures value How an enterprise innovates or adaptsHow an enterprise innovates or adapts How success will be measuredHow success will be measured

$80 for 15cents$80 for 15cents

… … Keep it to 3 WordsKeep it to 3 Words

MISSIONMISSION

NIKE 2012NIKE 2012 3 KEY WORDS3 KEY WORDSINSPIRATIONINSPIRATIONINNOVATIONINNOVATIONATHLETEATHLETE

One Laptop per ChildOne Laptop per Child

http://one.laptop.orghttp://one.laptop.org MISSIONMISSION

To To empowerempower the world's the world's

poorest poorest children children through through

educationeducation

We aim to We aim to provide each provide each child with a child with a rugged, low-cost, rugged, low-cost, low-power, low-power, connected connected laptop.laptop.

Benefits of a good mission Benefits of a good mission statementstatement

It provides focusIt provides focus Social entrepreneurs can stay on target as Social entrepreneurs can stay on target as

they develop the conceptthey develop the concept It helps to attract supportIt helps to attract support

As a marketing tool, it brings other As a marketing tool, it brings other resources into the enterpriseresources into the enterprise

For example, volunteers, donors, partnersFor example, volunteers, donors, partners

From social mission to business From social mission to business modelmodel

Business model – a plan for how Business model – a plan for how the mission will be achieved and the mission will be achieved and how the enterprise will create valuehow the enterprise will create value

A general description of how the A general description of how the enterprise will operate:enterprise will operate: Its missionIts mission Its strategic resourcesIts strategic resources Its partnersIts partners How it will serve its beneficiariesHow it will serve its beneficiaries

Business model for Business model for EMBRACEEMBRACE

Threats to business modelsThreats to business models

Demand side threatsDemand side threats A product or service that finds no A product or service that finds no

market – people don’t want itmarket – people don’t want it Its value is not accepted by clientsIts value is not accepted by clients

Supply side threatsSupply side threats Too much capital needed, or too Too much capital needed, or too

much ongoing cost to sustain itselfmuch ongoing cost to sustain itself Either threat can derail an enterpriseEither threat can derail an enterprise

Many social enterprises failMany social enterprises fail

Persistent lack of income is a common Persistent lack of income is a common reasonreason

A supply explanation would be that A supply explanation would be that costs are too highcosts are too high

A demand explanation would be that A demand explanation would be that revenues are too lowrevenues are too low

Both flaws can be examined in the Both flaws can be examined in the business modelbusiness model

What is a Business Model?What is a Business Model?

ModelModel A model is a plan or diagram that’s used to make or A model is a plan or diagram that’s used to make or

describe something.describe something. Business ModelBusiness Model

A firm’s business model is its plan or diagram for how it A firm’s business model is its plan or diagram for how it competes, uses its resources, structures its relationships, competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain interfaces with customers, and creates value to sustain itself on the basis of the profits it generates.itself on the basis of the profits it generates.

The term “business model” is used to include all the The term “business model” is used to include all the activities that define how a firm competes in the activities that define how a firm competes in the marketplace.marketplace.

Changing Business ModelsChanging Business Models

Dell’s Business ModelDell’s Business Model1 of 21 of 2

Beyond Its Own BoundariesBeyond Its Own Boundaries It’s important to understand that a firm’s business It’s important to understand that a firm’s business

model takes it beyond its own boundaries.model takes it beyond its own boundaries. Almost all firms partner with others to make their Almost all firms partner with others to make their

business models work.business models work. In Dell’s case, it needs the cooperation of its suppliers, In Dell’s case, it needs the cooperation of its suppliers,

customers, and many others to make its business model customers, and many others to make its business model work.work.

Dell’s Business ModelDell’s Business Model2 of 22 of 2

Dell’s Approach to Selling PCs versus Traditional Manufacturers

The Importance of Business ModelsThe Importance of Business Models

Having a clearly articulated business model is important because it does the following:

• Serves as an ongoing extension of feasibility analysis. A business model continually asks the question, “Does this business make sense?”• Focuses attention on how all the elements of a business fit together and constitute a working whole.• Describes why the network of participants needed to make a business idea viable are willing to work together.• Articulates a company’s core logic to all stakeholders, including the firm’s employees.

Diversity of Business ModelsDiversity of Business Models

Diversity or Variety in

Business Models

• There is no standard business model for an industry or for a target market within an industry. • However, over time, the most successful business models in an industry predominate.• There are always opportunities for business model innovation.

How Business Models Emerge How Business Models Emerge 1 of 31 of 3

The Value ChainThe Value Chain The value chain is the string of activities that moves a The value chain is the string of activities that moves a

product from the raw material stage, through product from the raw material stage, through manufacturing and distribution, and ultimately to the manufacturing and distribution, and ultimately to the end user.end user.

By studying a product’s or service’s value chain, an By studying a product’s or service’s value chain, an organization can identify ways to create additional organization can identify ways to create additional value and assess whether it has the means to do so.value and assess whether it has the means to do so.

Value chain analysis is also helpful in identifying Value chain analysis is also helpful in identifying opportunities for new businesses and in understanding opportunities for new businesses and in understanding how business models emerge.how business models emerge.


The Value Chain


The Value Chain (continued)The Value Chain (continued) Entrepreneurs look at the value chain of a product or a Entrepreneurs look at the value chain of a product or a

service to pinpoint where the value chain can be made service to pinpoint where the value chain can be made more effective or to spot where additional “value” can more effective or to spot where additional “value” can be added.be added.

This type of analysis may focus on:This type of analysis may focus on: A single primary activity such as marketing and sales.A single primary activity such as marketing and sales. The interface between one stage of the value chain and The interface between one stage of the value chain and

another, such as the interface between operations and outgoing another, such as the interface between operations and outgoing logistics.logistics.

One of the support activities, such as human resource One of the support activities, such as human resource management.management.

Potential Fatal Flaws in Business ModelsPotential Fatal Flaws in Business Models

Fatal FlawsFatal Flaws Two fatal flaws can render a business model untenable Two fatal flaws can render a business model untenable

from the beginning:from the beginning: A complete misread of the customerA complete misread of the customer Utterly unsound economicsUtterly unsound economics

““JOBS to be Done”JOBS to be Done” Video :“What JOB does a Milkshake Do?”Video :“What JOB does a Milkshake Do?” Prof. Clayton M. Christensen, Prof. Clayton M. Christensen, Harvard Business SchoolHarvard Business School

Osterwalder’s Business ModelOsterwalder’s Business Model

http://www.businessmodelgeneration.com/canvas

9 Components of Business Model 9 Components of Business Model (Osterwalder 2010)(Osterwalder 2010)

1.1. Customer Customer SegmentsSegments

2.2. Value Value PropositionsPropositions

3.3. Customer Customer RelationshipsRelationships

4.4. ChannelsChannels

5.5. Key ActivitiesKey Activities

6.6. Key ResourcesKey Resources

7.7. Key PartnersKey Partners

8.8. Revenue StreamRevenue Stream

9.9. Cost StructureCost Structure

1. Customer Segments1. Customer Segments For whom are we For whom are we

creating value?creating value? Who are our most Who are our most

important important customers?customers?

Mass Market/ Niche Mass Market/ Niche Market/ Segmented/ Market/ Segmented/ Diversified/ Multi-sided Diversified/ Multi-sided PlatformPlatform

What are JOBS to What are JOBS to be done?be done?

Customer Gains?Customer Gains?

Customer Pain?Customer Pain?

2. Value Propositions2. Value Propositions

What value do we deliver What value do we deliver to the customer?to the customer?

Which one of our Which one of our customer’s problems are customer’s problems are we helping to solve?we helping to solve?

What bundles of products What bundles of products and services are we and services are we offering to each Customer offering to each Customer Segment?Segment?

Which customer needs Which customer needs are we satisfying?are we satisfying?

Get the JOBS done?Get the JOBS done?

characteristicscharacteristicsNewnessNewnessPerformancePerformanceCustomizationCustomization““Getting the Job Done”Getting the Job Done”DesignDesignBrand/StatusBrand/StatusPricePriceCost ReductionCost ReductionRisk ReductionRisk ReductionAccessibilityAccessibilityConvenience/UsabilityConvenience/Usability

Gain creators?Gain creators? Pain relievers?Pain relievers?

3. Customer Relationships3. Customer Relationships

What type of relationship What type of relationship does each of our does each of our Customer Segments Customer Segments expect us to establish and expect us to establish and maintain with them?maintain with them?

Which ones have we Which ones have we established?established?

How are they integrated How are they integrated with the rest of our with the rest of our business model?business model?

How costly are they?How costly are they?

ExamplesExamplesPersonal assistancePersonal assistanceDedicated Personal Dedicated Personal AssistanceAssistanceSelf-ServiceSelf-ServiceAutomated ServicesAutomated ServicesCommunitiesCommunitiesCo-creationCo-creation

4. Channels4. Channels Through which Channels do Through which Channels do

our Customer Segments our Customer Segments want to be reached?want to be reached?

How are we reaching them How are we reaching them now?now?

How are our Channels How are our Channels integrated?integrated?

Which ones work best?Which ones work best? Which ones are most cost-Which ones are most cost-

efficient?efficient? How are we integrating them How are we integrating them

with customer routines?with customer routines?

channel phases:channel phases:

11. Awareness : . Awareness : How do we How do we raise awareness about our raise awareness about our company’s products /services?company’s products /services?

2. 2. Evaluation :Evaluation : How do we help How do we help customers evaluate our customers evaluate our organization’s Value organization’s Value Proposition?Proposition?

3. 3. Purchase : Purchase : How do we allow How do we allow customers to purchase specific customers to purchase specific products/services?products/services?

44. Delivery : . Delivery : How do we deliver How do we deliver a Value Proposition to a Value Proposition to customers?customers?

5. 5. After sales : After sales : How do we How do we provide post-purchase provide post-purchase customer support?customer support?

5. Key Activities5. Key Activities

What Key Activities What Key Activities do our Value do our Value Propositions Propositions require?require?

Our Distribution Our Distribution Channels?Channels?

Customer Customer Relationships?Relationships?

Revenue streams?Revenue streams?

categoriescategoriesProductionProductionProblem SolvingProblem SolvingPlatform/NetworkPlatform/Network

6. Key Resources6. Key Resources

What Key What Key Resources do our Resources do our Value Propositions Value Propositions require?require?

Our Distribution Our Distribution Channels? Channels?

Customer Customer Relationships?Relationships?

Revenue Streams?Revenue Streams?

types of resourcestypes of resourcesPhysicalPhysicalIntellectual (brand Intellectual (brand patents, copyrights, patents, copyrights, data)data)HumanHumanFinancialFinancial

7. Key Partners7. Key Partners

Who are our Key Who are our Key Partners?Partners?

Who are our key Who are our key suppliers?suppliers?

Which Key Which Key Resources are we Resources are we acquiring from acquiring from partners?partners?

Which Key Activities Which Key Activities do partners perform?do partners perform?

motivations for motivations for partnerships:partnerships:Optimization and Optimization and economyeconomyReduction of risk and Reduction of risk and uncertaintyuncertaintyAcquisition of Acquisition of particular resources particular resources and activitiesand activities

8. Revenue Stream8. Revenue Stream For what value are our For what value are our

customers really willing to customers really willing to pay?pay?

For what do they currently For what do they currently pay?pay?

How are they currently How are they currently paying?paying?

How would they prefer to How would they prefer to pay?pay?

How much does each How much does each Revenue Stream contribute Revenue Stream contribute to overall revenues?to overall revenues?

types:types:Asset saleAsset saleUsage feeUsage feeSubscription FeesSubscription FeesLending/ Renting/ LeasingLending/ Renting/ LeasingLicensingLicensingBrokerage feesBrokerage feesAdvertisingAdvertising

fixed pricingfixed pricingList PriceList PriceProduct feature dependentProduct feature dependentCustomer segment dependentCustomer segment dependentVolume dependentVolume dependent

dynamic pricingdynamic pricingNegotiation (bargaining)Negotiation (bargaining)Yield ManagementYield ManagementReal-time-MarketReal-time-Market

9. Cost Structure9. Cost Structure What are the most What are the most

important costs important costs inherent in our inherent in our business model?business model?

Which Key Which Key Resources are most Resources are most expensive?expensive?

Which Key Activities Which Key Activities are most expensive?are most expensive?

is your business more:is your business more:Cost Driven Cost Driven (leanest cost (leanest cost structure, low price value structure, low price value proposition, maximum proposition, maximum automation, extensive automation, extensive outsourcing)outsourcing)Value Driven Value Driven ( focused on ( focused on value creation, premium value value creation, premium value proposition)proposition)

characteristics:characteristics:Fixed Costs (salaries, Fixed Costs (salaries, rents, utilities)rents, utilities)Variable costsVariable costsEconomies of scaleEconomies of scaleEconomies of scopeEconomies of scope

Business Model Test DriveBusiness Model Test Drive1.1. How much do How much do switching costs switching costs prevent your prevent your

customers from churning?customers from churning?

2.2. How How scalablescalable is your business model? is your business model?

3.3. Does your business model produce Does your business model produce recurring recurring revenues?revenues?

4.4. Do you Do you earnearn before you spend? before you spend?

5.5. How much do you get How much do you get others to do others to do the work?the work?

6.6. Does your business model provide built-in Does your business model provide built-in protection from competitionprotection from competition??

7.7. Is your business model based on a game Is your business model based on a game changing changing cost structurecost structure??

Business Model of FacebookBusiness Model of Facebook

Business Model of ZyngaBusiness Model of Zynga

Strategic Business Model Strategic Business Model (Barringer & Ireland 2012)(Barringer & Ireland 2012)

Four Components of the Business Model

Core StrategyCore Strategy1 of 31 of 3

Core StrategyCore Strategy The first component of a business model is the core The first component of a business model is the core

strategy, which describes how a firm competes relative strategy, which describes how a firm competes relative to its competitors.to its competitors.

Primary Elements of Core StrategyPrimary Elements of Core Strategy Mission statementMission statement Product/market scopeProduct/market scope Basis for differentiationBasis for differentiation


Primary Elements of Core Strategy

Mission Statement

Product/Market Scope

A company’s product/market scope defines the products and markets on

which it will concentrate.

A firm’s mission, or mission statement, describes why it exists

and what its business model is supposed to accomplish.


Primary Elements of Core Strategy

Basis of Differentiati

on

It is important that a new venture differentiate itself from its

competitors in some way that is important to its customers. If a new firm’s products or services aren’t different from those of its competitors, why should anyone

try them?

Strategic ResourcesStrategic Resources1 of 31 of 3

Strategic ResourcesStrategic Resources A firm is not able to implement a strategy without A firm is not able to implement a strategy without

resources, so the resources a firm has affect its business resources, so the resources a firm has affect its business model substantially.model substantially.

For a new venture, its strategic resources may initially be For a new venture, its strategic resources may initially be limited to the competencies of its founders, the opportunity limited to the competencies of its founders, the opportunity they have identified, and the unique way they plan to serve they have identified, and the unique way they plan to serve their market.their market.

The two most important strategic resources are:The two most important strategic resources are: A firm’s core competenciesA firm’s core competencies Strategic assetsStrategic assets


Primary Elements of Strategic Resources

Core Competenci

es

Strategic Assets

A core competency is a resource or capability that serves as a source of a

firm’s competitive advantage. Examples include Sony’s competence in

miniaturization and Dell’s competence in supply chain management.

Strategic assets are anything rare and valuable that a firm owns. They include plant and equipment, location, brands,

patents, customer data, a highly qualified staff, and distinctive

partnerships.


Importance of Strategic ResourcesImportance of Strategic Resources New ventures ultimately try to combine their core New ventures ultimately try to combine their core

competencies and strategic assets to create a sustainable competencies and strategic assets to create a sustainable competitive advantage.competitive advantage.

This factor is one that investors pay close attention to This factor is one that investors pay close attention to when evaluating a business. when evaluating a business.

A sustainable competitive advantage is achieved by A sustainable competitive advantage is achieved by implementing a value-creating strategy that is unique implementing a value-creating strategy that is unique and not easy to imitate.and not easy to imitate.

This type of advantage is achievable when a firm has This type of advantage is achievable when a firm has strategic resources and the ability to use them.strategic resources and the ability to use them.

Partnership NetworkPartnership Network1 of 31 of 3

Partnership NetworkPartnership Network A firm’s partnership network is the third component of A firm’s partnership network is the third component of

a business model. New ventures, in particular, typically a business model. New ventures, in particular, typically do not have the resources to perform key roles. do not have the resources to perform key roles.

In most cases, a business does not want to do everything In most cases, a business does not want to do everything itself because the majority of tasks needed to build a itself because the majority of tasks needed to build a product or deliver a service are not core to a company’s product or deliver a service are not core to a company’s competitive advantage.competitive advantage.

A firm’s partnership network includes:A firm’s partnership network includes: SuppliersSuppliers Other key relationshipsOther key relationships


Primary Elements of Partnership Network

Suppliers

Other Key Relationshi

ps

A supplier is a company that provides parts or services to another company.

Intel is Dell’s primary suppler for computer chips, for example.

Firms partner with other companies to make their business models work. An entrepreneur’s ability to launch a firm that achieves a competitive advantage may hinge as much on the skills of the partners as on the skills within the firm

itself.


The Most Common Types of Business Partnerships

Customer InterfaceCustomer Interface1 of 31 of 3

Customer InterfaceCustomer Interface The way a firm interacts with its customer hinges on The way a firm interacts with its customer hinges on

how it chooses to compete.how it chooses to compete. For example, Amazon.com sells books over the Internet while For example, Amazon.com sells books over the Internet while

Barnes & Noble sells through its traditional bookstores and Barnes & Noble sells through its traditional bookstores and online.online.

The three elements of a company’s customer interface The three elements of a company’s customer interface are:are:

Target customerTarget customer Fulfillment and supportFulfillment and support Pricing modelPricing model


Primary Elements of Customer Interface

Target Market

Fulfillment and

Support

A firm’s target market is the limited group of individuals or businesses that it

goes after or tries to appeal to.

Fulfillment and support describes the way a firm’s product or service reaches

its customers. It also refers to the channels a company uses and what level

of customer support it provides.


Primary Elements of Customer Interface

Pricing Structure

The third element of a company’s customer interface is its pricing structure. Pricing models vary,

depending on a firm’s target market and its pricing philosophy.

Recap: The Importance of Business Recap: The Importance of Business ModelsModels

Business ModelsBusiness Models It is very useful for a new venture to look at itself in a It is very useful for a new venture to look at itself in a

holistic manner and understand that it must construct holistic manner and understand that it must construct an effective “business model” to be successful. an effective “business model” to be successful.

Everyone that does business with a firm, from its Everyone that does business with a firm, from its customers to its partners, does so on a voluntary basis. customers to its partners, does so on a voluntary basis. As a result, a firm must motivate its customers and its As a result, a firm must motivate its customers and its partners to play along.partners to play along.

Close attention to each of the primary elements of a Close attention to each of the primary elements of a firm’s business model is essential for a new venture’s firm’s business model is essential for a new venture’s success.success.

Further ReadingFurther Reading Scarborough, Norman, M. 2011. Scarborough, Norman, M. 2011. Essentials of Essentials of

Entrepreneurship and Small Business Management.Entrepreneurship and Small Business Management. 6 6thth edition. Pearson. edition. Pearson.

Brooks, Arthur C. (2006) Brooks, Arthur C. (2006) Social Entrepreneurship : A Social Entrepreneurship : A Modern Approach to Social Value Creation. Pearson Modern Approach to Social Value Creation. Pearson

Barringer, Bruce R. & Ireland, R. Duane, 2011 Barringer, Bruce R. & Ireland, R. Duane, 2011 Entrepreneurship – Successfully launching new Entrepreneurship – Successfully launching new ventures ventures 44thth edition, Pearson. edition, Pearson.

Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011. Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011. Entrepreneurship and Small Business.Entrepreneurship and Small Business. 3 3rdrd Asia Pacific Asia Pacific edition. John Wiley.edition. John Wiley.

Osterwalder, A. & Piqneur,Y. 2011 Osterwalder, A. & Piqneur,Y. 2011 Business Model Business Model GenerationGeneration . Business Model Foundry. . Business Model Foundry.