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Business Fundamentals

16/09/19: Definition of a business model Is creating value for : -

STAKEHOLDERS  Customer  Stakeholders  Personnel  Society

A business model consist of 9 building block and the 4 main area are:    

Customers Products / Services Infrastructure Financial liability

1.

Customer Segments  An organization serves one or several customer segments : the different group of people or organization you want to reach.  Different customer segment if : - the needs of the clients justify a separate offer (value proposition) - the customers ask for a different distribution channel - the customers prefer a different kind of relationship - the profitability of the customer segments differs (20-80 rule) - the different customer segments are willing to pay a different price for additional services/features

Mass vs Niche Market Niche: Niche marketing focuses only on a specific product, It first identifies a specific segment and then makes a strategy according to the market need, habits and preferences. Mass: The mass marketing only targets a group of people, Its motto is a huge amount of sales at a low cost and providing all those kind of services which will appeal to everyone who is in the market as well as the customers. Customer segments −

Segmented Market

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Diversified customer business model serves two unrelated customer segments

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Multi-sided markets / platforms serves interdependent customer segments

Segmented markets have an impact on your other building blocks.

2.

Value Proposition  An organization seeks to solve customer problems and satisfy customer with value proposition.

OBSERVE – UNDERSTAND – DESIGN A great value proposition starts with a deep understanding of your customers. When the features of your value proposition map perfectly match the characteristics of your customer profile then you achieve fit and create value.  



Step 1: Identify/Define your customer segment – be clear as to which segment you would like to serve. Step 2: Observe and Understand your customer segment – CUSTOMER CENTRICITY is putting yourself in the customers shoes and understand the customer jobs, pains and gains. Step 3: DESIGN (Value Map) – The value map allows the business to describe how they intend to create value for that customer, it helps map out the products and services, pain relievers, and gain

creators.

Customer Profile -

describes a specific customer segment in your business model in a more structured/detailed way breaks the customer down into what they experience in terms of jobs, pains, gains. -

What functional jobs are you helping your customer get done? (i.e. specific tasks)

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What social jobs are you helping your customer get done? (e.g. trying to look good, get power or status)

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What emotional jobs are you helping your customer get done? (e.g. aesthetics, feel good, security, etc.

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What basic needs are you helping your customer to satisfy (e.g. communication, sex, etc.)

Value Map / Value Proposition -

describes the features of a specific value proposition in your business model in a more structured/detailed way breaks the value proposition down into products and services, pain relievers and gain creators

3.

Channels  The channels building block describes how a company communicates with and reaches it’s customer segments to deliver a value proposition. Finding the right mix of channels to satisfy how customers want to be reached is crucial in bringing a value proposition to the market  Value propositions are delivered to customers through communication, distribution, and sales Channels. - Communication channels - Distribution channels - Sales (and after sales) channels

Channel Types Own

Partner Indirect

Direct

Own and Direct channels – sales force (e.g. In-house sales force), web sales Own and Indirect channels – Own stores/retail stores operated by the organization Partner and Indirect channels – Partner stores and wholesalers – wholesale distribution, partner stores, partner- owned websites (e.g. Nike brand sold on Zalando or Zappos websites).

Channels have five distinct phases. Each channel can cover some or all of these phases: 1. 2. 3. 4. 5.

Awareness How do we raise awareness about our company’s products and services Evaluation How do we help customers evaluate our organization’s value proposition? Purchase How do we allow customers to purchase specific products and services? Delivery How do we deliver a value proposition to customers? After Sales How do we provide post-purchase customer support

Cost implications: Partner brands – lead to lower margins but the reach is wider and can benefit from partner strength Owned channels – could lead to higher margins but can be costly to manage.

4.

Customer Relationship  Customer relationships are established and maintained with each Customer Segment.  The types of relationships a company establishes with specific customer segments the purpose of establishing a customer relationship can be: - Acquiring customers - Boosting sales (upselling) - Customer retention

5.

Revenue Streams  The Revenue streams building block represents the cash a company generates from each customer segment ( Costs must be subtracted from revenue to create earnings)  Revenue streams result from value propositions successfully offered to customers. - For what value is a customer really willing to pay? - What are they currently paying? - How are they currently paying? - How would they prefer to pay? - How much does each revenue stream contribute to overall revenues?

Each Revenue stream might have different pricing mechanism. The type of pricing mechanism chosen can make a big difference in terms of revenue generated. There are two main types of pricing mechanism. Pricing Mechanisms  

Fixed Pricing (are predefined prices are based on static values) typical for commodities – energy and other basic commodities – it makes prices more stable Dynamic Pricing (prices change based on market conditions) e.g. Bargaining and auctioning. Also typical for online hotel booking and airline tickets aka “yield management”, real-time market (e.g. Stocks in the stock market)

Revenue STREAMS can be divided into two categories  

Transaction revenues - earned from the customer making a one-time payment for the product or a rendering of a service. Recurring revenues - earned from consistent ongoing payments rendered to the company for either the delivery of the value proposition of after sales care for the customer.

There are several ways to generate Revenue Streams: 1. 2.

3. 4.

5.

6.

7.

Asset sale Selling ownerships rights to a physical product. Usage Fee Generated by the use of a particular service. The more a service is used, The more the customer pays ( A hotel charges customers for the number of nights rooms are used) Subscription Fees Generated by selling continuous to a service (BasicFits) Lending/ Renting/ Leasing Created by temporarily granting someone the exclusive rights to use a particular asset for a fixed period in return for a Fee Licensing Giving customers permission to use protected intellectual property in exchange for licensing fees. This is common in the media industry Brokerage fees Derives from intermediation services performed on behalf of two or more parties. (Credit card providers) Advertising Results from fees for advertising a particular product, service or brand

6.

Key Resources  The key resources building block describes the most important assets required to make a business model work.  These resources allow an enterprise to create and offer a value proposition, reach markets, maintain relationships with customer segments, and earn revenues.  Key resources can be physical, financial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners.

7.

Key Activities  Every business model calls for a number of key activities. These are the are the most important actions a company must take to operate successfully.  The key activities building block describes the most important things a company must do to make its business model work  What key activities do value proposition require ?  Production - These activities relate to designing, making, and delivering a product in substantial quantities and/or of superior quality  Problem solving - Key activities of this type relate to coming up with new solutions to individual customers problems  Platform/ network - Networks, matchmaking platforms, software, and even brands can functions as a platform 8. Key partnerships  The key partnerships building block describes the network of suppliers and partners that make the business model work  Companies create alliances to optimize their business models, reduce risk or acquire resources  We can distinguish between four different types of partnership - Strategic alliances between non-competitors - Coopetition: strategic partnerships between competitors - Joint ventures to develop new businesses - Buyer- supplier relationships to assure reliable

It can be useful to distinguish between three motivations for creating partnerships Optimization and economy of scale -

The most basic form of partnership or buyer- supplier relationship is designed to optimize the allocation of recourses and activities. Optimization and economy of scale partnerships are usually formed to reduce costs, and often involve outsourcing or sharing infrastructure

Reduction of risk and uncertainty -

It’s not unusual for competitors to form a strategic alliance in one are while competing in another.

Acquisition of particular resources and activities -

Few companies own all the resources or perform all activities described by their business models

9. Cost structure  The cost structure describes all costs incurred to operate a business model  Creating and delivering value, maintaining customer relationships, and generating revenue all incur costs. It can be useful to distinguish between two broad classes of business model cost structures: Cost driven -

Cost- driven business models focus on minimizing costs wherever possible. This approach aims at creating and maintaining the leanest possible cost structure, using low price value propositions, maximum automation, and extensive outsourcing.

Value driven -

Some companies are less concerned with the cost implications of a particular business model design, and instead focus on value creation. Luxury hotels, with their lavish facilities and exclusive services, fall into this services

Cost structure can have the following characteristics: Fixed cost -

Cost that remain the same despite the volume of goods or services despite the volume of goods or services produced. Examples include salaries, rents, and physical manufacturing facilities.

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Costs that vary proportionally with the volume of good or services produced. Some businesses such as music festivals, are characterized by high proportion of variable costs.

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Cost advantages that a business enjoys as its output expands. Larger companies, for instance benefit from lower bulk purchase rates.

Variable cost

Economies of scale

Economies of scope -

Cost advantages that a business enjoy as it its output due to a larger scope of operation

Pattern Pattern means similarities in... 

characteristics

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arrangements of business model Building Blocks

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behaviours

Unbundling business models  The concept of the ‘’unbundled’’ corporation holds that there are three fundamentally different types of businesses: Customer relationships businesses, product innovation businesses, and infrastructure businesses.  Each type has different economic, competitive, and cultural imperatives.  The three types may co-exist within a single corporation, but ideally they are ‘’ unbundled ‘’ into separate entities in order to avoid conflicts or undesirable trade-offs.

Three core business types Product innovation Economics

Early market entry enables charging premium prices and acquiring large market space; speed is key

Competition

Battle for talent; low barriers to entry; many small player thrive Employee centered; coddling the creative stars

Culture

Customer relationship management High cost of customer acquisition makes it imperative to gain large wallet share; economies of scope are key Battle for scope; rapid consolidation; a few big players dominate

Infrastructure management High fixed costs make large volumes essentials to achieve low unit costs; economies scale are key Battle for scale; rapid consolidation; a few big players dominate

Highly service oriented; customers comes- first mentality

Cost focused; stresses standardization, predictability, and efficiency

The long tail  Long tail business model are about selling less of more: they focus on offering a large number of niche products, each of which sells relatively infrequently

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Aggregate sales if niche items can be as lucrative as the traditional model whereby a small number of bestsellers account for most revenues. Long tail business models require low inventory costs and strong platforms to make niche content readily available to interested buyers. Long tail focus on a large number of products , each selling in low volumes.

Multi sides platforms  Multi- sides platforms brings together two or more distinct but interdependent groups of customers.  Such platforms are of value to one group of customers only if the other groups of customers are also present.  The platform creates value by facilitating interactions between the different groups.  A multi- sided platform grows in value to the extent that it attracts more users, a phenomenon known as the network effect. What exactly are multi-sided platforms? They are platform that bring together two or more distinct but interdependent groups of customers. They create value as intermediaries by connecting these groups. Credit cards, for example, link merchants with cardholders; computer operating system link hardware manufacturers, application developers, and users; newspapers link readers and advertisers; video gaming consoles link game developers with players.

Free as a business model  Free   

In the free business model at least one substantial customer segment is able to continuously benefit from a free – of- charge offer Different patterns make the free offer possible. Non- paying customers are financed by another part of the business model or by another customer segment.

VARIANT: BAIT AND HOOK  An attractive, inexpensive, or free initial offer that encourages continuing future purchases of related products or services’ •

a subsidized initial offer

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‘lock’in

Open business models  Can be used by companies to create and capture value by systematically collaborating with outside partners.  This may happen from the ‘’outside-in’’ by exploiting external ideas within the firm, or the ‘’inside-out’’ by providing external parties with ideas or assets lying idle within the firm.

Context

Challenge Solution

Rational

Examples

Unbundling business

The long tail

An integrated model combines infrastructure management, product innovation and customer relationship under 1 roof Costs are too high, several conflicting organization cultures are combined in a single entity, The business is bundled into three separate but complementary models dealing with infrastructure, product innovation, customer relationship

The value proposition targets only the most profitable clients.

IT and management tool improvement allow separating and coordinating different business models at lower cost, thus eliminating undesirable trade offs Private banking, Mobile Telco

IT and operations management improvements allow delivering tailored value propositions to a very large number of new customer at low cost.

Targeting less profitable segments with specific value propositions is too costly The new or additional value proposition targets a marge number of historically less profitable, niche customer segments—which in aggregate are profitable.

LuLu.com, LEGO

Multi- sided platform

Free as a business model

Open business model

One value proposition targets one customer segment.

A high-value, highcost value proposition is offer to paying customers only

Enterprise fails to acquire potential new customers who are interested in gaining access to a company’s existing customer base A value proposition ‘’giving

The high price dissuades customer.

R&D Resources and key activities are concentrated in-house -Ideas are invented ‘’inside’’ only - results are exploited ‘’ inside’’ only R&D is costly and/ or productivity is falling.

Several value

Internal R&D resources

access’’ to a company ‘s existing customer segment is added.

An intermediary operating a platform between two or more customer segments adds Revenue stream to the initial model.

Google, Video game consoles from Apple, Nintendo, Sony Microsoft

propositions are offered to different customer segment with different revenue streams, one of them being freeof-charge ( or very low cost) Non-paying customers segments are subsidized by paying customers in order to attract the maximum number of users. Metro, Flickr, Open source, Red hat, Skype, Gillette

and activities are leveraged by utilizing outside partners. Internal R&D results are transformed into a value Proposition and offered to interested customer segments. Acquiring R&D from external sources can be less expensive, resulting In faster time-to-market. Unexploited innovations have the potential to bring in more revenue when sold outside. Procter & gamble, GlaxoSmithKline, Innocentive.

BLUE OCEAN STRATEGY and BUSINESS MODEL CANVAS  Blue ocean strategy is about creating completely new industries through fundamentals differentiation as opposed to competing in existing industries by tweaking established models. Blue ocean matrix •

ELIMINATE Which factors can you eliminate that your industry has long competed on?

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REDUCE Which factors should be reduced well below the industry’s standard?

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RAISE Which factors should be raised well above the industry’s standard?

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CREATE Which factors has the industry never offered, should be created?

Blue ocean – Value innovation

Simultaneously adding value while reducing costs

BLUE OCEAN STRATEGY •

Two ways to create blue oceans  Launch completely new industries (f.e. eBay with online auctions)  Much more common : −

A blue ocean created from within a red ocean

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How? when a company expands the boundaries of an existing industry

BLENDING BLUE OCEAN STRATEGY AND BUSINESS MODEL CANVAS 1. CUSTOMER SEGMENT PERSPECTIVE -

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Target ...