Strategy, Business Model


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  • Last week tried to get you to think about who might want the product or service you provide -- and how you might serve them. This week, I will try to help you learn some concepts and tools that will help you think about the competitive context in which you will operate. I want to talk about the industry, the environment in which the industry operates, the structure of the industry itself, and your actual competitors… Next week, we will turn to strategy and business models...
  • We’re in the midst of working on the context of your business -- on the environment, industry, competition -- on what the world gives you to work with. Before this we looked a little at what you bring to the table: your vision, skills, idea, networks. The next step is to combine the two. To take stock of what the world offers and what you bring and to fit them together into a strategy in which you use your strengths to take advantage of opportunities, shore up weaknesses, stave off threats, etc. Your strategy is summarized as a business model -- the gist of your plan to take advantage of an opportunity. This is the heart of your plan. Once you have the model, it’s a matter of working out the details of how you will implement the model. And then reassuring the investors that you’ve thought through the risks.
  • By now you should have a pretty good picture of Customers – who are, how organized, what problem product solves for them, what else they see, how to reach ‘em…thus value proposition Industry space – rules and drivers, competitors and how they operate, space that is left…thus a position Goal of strategy is: Goal: Articulate and DELIVER long-term, defensible offer of unique value to customers…
  • What is strategic management? Disciplined process Fed by scanning – like you just did Anchored by mission Pulled by vision Built on resources Shaped by external and competitive forces REQUIRES constant attention…
  • When develop strategy, develop lot of things…here is checklist Vision… Value prop (done…will do more) Position or direction (depending on change) Structure or resource base (always both but which emphasize depends on change) Revenue model – cf Sid and future…gotta see and realize value concretely Timelines or guidelins – timing matters (see later) FIT – most important, pieces have to fit together and reinforce, esp when small
  • Company A provides a new-generation process historian that helps pharmaceutical and other batch process firms prevent bad batches by analyzing and adjusting batches in real time. Because each batch can cost between $250,000 and $1 million, the $100,000 cost of A-RS will be paid off within a year. As important, because A-RS is fully compliant with regulation xyz, it provides a cost-effective, painless way to fulfill companies’ reporting requirements. “A-RS is the only product we found that truly fulfills the FDA’s requirement for paperless reporting and record-keeping without any additional programming or work-arounds.” Alan A, GSK.
  • Example: Riskforce…Active preparation for risk management…concrete and specific…per company (maybe not wider yet) Two-ten…control dental…
  • 27 2 kinds of strategy
  • 27
  • 27 More systematic way of looking for a niche…elaboration of funnel….kind of OTSW analysis, and then some….
  • 14 Automsoft example… SO-low-end historian WT-weak CEO, threat from size of market + competitors…so remove CEO ST – CEO + tech…reposition to turn size market to opportunity, keep edge on competitors WO – still no money, small staff…so marketing mind share: white papers, industry standards group (with CEOs) Captive insurance example W & T: Loss of 65% of business…owner/managers hurting… big firms 50,000 vs their 200 S: Sales, experience, location (Cayman & Bahama), desperation, IT Min W by saying: No DIS economies of scale…3 vs 12, very focused (one industry – oil and gas) Emphasize S: owners vs peons, fun to do business with (parties), edgy & aggressive + built IT support to deliver Attack T – in very specific way: one vertical, focused product, as good as cheap, better service and attention Opportunity…growth! Suisse Re…
  • Get into this in two weeks as push strategy… Consulting group example… Thought it was thought leader…analysis showed that it was on intimacy/operational effectiveness border…and should focus on operational effectiveness…using intimacy (from main consulting), using others inventions to produce semi-automatic change management consulting tools...
  • Get into this in two weeks as push strategy… Consulting group example… Thought it was thought leader…analysis showed that it was on intimacy/operational effectiveness border…and should focus on operational effectiveness…using intimacy (from main consulting), using others inventions to produce semi-automatic change management consulting tools...
  • Get into this in two weeks as push strategy… Consulting group example… Thought it was thought leader…analysis showed that it was on intimacy/operational effectiveness border…and should focus on operational effectiveness…using intimacy (from main consulting), using others inventions to produce semi-automatic change management consulting tools...
  • Lead with product? Cost? Focus? Value proposition? Thought it was thought leader…analysis showed that it was on intimacy/operational effectiveness border…and should focus on operational effectiveness…using intimacy (from main consulting), using others inventions to produce semi-automatic change management consulting tools...
  • Entrepreneurs have one distinct advantage: the ability to build to suit…The philosophy is that of tai chi – listening so carefully, balanced so well, that 4 ounces of pressure sends an opponent sprawling… Examples: OCS – electrical engineer + electronic music + macintosh subculture. Early warehouse scene and culture. Garage to high-end with marketing clout to Shockwave. Dollar Express – Big format, careful locations, small HQ to control buying and costs, decentralized customer service: Youthbuild. Visionary + nerd + street boy + construction head. Nonprofit + school + charter + HUD. Teacher/ caseworker/foreman teams in 4 pods of 100.
  • The steps to building a business model
  • The steps to building a business model
  • Strategy, Business Model

    1. 1. Strategy, Business Model & Business Plan IEI Business Plan Workshops TL Hill tl.hill 215-204-3079
    2. 2. Business plan workshops <ul><li>Idea Creation and Opportunity Assessment </li></ul><ul><ul><li>- February 2 </li></ul></ul><ul><li>Matching Products and Services with Markets </li></ul><ul><ul><li>February 9 </li></ul></ul><ul><li>Competitive Analysis </li></ul><ul><ul><li>February 16 </li></ul></ul><ul><li>Strategy & Business Model </li></ul><ul><ul><li>February 23 </li></ul></ul><ul><li>Marketing and Sales Strategies </li></ul><ul><ul><li>March 2 </li></ul></ul><ul><li>Management & Ownership </li></ul><ul><ul><li>March 16 </li></ul></ul><ul><li>Financial Projections and Funding Strategies </li></ul><ul><ul><li>March 23 </li></ul></ul><ul><li>Professional Presentations </li></ul><ul><ul><li>March 30 </li></ul></ul>
    3. 3. Business plan outline <ul><li>Executive Summary </li></ul><ul><li>Company Description </li></ul><ul><ul><li>Including product/service & technology/core knowledge </li></ul></ul><ul><li>Industry Analysis & Trends </li></ul><ul><li>Target Market </li></ul><ul><li>Competition </li></ul><ul><li>Strategy/Business Model </li></ul><ul><li>Marketing and Sales Plan </li></ul><ul><li>Production/Operations Plan </li></ul><ul><li>Technology Plan </li></ul><ul><li>Management & Organization </li></ul><ul><li>Social Responsibility </li></ul><ul><li>Development & Milestones </li></ul><ul><li>Financials </li></ul><ul><ul><li>Including Capital Requirements & Financial Statements </li></ul></ul><ul><li>Appendix </li></ul>
    4. 4. Strategy funnel Goal: Articulate and execute long-term, defensible offer of unique value to customers Customer & Benefits Competitive Dynamics Competitive Space Segment,Size Channels Strategic Positioning Value Proposition Industry Structure Environmental Trends Industry Market Perceptual Space
    5. 5. Strategic management Vision <ul><li>Disciplined, iterative process of driving towards vision, by finding or making and maintaining a defensible space or trajectory in a given business environment. </li></ul>Environmental Scanning Evaluation & Control Strategy Implementation Strategy Formulation Mission
    6. 6. Strategy checklist <ul><li>Vision </li></ul><ul><li>Value proposition </li></ul><ul><li>Position or direction </li></ul><ul><ul><li>Structure or resource base </li></ul></ul><ul><li>Revenue & business model </li></ul><ul><li>Timeline or guidelines </li></ul><ul><li>Fit </li></ul>
    7. 7. Value proposition <ul><li>Specific, concrete offer of benefits </li></ul><ul><ul><li>Price, quality, convenience, choice, cost-savings, reliability, etc </li></ul></ul><ul><li>To precisely defined customers </li></ul><ul><ul><li>Who recognize that the offer solves a problem for the </li></ul></ul>
    8. 8. Vision <ul><li>Stable core </li></ul><ul><ul><li>Mission: Central audience + core product/service </li></ul></ul><ul><ul><li>Ideology: Values, principles, culture </li></ul></ul><ul><li>Focused ambition </li></ul><ul><ul><li>Concrete picture of successful impact </li></ul></ul><ul><ul><li>Serious, scary stretch goals </li></ul></ul><ul><ul><li>Disciplined experimentation </li></ul></ul>
    9. 9. Value & Vision exercise <ul><li>Stable core </li></ul><ul><ul><li>Mission: </li></ul></ul><ul><ul><li>Ideology: </li></ul></ul><ul><li>Focused ambition </li></ul><ul><ul><li>What success will look like: </li></ul></ul><ul><ul><li>One audacious goal: </li></ul></ul><ul><li>Value proposition: </li></ul><ul><ul><li>Concrete offer tailored to key customers: </li></ul></ul>
    10. 10. Position or navigation? <ul><li>Position Strategies </li></ul><ul><ul><li>Unique, valuable, defensible position in a market or industry </li></ul></ul><ul><ul><li>Supported by a tightly integrated value chain / activity system </li></ul></ul><ul><ul><li>Good for relatively stable industries/markets </li></ul></ul><ul><li>Navigation Strategies </li></ul><ul><ul><li>Vision-driven nurturing and leveraging of core resources </li></ul></ul><ul><ul><li>Supported by tight culture and explicit learning </li></ul></ul><ul><ul><li>Good for dynamic industries/markets </li></ul></ul>
    11. 11. Strategic positions require niches External Opportunities & Threats Niche Internal Strengths & Weaknesses <ul><li>A niche is the market the firm is uniquely qualified to serve </li></ul><ul><li>And the unique way the firm serves that market </li></ul>
    12. 12. Strategic situation External Factors Internal Factors Possible Niches Resources (know-how, people, IP, vision, values, culture) Environmental opportunity: Social, political, regulatory, technological & community Industry-based opportunity (attractiveness, competitive dynamics) Market opportunity: Unmet customer needs & desires Firm- specific competitive advantages Unique and/or tailored products or services Strategic situation exercise
    13. 13. Strategy: Match SW to OT Strengths (S) Internal Factors External Factors Opportunities (O) SO Strategies ------------------------- WO Strategies ------------------------ Threats (T) ST Strategies -------------------------- WT Strategies ------------------------- Use strengths to avoid threats Min. weaknesses to avoid threats Use strengths to take advantage of opportunities Offset weaknesses to take advantage of opportunities Weaknesses (W )
    14. 14. Classic position strategies <ul><li>Cost (price) leadership </li></ul><ul><ul><li>Efficiency and scale </li></ul></ul><ul><li>Differentiation </li></ul><ul><ul><li>Quality, design, support/service, image -- that make a product or service special </li></ul></ul><ul><li>Focus </li></ul><ul><ul><li>Explicit tie to a broad or narrow market segment </li></ul></ul>
    15. 15. Examples <ul><li>Cost (price) leadership </li></ul><ul><ul><li>Crown, Cork & Seal (pennies, plants). </li></ul></ul><ul><ul><li>Motel 6 (location, services, salespeople). </li></ul></ul><ul><ul><li>Cintas (plants, logistics). </li></ul></ul><ul><li>Differentiation </li></ul><ul><ul><li>Quality (Mercedes) </li></ul></ul><ul><ul><li>Design (MacIntosh) </li></ul></ul><ul><ul><li>Service (Nordstrom). </li></ul></ul><ul><ul><li>Image (Nike). </li></ul></ul><ul><ul><li>Special niches (G&K clean rooms; Zitner’s candied apples; Prompt folding) </li></ul></ul>
    16. 16. Examples <ul><li>Focus </li></ul><ul><ul><li>Broad (Wal-Mart - rural) </li></ul></ul><ul><ul><li>Narrow (NSP - activists, NRI - network administrators) </li></ul></ul><ul><ul><li>Segmented (Becrypt – spooks and commerce, Glenmede – very rich, rich and in-between.) </li></ul></ul>
    17. 17. Elaborations <ul><li>Develop new markets (leverage expertise & networks) </li></ul><ul><ul><li>Bearing Point e-government. </li></ul></ul><ul><li>Elaborate products (leverage brand & market) </li></ul><ul><ul><li>Gillette. Intel. </li></ul></ul><ul><li>Become indispensable </li></ul><ul><ul><li>Microsoft & standards. Subcontractors & service. </li></ul></ul><ul><li>Fortify assets </li></ul><ul><ul><li>B&N’s leases. Patenting strategies. </li></ul></ul>
    18. 18. Value discipline positioning <ul><li>Product Leadership </li></ul><ul><li>(Differentiation) </li></ul><ul><li>Customer Intimacy </li></ul><ul><li>(Focus) </li></ul><ul><li>Operational Excellence </li></ul><ul><li>(Cost Leadership) </li></ul>
    19. 19. Value disciplines <ul><li>Product Leadership - Compete on Speed </li></ul><ul><li>Good design, great execution </li></ul><ul><li>Educate & lead the market </li></ul><ul><li>Ad hoc, risk oriented culture </li></ul><ul><li>Organization designed for innovation </li></ul><ul><li>Operational Excellence - Compete on Scale </li></ul><ul><li>Low price, limited options, ultimate convenience </li></ul><ul><li>Managed customer expectations </li></ul><ul><li>Measurement culture </li></ul><ul><li>Processes & transactions continually redesigned for efficiency </li></ul>
    20. 20. Value disciplines <ul><li>Customer Intimacy - Compete on Scope </li></ul><ul><li>Offerings tailored to customers & segments </li></ul><ul><li>Deep insight into customer needs </li></ul><ul><li>Problem solving service culture </li></ul><ul><li>Full range of services, so customers stay </li></ul><ul><li>Breakthrough thinking, unique solutions </li></ul>
    21. 21. Position strategy exercise 1. Choose a strategic focus 2. Revise your value proposition: The unique benefits your firm provides and to whom <ul><li>Product Leadership </li></ul><ul><li>(Differentiation) </li></ul><ul><li>Customer Intimacy </li></ul><ul><li>(Focus) </li></ul><ul><li>Operational Excellence </li></ul><ul><li>(Cost Leadership) </li></ul>
    22. 22. Fit : Entrepreneurial advantage <ul><li>Possibility of crafting a perfect fit between specific opportunities and internal capabilities </li></ul><ul><li>Fit refers to the integration of every part of firms’ internal structures to better serve a niche. </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Dollar Express vs Dollar Tree </li></ul></ul><ul><ul><li>Youthbuild vs School District </li></ul></ul><ul><ul><li>Giovanni’s Room vs Borders </li></ul></ul>
    23. 23. Value chain & fit <ul><li>A strong value chain is a cross-linked net of activities that affects the cost or performance of the whole. </li></ul><ul><li>Supporting a strategy by optimizing both individual functions and the links between them to support a strategy yields a powerful, durable, hard-to-duplicate advantage. </li></ul>Inbound Logistics Operations Outbound Logistics Marketing/ Sales After Sales Service Margin Technology Infrastructure Procurement Human Resources
    24. 24. Value chain for NSP Small but steady Technology: Desk-top, enterprise, email, web Editorial Newsletter Rights Production Printing Shipping In-house Library rate Sales: DM, Reps, Distributor Prepay Prepay disc. Green tax Infrastructure: Land trust, warehouse Financial: 501(c)3, friendly capital HR: Cooperative: multiple skills, networks, low-cost, apprenticeship Social Network: Audience, authors, rights, co-printing, Prompt
    25. 25. Activity system <ul><li>A less linear way of thinking about the internal fit that supports strategy. </li></ul><ul><li>Map crucially interrelated features and functions that define a firm’s unique skills and strategy. </li></ul><ul><li>Support competitive advantage with reinforcing patterns or systems. </li></ul>
    26. 26. Ikea’s Activity System Limited Customer Service Modular Designs Low Mfg Cost Self-service Selection Self-transport Limited sales staff Customer loyalty Self -assembly Suburban Location Most items in stock Design focused on low cost Explanatory labeling Easy transport Flat packing kits Wide variety Long-term suppliers Year-round stocking On-site inventory Impulse buying High-traffic store layout Easy to make
    27. 27. ECOPLANS Activity System Tight Team Proximity Technical Expertise Responsi-bility w/ authority Try & buy expertise Mgt trained together Mgt ties to gov’t/ customers Reduced travel costs Low overhead Partner Spin-offs Annual job in the wilds
    28. 28. Experience curve <ul><li>For positional strategies, experience is the ultimate source of advantage. </li></ul><ul><li>Experience fuels the tacit knowledge that drives productivity improvements, innovations, elaborations of strategy, etc </li></ul><ul><li>Successful firms are especially good at creating the social and institutional structures that support the shared development of such tacit knowledge </li></ul>
    29. 29. Fit exercise <ul><li>Draw the value chain for your firm </li></ul><ul><li>Note reinforcing (and jarring) pieces </li></ul><ul><li>Try to create more reinforcements </li></ul><ul><li>OR </li></ul><ul><li>Jot down functions and features </li></ul><ul><li>Look for patterns and connections </li></ul><ul><li>Try to crystallize patterns </li></ul>
    30. 30. <ul><li>A business model describes what a firm will do, and how , to build and capture wealth for stakeholders </li></ul><ul><li>Effective business models operationalize good strategies -- turning position and fit into wealth </li></ul>Business model
    31. 31. <ul><li>Build wealth: </li></ul><ul><ul><li>By efficiently (profitably) transforming inputs into something that customers value enough to pay for – again and again and again </li></ul></ul><ul><ul><li>By supporting growth </li></ul></ul><ul><li>Capture wealth: </li></ul><ul><ul><li>By siphoning off some of the accumulated wealth for stakeholders </li></ul></ul><ul><ul><li>And by developing recognizable value – strategic positions, know-how, customers, free cash flow, lifestyles, social impact – that can be captured </li></ul></ul>Effective business models build & capture wealth
    32. 32. <ul><li>About who matters </li></ul><ul><ul><li>Owners, investors, family, workers, community </li></ul></ul><ul><li>About what kind of wealth matters </li></ul><ul><ul><li>Financial capital, social capital, intellectual, cash, good life, rich family life, entrepreneurial impact, social impact </li></ul></ul><ul><li>About the strategy that will deliver the wealth that matters to the stakeholders that matter </li></ul><ul><li>About the structure that supports strategy </li></ul>Effective business models require hard choices
    33. 33. <ul><li>1. Describe the landscape: </li></ul><ul><ul><li>Porter + OT. </li></ul></ul><ul><ul><li>Environment, industry, and relevant trends. </li></ul></ul><ul><li>2. Paint in competitors: </li></ul><ul><ul><li>Competitor table. Perceptual maps. </li></ul></ul><ul><ul><li>What do you need to play? How do competitors compete? What opportunities exist? </li></ul></ul><ul><li>3. Identify strengths & weaknesses </li></ul><ul><ul><li>Vision, skills, core technologies </li></ul></ul>Business models start with what the world gives
    34. 34. <ul><li>4. Identify stakeholders you must serve </li></ul><ul><ul><li>Owners, family, workers, community </li></ul></ul><ul><li>5 . Identify the wealth you will capture </li></ul><ul><ul><li>Capital, good life, family life, fame entrepreneurial effectiveness, social value </li></ul></ul><ul><li>6 . Choose a position or approach </li></ul><ul><ul><li>And elaborate a strategy to realize this </li></ul></ul><ul><ul><li>Especially a revenue model </li></ul></ul>Business models are based on strategy
    35. 35. <ul><li>7 . Sketch a structure to operationalize the strategy </li></ul><ul><ul><li>Value chain, activity system, culture, simple rules </li></ul></ul><ul><li>8 . Work out the implications </li></ul><ul><ul><li>Functional strategies </li></ul></ul><ul><ul><li>Timeline and milestones </li></ul></ul><ul><ul><li>Financial projections & capital needs </li></ul></ul><ul><ul><li>Path to profitability, sale, or other realization of value </li></ul></ul>Business models define structure
    36. 36. Build a business model exercise <ul><li>Opportunity </li></ul><ul><li>Stakeholders </li></ul><ul><li>Wealth </li></ul><ul><li>Strategy </li></ul><ul><li>Model </li></ul><ul><ul><li>Structural implications, timing, capital needs, etc </li></ul></ul>
    37. 37. Good execution is more important than good strategy! <ul><li>Seeing a position or approach is fundamentally creative </li></ul><ul><ul><li>Immersion, scenarios, future search, </li></ul></ul><ul><li>Constructing a strategy involves careful analysis and planning </li></ul><ul><li>Executing a strategy requires relentless discipline </li></ul>
    38. 38. Bibliography <ul><li>Verna Allee, “Reconfiguring the Value Network,” The Journal of Business Strategy , 21 (4), PP 36-39. </li></ul><ul><li>R Boulton, B Libert, S Samek, “A Business Model for the New Economy,” The Journal of Business Strategy , 21 (4), July-August 2000, pp 29-35. </li></ul><ul><li>James Collins & Jerry Porras, Built to Last (HarperBusiness, 1994). </li></ul><ul><li>Richard D’Aveni, Hypercompetition (Free Press: 1994). </li></ul><ul><li>Kathleen Eisenhardt & Donald Sull, “Strategy as Simple Rules,” Harvard Business Review , January 2001. </li></ul><ul><li>Mark Feldman & Michael Spratt, PWC, Five Frogs on a Log: A CEO’s Guide to Accelerating the Transition in Mergers, Acquisitions and Gut Wrenching Change, (HarperBusiness 1999). </li></ul><ul><li>Craig Fleisher & Babette Bensoussan, Strategic and Competitive Analysis (Prentice Hall, 2003). </li></ul><ul><li>Pankaj Ghemawat, Strategy and the Business Landscape (Prentice Hall, 2001). </li></ul><ul><li>G. Hamel & C. K. Prahalad, “Strategic Intent,” Harvard Business Review , May-June 1989. </li></ul><ul><li>Robert Hamilton lecture notes, 1998. </li></ul><ul><li>Robert Hamilton, E. Eskin, M. Michael, &quot;Assessing Competitors: The Gap between Strategic Intent and Core Capability&quot;, International Journal of Strategic Management-Long Range Planning, Vol. 31 , No. 3, pp. 406-417, 1998 </li></ul><ul><li>(more…) </li></ul>
    39. 39. Bibliography (continued) <ul><li>TL Hill lecture notes, 1999, 2001, 2002 </li></ul><ul><li>J. D. Hunger & T.L. Wheelan, Essentials of Strategic Management (Prentice Hall, 2001). </li></ul><ul><li>Ivan Lansberg, Succeeding Generations (Harvard Business School Press, 2000). </li></ul><ul><li>B. Mahadevan, “Business Models for Internet-based E-Commerce,” California Management Review , 42 (4), Summer 2000, pp 55-69. </li></ul><ul><li>Henry Mintzberg & James Brian Quinn, Readings in the Strategy Process , 3 rd Edition (Prentice Hall, 1998). </li></ul><ul><li>Henry Mintzberg & Joseph Lampel, “Reflecting on the Strategy Process,” Sloan Management Review , Spring, 1999. </li></ul><ul><li>Alex Moss, Praxis Consulting presentation on worker ownership, 1999 </li></ul><ul><li>Sharon Oster, Modern Competitive Analysis, 2 nd Edition (Oxford University Press, 1994). </li></ul><ul><li>Michael Porter, Competitive Advantage (Free Press, 1985). </li></ul><ul><li>Michael Porter, “What is Strategy?”, Harvard Business Review , November-December 1996. </li></ul><ul><li>Jim Portwood lecture notes, 1998. </li></ul><ul><li>C.K, Prahalad & G. Hamel, “The Core Competence of Corporations,” Harvard Business Review , May-June, 1990. </li></ul><ul><li>Pamela Tudor, Notes on responsibility charting, 1999 </li></ul>