Business Modeling
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Business Modeling Business Modeling Presentation Transcript

    • Business Modeling ®
    • Krittabhas Supanyachotesakul
    • Why are firms different in their profitability?
    • Industry Factors
    • Competitive Forces
    • Cooperative Forces
    • Macro Environment
    • Firm-Specific Factors
    • Resources
    • Activities
    • Positions
    • Components of a Business Model
    Industry Factors Activities Costs Positions Resources Profitability leve- rage reduce consistent with influence
    • Fundamental of Business Modeling
    • How to decide appropriate activities that constitute firm’s competitive advantage?
    • Firm needs to identify its …
    • STRATEGY .
    • Strategic Management Framework
    • Business Drivers
    Context Models Strategy Models Performance Models Change Models Organizational Models Marketing Models Sector Analysis Model Stakeholder Model 5-Forces Model Value Chain Generic Strategy Life Cycle Model Marketing Mix Operating Structures Administrative & Technology Systems Corporate Cultures Transition Management Contingency Models (7’s and Congruence Model) Accounting Ratios Economic Value Shareholder Value Balanced Scorecard Business Drivers
    • Context Models
    • Suggest how company must adapt to environmental circumstances in order to function properly.
    • Sector Model
    • The overall pressure on company to act is driven by Economic, Technological, Social/Cultural, and Political Sectors.
    • Economic – Macro/Micro conditions
    • Technology – Product/Process trends
    • Society/Culture – Demographic forces
    • Politic – Legislative & Regulatory constraints
    • Macro/Micro
    • Condition
    • Product/Process
    • Trends
    • Demographic
    • Forces
    • Legal/Regulatory
    • Constraints
    Economic Sector Technological Sector Socio/Cultural Sector Political Sector Overall Pressure on Company to Act
    • Stakeholder Model
    • Describe the environment of the company in terms of specific groups of actors that have a ‘stake’ in what the company does because they control the resources the company needs.
    • Primary Stakeholders – Customers, Employees, and Investors have greatest influence on the company performance.
    • Secondary Stakeholders – Regulators, and Pressure groups (e.g., public, activist)
    • Company’s performance is resulted from strong direct and indirect relationships among stakeholders.
  • Company Employees Investors Customers Pressure Groups Regulators
    • Five-Forces Model
    • Company’s performance has its roots in its structural position in an industry. To improve performance is to strengthen the position.
    • Customers/Buyers’ Bargaining Power
    • (Key Input) Suppliers’ Bargaining Power
    • Substitute Products
    • Competitive Rivalry – Industry structure
    • Potential New Entrants - Entry/Exit Barriers
  • Rivalry Among Competing Firms Key Suppliers Substitute Products Potential New Entrants Buyers
    • Strategy Models
    • Suggest ways firm can create tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.
    • Generic Strategy Model
    • Alternative preferred way to compete in an industry and across industries.
    • Low Cost Leadership
    • Differentiation – in value offerings
    • Focus – specific group of customers
    • (Focus-Differentiation)
    • Value Chain Model
    • Company’s performance can be improved by improving value-creating activities along a value chain.
    • Primary Activities – Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Services
    • Support Activities – Technology Development, Human Resources Management, Procurement, and Firm Infrastructure (General Administration)
  • Inbound Logistics Operations Marketing & Sales Outbound Logistics Services Firm Infrastructure Procurement Human Resource Management Technology Development Margin
    • Strategy vs Operational Efficiency
    • Strategy – involves committing to undertake one set of actions rather than another and, in the process, creating a unique and valuable position that allows the firm to perform better than its competitors.
    • It is about which activities to perform and which ones not to perform
    • Operational Efficiency – involves performing similar activities better than rivals do.
    • Best practice is NOT strategic but operational.
    • Strategy Levels
    • Corporate Strategy – Creating value for the portfolio of businesses
    • Business Strategy – Creating value within each business (in the portfolio) so called, Competitive Strategy
    • Functional Strategy – The set of functional activities that a firm performs (operationally efficiently) in supporting of a business’s goal of attaining and maintaining competitive advantages
    • Corporate Strategy tradeoff b/w
    • Low Synergy (Unrelated businesses) – Financial advantage (Diversification)
    • High Synergy (Related businesses)– Know-how and Staffing advantage (Specialization)
    • Business Strategy tradeoff b/w
    • Low Price – Cost-based advantage
    • Premium Price – Uniqueness-based advantage (Differentiation)
    • Functional Strategy design and tradeoff b/w activities to create competitive advantage
    • Analyzing
    • Planning
    • Organizing
    • Implementing
    • Controlling
    Mission Objectives/Goals Strategy Business Modeling Performance Measures Actions
    • Mission
    • Objectives/Goals
    • Strategy
    • Business Modeling
    • Organizing
    • Performance Measures
    • Actions
    e.g., - Sales ($) - Mkt share (%) - Unit cost ($/unit) - Expense ($) - CusSat score (pt) Quantitative Indicators with Time frame, e.g., -Market share 5% in 1 year -Cost reduction 10% in 6 months -Increase CusSat 12% in 1 year Strategy Implementation
    • Business Model
    • The profit-oriented aspects of firm’s business strategy with the associated operational efficiency and implementation.
    • The set of activities which a firm performs so as to offer its customers benefits they want and to earn a profit. It involves firm’s decision on which activities to perform, how to perform, and when to perform.
    • Components of a Business Model
    Industry Factors Activities Costs Positions Resources Profitability leve- rage reduce consistent with influence
    • Customer Value and Positioning
    • Customer Value is created in 2 ultimate forms
    • Lower Cost
    • Superior Product (Differentiation)
    • Profitability S
    • Differentiation Low Cost
    • T
    • Market Share
    • Differentiation With Low Cost
    • Path T, firm cannot do either well in contrast with Path S, where firm can do both well because…
    • Nature of technology – In some cases allows cost reduction and differentiation to rest on the same activities. E.g., Intel chip smaller and faster
    • Lower cost does not mean indifferentiated . – E.g., Low cost airline is also different in other aspects, e.g., more flights, etc.
    • Rate of technology change and imitation rate – Both are generally high which results in short period of being differentiated. Thus to survive firm must operate at low cost as well.
    • Competitive advantage – If comes from owning valuable, rare, and inimitable resources, allows firm to be able to differentiate and operate at low-cost.
    • Making More Valuable Products
    • Standard ways of delivering value include
    • Product Features – Physical
    • Brand Name Reputation – Psychological
    • Network Externalities – Some products such as Software are more valuable when more customers use them. Metcalfe’s Law: value of network size  n 2 to n n where n is # of nodes on the network
    • Timing – The first to introduce product
    • Location – Availability, Accessibility, Location reputation
    • Service – Before/After-sale service
    • Product Mix – One-stop shopping. Amazon carried 16 million items at its website as of May 1999
    • Sources of Revenues and Market Targets
    • Targeting the right customers with the right value.
    • Many market targets have more than one sources of revenue, some of which may be more profitable than others.
    • Sources of Revenue
    • Understanding its market’s sources of revenues, especially the profitability of each source, enables firm to
    • be able to make better choices about which activities to perform.
    • better position itself to understand the threats a technological change can pose to it.
    • Example: Sources of income
    • Credit Card business
    • Merchant fee (charge on vendors)
    • Intercharge (charge on different card issuers for using through bank’s EDC)
    • Interest income (charge on cardholder’s outstanding balance)
    • Annual fee
    • Other charges like late fee, high balance fee, etc. (was prohibited in Thailand 3 years ago)
    • Taxonomy of Revenue Sources and Revenue Models
    • Direct Product/Service Sales – product sales
    • After-Sales Service – complex products, in some cases more profitable than product sales (auto dealer, computer network, etc.)
    • Indirect Content Sales – advertising revenue
    • Product Financing – interest charges and other fees for install payment
    • Collect-early, Pay-later Financing – return on investment using firm’s credit on suppliers, Dell-Direct Model
    • Royalties on Intellectual Property – up-front fee and/or per-unit charge
    • Revenue Models
    • Production Model – simple produce and sell model
    • Subscription Model – customer pays a flat fee for the right to use the product for a period of time whether she uses it or not. E.g., rent, flat-rate phone service, etc.
    • Fee-for-Service Model – customer pays for only service she uses.
    • Markup Model – firm buys a product and resells it to the customer at a markup price.
    • Commission Model – brokerage fee, firm acts as a mediator/match maker/or broker.
    • Advertising Model – firm’s product can perform a function of a media for other firms to advertise their products on. E.g., ATM slip, bank statement, building surface, internet banner, club magazine, etc.
    • Targeting Customers
    • Mass Market
    • Market Segments
    • Individual Customers
    • Activities Customer Target
    • of Firm Mass Market Market Segment Individuals
    • Needs and One-to-all One-to-segment One-to-one
    • Preferences marketing marketing marketing
    • Identification
    • Value creation Mass Mass production Customization
    • and delivery production Mass customization Mass
    • Approach customization
    • Market Segments
    • Business Segments
    • Consumer Segments
    • Business Segments
    • Benefits
    • Timing of Needs – lead users, e.g., latest technology mobile, fashion from the catwalk, etc.
    • Industry – different industrial customers demand differently
    • Customer Size – large and small customer, e.g., institutional vs individual customers, more frequently-fly passengers, etc.
    • Geography
    • Consumer Segments
    • Demographics
    • Psychographics
    • Behavior
    • Geography
    • Multidimensional Segmentation
    • Mapping Value into Targeted Markets
    • (Positioning)
    • Matching targeted customers’ needs and firm’s offerings (position)
    • Evolution of Targets
    • More sophisticated and smart
    • More variety of tastes
    • Technological change alters preferences
    • Designing Activities for Profitable Business Model
    • Activities that firms perform to offer value
    • Choice of activities
    • How to perform them
    • When to perform them
    • Frameworks
    • Business System
    • Value System
    • Business System
    • Sequence of activities that firm performs to produce products.
    • Ex. Automobile involves key activities:
    • Design
    • Purchase components
    • Assemble
    • Market
    • Distribute
    • Generic Business Systems
    • Value Chain
    • Value Network
    • Value Shop
    • Outsourcing
    • Value Chain
    • Activities is classified by functions. Each stage adds value before turning its output to the nest step.
    • Function Product Manufac./ Sales/ Dist n Customer
    • R&D Design Operations Marketing Support
    • Patent Function Location Pricing Channels Warranty
    • Activities Process Quality Assembly Packaging Inventory Speed
    • Tech. Physical Procurement Advertising Warehouse Info n
    • etc. etc. etc. etc. etc. etc.
    • Upstream Downstream
    • Value Network
    • Firm acts as a mediator (intermediary) between the clients and performs value-adding activities.
    • A firm and the clients that it mediates make up a network call Value Network, a property of Network Externality.
    • Ex. Financial institutions mediates between surplus units (like depositors, investors) and deficit units (like borrowers, issuers)
    • Value Shop
    • Firm decides which activities are needed to fulfill customer’s demand. The business whose value is created this way is called a Value Shop.
    • Hospital, Consulting business, Universities, and etc. involve variety of clients with different needs and thus require a business system that offers flexibility in meeting those needs.
    • Ex. Hospital has different kinds of clients (patients) who demand different treatments. It is a hospital (by a doctor) who decides which activities are required to respond those needs.
    • Outsourcing
    • From outsourcer to outsourcee: When will outsourcer outsource its value activities to the outsourcee? Depends on
    • Outsourcee’s capabilities
    • Outsourcee’s market power
    • Outsourcer’s integrative or architectural capability (ability to coordinate)
    • Criticalness of activity’s underpinning capability (activities critical to firm’s competitive advantage will not be outsourced)
    • Ex. eBay decided to outsource its back end internet activities to 2 companies: Abovenet and Exodus. These 2 companies would be responsible for the maintenance and performance of web servers, database servers, internet routers, and other technologies that were critical to the availability of eBay’s site for trading. Has eBay done right?
    • First, identify eBay’s Competitive Advantage
    • Network Size and Brand Name
    • Then check
    • Outsourcees’ capability: Both are specialists. 
    • Market power: There are many and eBay picked 2. 
    • Integrative capability: Keeping website up does not require much integration. 
    • Criticalness of activities: Learning how to run a website is not critical to the eBay’s competitive advantage. 
    • Value System
    • (Supply Chain and Vertical Linkage)
    • Value System: The chain that stretches from end customers to the firm to its suppliers to their own suppliers and so on.
    • Ex. Value system for market of PC microprocessors
    • Semiconductor Microprocessor Computer Distributors Computer
    • Equipment Makers Makers Users
    • Manufacturers
    • Applied Intel Dell Retail stores Business
    • Material AMD HP Consumer
    • Motorola IBM
    • Gateway
    • Upstream Downstream
    • Vertical Integration
    • Vertical Integration (VI) : Producing one’s input or disposing of one’s output (perform more activities along the value system)
    • Backward VI : Firm is vertically integrated into the upstream market.
    • Forward VI : Firm is vertically integrated into the downstream market.
    • Tapered integration : Firm produces only some of the quantity of the input that it needs and buys the rest of the input from outside suppliers.
    • Strategic Alliance
    • Instead of backward vertical integration where firm produces its own input another way is to form Strategic Alliances or Strategic Collaboration where 2 or more firms agree to combine their resources to carry out a project.
    • Strategic Alliances can be formed for a specific time and/or specific operations.
    • Ex. Joint Venture: collaboration creates a separate legal entity.
    • Which Activities to Perform and NOT to
    • Activities are chosen from
    • Business System Activities
    • Value Chain – choose activities at each stage
    • Value System Activities
    • Value Added Process – integration choice
    • Activities to perform must strengthen firm’s competitive advantage. Any criteria?
    • Activities to Perform
    • Must have the potential to enable a firm to…
    • Attain and maintain the right position
    • Take advantage of industry factors
    • Better build and exploit its resources
    • Keep its costs low irrespective of whether the firm pursues a low-cost or differentiation strategy
    • The criteria for ensuring firm’s competitive advantage.
    • 1. Attain & Maintain the Right Position
    • Offer Superior Value – Activities should be consistent with the type of value the firm offers customer
    • Ex. Southwest Airline, the most profitable low-cost airline in the US, offers low cost value hence its activities to ensure low fare to customer include offer no meal, operate largely from uncongested airports, etc.
    • Air Asia can save ticket reservation cost through internet system.
    • Coca-Cola offers differentiation value then activities performed are aimed to create Brand Equity.
    • Attain Superior Position – Activities to address negative aspects of the industry.
    • For example, if suppliers are powerful firm may decide to eliminate by integrating backward. If distributors are powerful firm may bypass them by innovation.
    • Ex. Dell at the beginning had little bargain power over PC dealer. Dell bypassed the dealer channel by offering 1800 number and later internet.
    • Air Asia with no dealer network employed 1800 number and internet for ticket reservation.
    • Heineken bypasses Singha and Chang monopoly power of distribution by channeling through modern trade and through restaurant channel by “push girls”.
    • Take Advantage of Industry Factors – Critical industry factors must be identified and exploited.
    • Ex. Airline industry – capacity utilization is critical. Plane should not be sitting at a terminal but rather should be flying. By choosing to fly out of uncongested airports, Southwest planes can land and take off more quickly.
    • PC’s short shelf-life is critical. So if they sit on dealers’ shelves too long they will be obsolete. Dell build-to-order attributes take advantage of this characteristic.
    • Bank’s transaction cost over Teller counters is critical (about 7 Bt./transaction) but with a mass number of customers who make basic transactions, bank then offers e-Banking, m-banking including e-branch with no tellers.
    • Build and Exploit Resources and Capabilities – Resources that are scarce, difficult to imitate, and can make unusually high contribution to the value that customers perceive in a firm’s product.
    • Ex. Honda Motor has a reputation for making high-performance, reliable engines. Honda develops and sells cars, motorcycles, lawn mowers, etc. that have reliable engines.
    • 7-11 having developed the largest store network nationwide now expands its business from everyday grocery to counter services.
    • Keep Costs Low – Firm’s operational efficiency must be achieved inevitably.
    • Activities NOT to Perform
    • Each time firm chooses one activity it is forgoing another activity – to undo is costly
    • Firm has limited resources – choosing one activity some of its resources are tied up in that activities – Opportunity Cost
    • Firm may delegate some activities to other firms that are more specialized in performing that activities - Outsourcing
    • How to Perform Activities
    • After deciding which activities to perform ( doing the right things ) firm is to decide how to perform them ( doing things right ).
    • Process – the patterns of interaction, coordination, communication, and decision making – that a firm uses to perform the activities that transform its resources into customer value and position the firm to appropriate the value.
    • The appropriate processes are chosen in response to...
    • Business System Activities
    • Choose processes for each activity at each stage
    • Cross-Functional and Cross-Firm Processes
    • Process involves more than one stage of business system, and sometimes more than one firm or country.
    • Process to Implement
    • Like choosing which activities to perform, the criteria for choosing processes to implement must have the potential to enable a firm to…
    • Attain and maintain the right position
    • Take advantage of industry factors
    • Better build and exploit its resources
    • Keep its costs low irrespective of whether the firm pursues a low-cost or differentiation strategy
    • Business System Activities
    • If firm chooses to perform activities in every stage of business system (else, outsourcing)
    • R&D
    • Product Design
    • Manufacturing/Operations – interact with suppliers: work closely or fight over cost, etc.
    • Marketing/Sales
    • Distribution – to own channels or not or whether to develop new channels
    • Customer Services/Support
    • Cross-Functional and Cross-Firm Processes
    • If processes involve more than one stage of business system
    • TQM – get things right the first time and keep improving.
    • Benchmarking – inside and outside industry
    • Business Process Reengineering – rethinking the whole system
    • When to Perform Activities
    • First-Mover Advantage
    • Windows of Opportunity
    • Timing Options – in each business system activities
    • Conclusions
    • Business modeling involves which, how, and when activities are to perform.
    • Started by firm’s competitive strategy value-rendering activities are designed.
    • Processes to perform activities then are immediate.
    • Taking right timing to perform.
    • Case Example: Wal-Mart vs Kmart
    • (both founded in 1962 Wal-Mart has become the world largest company while Kmart has filed for bankruptcy)
    • Wal-Mart’s strategy is on locating store in the small towns.
    • Kmart’s strategy is on locating store in the cities.
    • Resources and Capabilities Analysis
    • Resources – or Assets : both tangibles and intangibles
    • Capabilities – Competences or firm’s ability to transform its resources into customer value and profit.
    • Assessing the profitability potential of resources – VRISA Analysis
    • (Customer) Value – Does the resource provide customers what they value?
    • Rareness (Uniqueness) – Are you the only one with that capability? If not, are you better or worse than competitors?
    • Imitability – Is it easy for other firms to acquire the resources?
    • Substitutability – Are there any other resources that can offer the same value to customers?
    • Appropriability – Can you make money from it?
    • Examples: Wal-Mart’s Location in Small Towns
    • Attributes Key Question Answer
    • Value Does Wal-Mart’s location in Yes, customers can buy
    • small towns provide customers low-cost merchandise
    • what they value? close to home.
    • Rareness Is Wal-Mart the only one with Yes, its price are lower
    • this resource? If not. Is it better? than competitors’.
    • Imitability Is it easy for other firms to No, it is hard for others to
    • acquire Wal-Mart’s location come in and build similar
    • advantage? stores and dist n centers.
    • Substitutability Can other resources offer Yes, for some products
    • customer the same value? via e -commerce.
    • Appropriability Does Wal-Mart make money Yes, there are few rivals,
    • from its location in small and Wal-Mart has power
    • towns? over suppliers.
    • Examples: Pfizer’s Knowledge for making Lipitor
    • Attributes Key Question Answer
    • Value Does Pfizer’s knowledge of Yes, Lipitor reduces bad
    • making Lipitor drug give cholesterol in many
    • customers what they value? customers.
    • Rareness Is Pfizer the only one with No, but Pfizer’s Lipitor is
    • this resource? If not. Is it better? better than competitors’.
    • Imitability Is it easy for other firms to No, Pfizer holds patent
    • acquire Pfizer’s knowledge? for its Lipitor that will exclude others’ imitation.
    • Substitutability Can other resources offer Yes, but so far Pfizer’s
    • customer the same value? Lipitor offers the best
    • benefit.
    • Appropriability Does Pfizer make money Yes, suppliers and
    • from its knowledge of making customers have not
    • Lipitor? been very powerful.
    • Examples: Southwest Airlines’ Network of Uncongested Airports
    • Attributes Key Question Answer
    • Value Does Southwest’s network of Yes, passengers can select uncongested airports provides from more frequent flights,
    • customers what they value? low price, on time, and
    • a lot of parking spots.
    • Rareness Is Souhtwest the only one with Yes, Souhtwest has largest
    • this resource? If not. Is it better? network with uncongested
    • airports (largest slots).
    • Imitability Is it easy for other firms to No, it is difficult to replicate
    • acquire Souhtwest’s network Souhtwest’s complete advantage? network.
    • Substitutability Can other resources offer No, it is hard to offer what
    • customer the same value? Souhtwest’s complete
    • network can provide.
    • Appropriability Does Souhtwest make money Yes, suppliers & customers
    • from its network? do not have much power.
    • Competitive Consequences of Resource Characteristics
    • Characteristics of Resources Competitive Advantage
    • V R I S A Consequence
    •      Sustainable C. A.
    •      Temporary C. A.
    •      Temporary C. A.
    •      Temporary C. A.
    •      Competitive parity
    •      Competitive disadvantage
    • Executing a Business Model
    • Structure – organizational structure firm uses to effect differentiation, integration, and coordination: functional, M-form, matrix, project, and network
    • Systems and Processes – performance measures, rewards, and information flows.
    • systems spell out how the performance of individuals, groups, etc. is monitored.
    • People – culture and types of people
    • Environment
    • What are left for further studies…
    • Innovation, Sustainability, and Change
    • Analyzing the Costs of Business Model
    • Analyzing the Sources of Profitability and Competitive Advantage in a Business Model (7 C’s)