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Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
Business modelling
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Business modelling

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  • 1. Understanding & Improving ourBusiness Model
  • 2. Key advantages ofBusiness Modelling• Focuses the definition of competitive advantage on the Customer’s current & emerging priorities• Directly links the drivers of competitive advantage to quantitative measures of business performance• Provides a generic framework to utilise when looking for future sources of competitive advantage Helps us see competitive advantage more clearly
  • 3. Business Modelling Framework Background to the Framework 1960’s 1970’s 1980’s 1990’s + “The rising tide lifts all “Scale & market share “Become lean and “Better business design boats” drive value growth” mean” drives profitable growth” Customer Economics Organisation Economics Relative Supply Economics Efficiency Economics • Customer needs and • Post WWII, demand out- • Supply and demand • Global competition, lower priorities changing rapidly stripped supply becomes more balanced trade barriers, de- • Information flowing more • Regulation, global trade • Approaches to business regulations allows capacity freely; Internet exacerbating management strategy focussed on the to exceed supply situation (protectionism) created identification and building of • Corporate raiders and more • Markets converging, relatively stable industries structural advantage active shareholders drive channels compressing, • “If you build it they will • Exemplified by Experience trend to downsizing, products to solutions come” euphoria supplanted curve and Porter’s Five restructuring, re- • Structural advantages and by a need for more rigorous Forces model engineering barriers to entry becoming thinking • Economies of scale, High • Focus on core less easy to protect • Approaches to strategy market share = high competencies, “Stick to the focussed on improving profitability knitting” organisation structure & command-control functionsSource :- Slywotzky & Morrison, The Profit Zone
  • 4. What makes a better Business Model? TRADITIONAL BUSINESS MODELLING • More Customers / Volume • More Profitable & faster growing Customers • What new products can I • What are my customers key sell to increase sales and priorities & how can I meet profit? them better ? • Where are the opportunities • When I look at all the in my industry to get bigger money a customer spends & more efficient? along the value chain - where’s the profit zone? • How do I create barriers to • What mechanisms are protect my market share? available to keep me in the profit zone?
  • 5. Business Modelling Framework Business Modelling tries to focus on a small number of key questions • Defining the important customers? – Who are the most profitable customers? – What are their priorities / business drivers? – How are these priorities changing? • How do we capture the value we create in the form of profit? • How do we protect our profit stream? • How do we deliver value to these customers? (operating systems)
  • 6. Business Modelling Framework Definition of Key Terms Dimension Key Issue Key Questions Strategic Dimensions To which customers can I add real value? Which customers I we chose to Customer Selection Which customers will allow me to profit? deal with? (or focus on) Which customers do I want to serve? Fundamental What is my fundamental What are our customers priorities? How do Assumptions about assumption about what the we assume they will change in the future? Customer Priorities customer values? How do I provide additional value to the Profit Model / customer that enables me to extract a price How do I make a Profit? Value Capture (or volume) premium over others in the market? What is my unique value proposition? Why Differentiation / Strategic How do I protect my profit should customers buy from me ahead of Control stream? the competition? How do I conterbalance customer or competitor power? Do we confine ourselves to certain How do I define the limitations Scope of Activities products, markets or customers? What of our business? wont we make or where wont we go?Source :- Slywotzky & Morrison, The Profit Zone
  • 7. Business Modelling Framework Example - General Electric DIMENSIONS 1981 1997 CUSTOMER SELECTION Consumers Consumers Manufacturers Manufacturers Engineers Senior Executives FUNDAMENTAL Customers value high quality, Customers value suppliers who can ASSUMPTIONS ABOUT economical products, deliver lower total systems costs by CUSTOMER PRIORITIES delivered reliably providing a complete solution in areas outside their core competencies PROFIT MODEL / Product sales Multi-component product, service, VALUE CAPTURE “sell the box” solution, and financing “Sell the whole solution” DIFFERENTIATION / Brand Customer solutions STRATEGIC CONTROL Market Leaders Customer relationships “Be No. 1 or No 2 or exit” CEO marketing 6-Sigma Quality SCOPE Manufactured Products Customer Solutions Financing Manufactured Products & Services OUTCOMES S’holder Value US$13.1 Billion S’holder Value US$239.6 Billion Sales US$26 Billion Sales US$90 Billion Value to Sales 0.5 x Value to Sales 2.7 xSource :- Slywotzky & Morrison, The Profit Zone
  • 8. Value Capture - Generic Profit ModelsCustomer Solution ProfitSell the Box, or ... • Know the customer Product • Create a solution (thatSell the Solution reduces total customer The Profit Zone system costs) Product Services Options Financing • Build the relationship • May incur early losses • But significant profits follow • Example Profit ABB (can build & finance a power station not just supply the generators) GE (provides financing, maintenance Time & scheduling services as well as Source :- Slywotzky & Morrison, The Profit Zone selling locomotives)
  • 9. Total System Economics Example : - Printing Company • This company sold mainly Point of Sale Material to big consumer marketing companies (e.g. Coke, Frito Lay, etc.) • Business was competitive based upon cost per item. • The printer investigated their customer’s real cost of putting POS Material in the market and found that for the average POS Promotion, 40% of the printed materials never made it to a store to be displayed due to inefficient customer distribution systems and poor tracking. • The printer changed his business model - he now organises distribution to the store himself and charges the customer on a cost per item displayed instead of a cost per item printed. • Needless to say his new model is far more profitable.Source :- Slywotzky & Morrison, The Profit Zone
  • 10. Total System EconomicsExample : - Printing Company • Expense of Usage Big Box : • Cost of Maintenance• Cost of Distribution / installation• Cost of having no POS material in • Associated Labour the store when the promo starts• Lost Sales at store • Cost of Distribution• Cost of storing / disposing of • Cost of Inventory unused POS Material • Cost of Defects /Little Box : Returns / Failure Cost ofPrinting POS • Costs of inflexibility Material • Inefficiencies
  • 11. Business Modelling Framework Example - Intel DIMENSIONS 1981 1997CUSTOMER SELECTION Industrial Equipment PC OEMs Manufacturers ConsumersFUNDAMENTAL Customers value leading edge Customers value leading edgeASSUMPTIONS ABOUT technology delivered with high quality, technology with broad consumerCUSTOMER PRIORITIES low cost manufacturing systems acceptance and guaranteed compatibilityPROFIT MODEL / Chip manufacture Chip ManufactureVALUE CAPTURE Licensing Brand PremiumDIFFERENTIATION / Technology Speed of Product DevelopmentSTRATEGIC CONTROL Consumer Brand CompatibilitySCOPE Memory Chips and Processor Chips solutions Chip sets Value Chain Management Source :- Slywotzky & Morrison, The Profit Zone
  • 12. Value Capture - Generic Profit Models “Two steps ahead” Profit The • First mover generates Profit Zone excess returns before imitators begin to erode margins • Create and maintain a$ per Unit lead time over the Cost next competitor and a Price constant stream of new products Q2 Q4 Q6 Quarters Post Launch Q8 • Example Intel (focuses on being two years ahead of nearest rival’s product developments) Source :- Slywotzky & Morrison, The Profit Zone
  • 13. Value Capture - Generic Profit Models Brand Profit • Brand company expends considerable marketing investment in building awareness, recognition & credibilityPrice per Unit • These “intangibles” are reinforced by customer experience • The Brand achieves a significant price premium in the marketplace Market Brand • Examples Price Price Nike, Coca-Cola Source :- Slywotzky & Morrison, The Profit Zone
  • 14. Value Capture - Generic Profit Models Value Chain Position Profit • Profit concentrates itself in certain parts 40% of the value chain • Profit comes from 30% Operating Margin – participating in the more profitable value Microprocessors chain segments OR 20% – capturing downstream Software10% margin by leveraging Services Peripherals value chain power Other Personal Components Computers 0 0 25% 50% 75% 100% Share of Industry Revenue Source :- Slywotzky & Morrison, The Profit Zone
  • 15. Example : The way Ford looks at it’s Value Chain 20% 15% Leasing Operating Margin Warranty Gasoline 10% Auto New Car Loans Dealers 5% Auto Service / Repair Auto Rental Insurance After- Auto Used Car market Manufacturing Dealers Parts 0 0 25% 50% 75% 100% Share of Industry Revenue
  • 16. Notes about using the GenericProfit Models• The models serve two purposes – They help us understand the drivers of our current profitability – They present us with alternative ways to look for future profitability• The models illustrate where the key sources of profit are, they don’t suggest that this is where all sales / profits should come from• There are few “pure” examples of any model - most successful business use a combination of models
  • 17. How do I assess the power of mybusiness model?• Hypothesis The most powerful business models deliver greater shareholder value• A number of quantitative & qualitative factors are considered important ... – Return on Sales (EBIT Margin) – Profit Growth – Asset Efficiency (Assets / Sales) the inverse of Asset Turns – The Degree of Strategic Control
  • 18. How do I assess the power of my business model? Shareholder Return Profit Asset Degree of Value on Sales 1 Growth 2 Efficiency 1 Strategic Control 3 to Sales 4 40% 30% 0.1 10 10XIntel 38% Intel 9 Intel 24% Intel 6x Intel 0.7 0% 0% 1.0 0 0X 1. 1999 Actual levels have been used 2. Compound annual EBITA growth 1995 to 1999 3. A rating based upon the strength of differentiation / sustainability 4. Shareholder Value divided by Sales is used, however any valid measure of the leverage you have in shareholder value creation would suffice e.g. EV Multiple, PE Multiple, Market to Book, etc.
  • 19. What is a Strategic Control Point ?• A Strategic Control point is a mechanism that helps protect the profits flowing from a business model against the corrosive effects of competition and customer power• A business model without a strategic control point is like a ship with a hole in its hull - it will sink much sooner !• Strategic Control Point keep you in the profit zone longer
  • 20. Examples of Strategic ControlPointsBusiness models that have strong ...• Brand, Copyright, Patents• Control of Distribution / the Value Chain• Two year lead in product development• Commodity with 10% - 20% cost advantage
  • 21. Assessing the strength of yourStrategic Control Point(s)• Strength is often different in different industries (e.g. Brand is almost irrelevant in OE Automotive but extremely relevant in carbonated beverages)• Strength is relative to the countervailing strength of your competitors & customers• It is also relative to it’s reach (e.g. if your patent protected product only has application in a very small segment of the market)• Strength is cumulative i.e. if you have more than one Strategic Control Point you can add their scores together
  • 22. The Template Strength vs. Possession Reach Competitors / Index Value Customers Strategic Control Countervailing What %age of Point Do you Posses it? your Sales does it strength of Index value for my Extended Value (Yes=1, No=0) Competitors / industry apply to? Customers A B C D AxBxCxD Commodity with cost disadvantage 1 0.0 Commodity with cost parity 2 0.0 Commodity with 10% to 20% cost 3 0.0 advantage One Year lead in Product development 4 0.0 Two Year lead in Product development 5 0.0 Strong Brand, Copyright or Patent 6 0.0 protection Own the Customer Relationship 7 0.0 String of super- dominant positions 8 0.0 Control the Value Chain / Distribution 9 0.0 Own the Industry Standard 10 0.0 Total Strategic Control Rating 0.0
  • 23. ExamplesINTEL GE Strength vs. Strength vs. Possession Reach Competitors / Index Value Possession Reach Competitors / Index Value Customers Customers Strategic Control Countervailing Strategic Control Countervailing What %age of What %age of Point Do you Posses it? your Sales does it strength of Index value for my Extended Value Point Do you Posses it? your Sales does it strength of Index value for my Extended Value (Yes=1, No=0) Competitors / industry (Yes=1, No=0) Competitors / industry apply to? apply to? Customers Customers A B C D AxBxCxD A B C D AxBxCxDCommodity with cost Commodity with costdisadvantage 1 0.0 disadvantage 1 0.0Commodity with cost Commodity with costparity 2 0.0 parity 2 0.0Commodity with 10% Commodity with 10%to 20% cost 3 0.0 to 20% cost 1 100% 70% 3 2.1advantage advantageOne Year lead in One Year lead inProduct development 4 0.0 Product development 4 0.0Two Year lead in Two Year lead inProduct development 1 60% 40% 5 1.2 Product development 5 0.0Strong Brand, Strong Brand,Copyright or Patent 1 100% 70% 6 4.2 Copyright or Patent 6 0.0protection protectionOwn the Customer Own the CustomerRelationship 7 0.0 Relationship 1 100% 70% 7 4.9String of super- String of super-dominant positions 8 0.0 dominant positions 8 0.0Control the Value Control the ValueChain / Distribution 1 80% 50% 9 3.6 Chain / Distribution 9 0.0Own the Industry Own the IndustryStandard 10 0.0 Standard 10 0.0Total Strategic Control Rating 9.0 Total Strategic Control Rating 7.0
  • 24. End of Section 1 Do we understand what Business Design is all about ?
  • 25. Going Downstream• Going downstream involves assessing the potential application of three generic profit models … – Customer Solution Profit – After sale / installed base profit – Value chain position profit
  • 26. Value Capture - Generic Profit ModelsCustomer Solution ProfitSell the Box, or ... • Know the customer Product • Create a solution (thatSell the Solution reduces total customer The Profit Zone system costs) Product Services Options Financing • Build the relationship • May incur early losses • But significant profits follow • Example Profit ABB (can build & finance a power station not just supply the generators) GE (provides financing, maintenance Time & scheduling services as well as Source :- Slywotzky & Morrison, The Profit Zone selling locomotives)
  • 27. Value Capture - Generic Profit ModelsAfter-Sale / Installed BaseProfit • Profit on the Initial sale isAfter-Sales Model secondary to profits from The Profit Zone follow-on products & Product services Maintenance Consumables Accessories • In the installed base model - having the base gives you proprietary rights to the Installed Base Model follow-on • In the after-sales model you focus on follow-on sales of Profit Margin yours & others base products • Example Gillette (Razor sales secondary to blade follow on sales) Hardware Consumables / Base Product Follow-on Products Source :- Slywotzky & Morrison, The Profit Zone
  • 28. Value Capture - Generic Profit Models Value Chain Position Profit • Profit concentrates itself in certain parts 20% Leasing of the value chain • Profit comes from 15% Operating Margin Warranty – participating in the Gasoline more profitable value 10% chain segments OR Auto Loans – capturing downstream5% New Car Dealers Auto margin by leveraging Service / Repair Auto Rental Insurance After- value chain power Auto Used Car market Manufacturing 0 Dealers Parts 0 25% 50% 75% 100% Share of Industry Revenue Source :- Slywotzky & Morrison, The Profit Zone
  • 29. Tools to assist in the process• Total System Economics (Little Box / Big Box)• Value Chain Analysis• Downstream Potential Tool (HBR Article)
  • 30. Total System Economics • Expense of Usage • Cost of Maintenance • Associated Labour • Cost of Distribution Big Box : • Cost of Inventory The Customer’s Total Economics • Cost of Defects / Returns / Failure Little Box : Our Product • Costs of inflexibility Sales • InefficienciesReducing the Customer’s Total System Economics (Big Box)creates opportunities to increase our product sales (Little Box)
  • 31. Total System EconomicsExample : - Printing Company• This company sold mainly Point of Sale Material to big consumer marketing companies (e.g. Coke, Frito Lay, etc.)• Business was competitive based upon cost per item.• The printer investigated their customer’s real cost of putting POS Material in the market and found that for the average POS Promotion, 40% of the printed materials never made it to a store to be displayed due to inefficient customer distribution systems and poor tracking.• The printer changed his business model - he now organises distribution to the store himself and charges the customer on a cost per item displayed instead of a cost per item printed.• Needless to say his new model is far more profitable.
  • 32. Total System EconomicsExample : - Printing Company • Expense of Usage Big Box : • Cost of Maintenance• Cost of Distribution / installation• Cost of having no POS material in • Associated Labour the store when the promo starts• Lost Sales at store • Cost of Distribution• Cost of storing / disposing of • Cost of Inventory unused POS Material • Cost of Defects /Little Box : Returns / Failure Cost ofPrinting POS • Costs of inflexibility Material • Inefficiencies
  • 33. Similar Exercise :-What is most important to mycustomers? (Customer Priorities)• What are the top three priorities for my customer’s business?• Try to answer this question … – Imagine that you’re the CEO of your five most important customers • What would your overall objectives be? • What major concerns would you have? • How could a supplier help you towards your goals?
  • 34. Value Chain Analysis Can we draw this picture for the relevant Customer Activities ? • What are the relevant Leasing segments ? 20% (Total cost of a brake job ?) • How do we get the dataOperating Margin Warranty 15% ? Gasoline10% Auto Loans New Car 5% Dealers Auto Service / Repair Auto Rental Insurance After- Auto Used Car market Manufacturing Dealers Parts 0 0 25% 50% 75% 100% Share of Industry Revenue
  • 35. Downstream Potential Tool• Attractiveness of Downstream Business – Ratio of Installed base to New Products – Product Life Cycle Spend vs. Initial Product Cost – Difference between downstream margin & product margin• Importance of Customer Relationships – Magnitude of Product differentiation – Market share of top 5 Customers – Share of total profit earned from Top 20% of Customers• Power of the Distribution Channel – Distribution & selling expense as a percentage of product Price – Channel Concentration - Market Share of Top 5 Distributors – Degree of Channel Innovation or multiplication
  • 36. How to Scope out the Downstream Opportunity Attractiveness of Importance of Power of the Downstream Business Customer Relationships Distribution Channel Ratio of Ratio of Difference Magnitude Market Share of Total Distribution & Channel Degree ofInstalled Base Life Cycle Between Of Downstrem Share of Profit earned Selling Costs Concentration Channel to New Spend to D’stream Margin Product-based Top 5 from the top 20% as a Percentage Share of MultiplicationProduct Sales Our Product & Our Product Differentiation Customers of Customers of Product Price Top 5 Cost Margin Distributors Stable & 2x 1x -10% Significant 10% 30% 20% 10% Monolithic Patent Unattractive or Unimportant Focus on Traditional Strong Mfg Strategies Brand Potentially Technology or troublesome Performance Monitor & Lead Experiment 20% Cost Advantage Attractive & Imperative Commodity 20 x 5x +10% 50% 60% 30% 50% Dynamic & Multiplying
  • 37. Appendix A Generic Profit Models
  • 38. Notes about using the GenericProfit Models• The models serve two purposes – They help us understand the drivers of our current profitability – They present us with alternative ways to look for future profitability• The models illustrate where the key sources of profit are, they don’t suggest that this is where all sales / profits should come from• There are few “pure” examples of any model - most successful business use a combination of models
  • 39. Notes about using the GenericProfit Models (con’t)• Following is a summary of 15 of the 21 profit models used in the Business Modelling theory. A full list with more detailed descriptions and examples can be provided if required.
  • 40. Value Capture - Generic Profit Models Relative Market Share Profit • Companies with high The Profit market shares are more Zone profitable because they enjoy pricingReturn on Sales advantages and cost economies (manufacturing experience & purchasing power) • Examples Relative Market Share Procter & Gamble, Coles-Myer Source :- Slywotzky & Morrison, The Profit Zone
  • 41. Value Capture - Generic Profit Models Cycle Profit Price • Firm profitability is a function of position in the cycle The Profit • Maximise profit within Zone the cycle by …$ per Unit – Lowering your break- even point Cost – Pricing within the cycle • Example Capacity Utilisation Dow Chemicals (leads price increases as capacity tightens and lags decreases as capacity declines) Source :- Slywotzky & Morrison, The Profit Zone
  • 42. Value Capture - Generic Profit Models Brand Profit • Brand company expends considerable marketing investment in building awareness, recognition & credibilityPrice per Unit • These “intangibles” are reinforced by customer experience • The Brand achieves a significant price premium in the marketplace Market Brand • Examples Price Price Nike, Coca-Cola Source :- Slywotzky & Morrison, The Profit Zone
  • 43. Value Capture - Generic Profit Models Product Pyramid Profit The Profit • Multi-tiered branding Zone • Most of the Profit is made at the top segments of the pyramidPrice • Base brands protect top tier brands • Example SMH (watch makers who derive more than half their profit from Volume Omega, Longines, Blancpain & Rado brands but also have brands like Swatch, Tissot, etc.) Source :- Slywotzky & Morrison, The Profit Zone
  • 44. Value Capture - Generic Profit ModelsCustomer Solution ProfitSell the Box, or ... • Know the customer Product • Create a solution (thatSell the Solution reduces total customer The Profit Zone system costs) Product Services Options Financing • Build the relationship • May incur early losses • But significant profits follow • Example Profit ABB (can build & finance a power station not just supply the generators) GE (provides financing, maintenance Time & scheduling services as well as Source :- Slywotzky & Morrison, The Profit Zone selling locomotives)
  • 45. Value Capture - Generic Profit ModelsAfter-Sale / Installed BaseProfit • Profit on the Initial sale isAfter-Sales Model secondary to profits from The Profit Zone follow-on products & Product services Maintenance Consumables Accessories • In the installed base model - having the base gives you proprietary rights to the Installed Base Model follow-on • In the after-sales model you focus on follow-on sales of Profit Margin yours & others base products • Example Gillette (Razor sales secondary to blade follow on sales) Hardware Consumables / Base Product Follow-on Products Source :- Slywotzky & Morrison, The Profit Zone
  • 46. Value Capture - Generic Profit Models New Product Profit • New product profits are a function of newness and growth • New products produce high margins, which reduces as the products matureTotal Sales $ • Profitability is driven by investing to lead the next The Profit generation of products in Zone your industry • Example Time Compaq (it’s investment in servers gives it a high margin base while PC profits are declining and Laptops are gradually reaching maturity) Source :- Slywotzky & Morrison, The Profit Zone
  • 47. Value Capture - Generic Profit Models “Two steps ahead” Profit The • First mover generates Profit Zone excess returns before imitators begin to erode margins • Create and maintain a$ per Unit lead time over the Cost next competitor and a Price constant stream of new products Q2 Q4 Q6 Quarters Post Launch Q8 • Example Intel (focuses on being two years ahead of nearest rival’s product developments) Source :- Slywotzky & Morrison, The Profit Zone
  • 48. Value Capture - Generic Profit Models Protectable Intellectual Property Profit • Profit comes from increasing proportion of sales coming from patentable products Protectable IP • Key driver of profitability is Products Protectable IP the astute selection of R&D Products projects to generateRevenue tomorrows products • Examples Commodity Products Merck, 3M Commodity Products Five Years Today Ago Source :- Slywotzky & Morrison, The Profit Zone
  • 49. Value Capture - Generic Profit Models Local Leadership Profit The Profit • Profitability is a Zone function of local market strength • Cost structure is localProfitability by Region in nature • Profitability supports 0 growth, not the other way around • Example Local Market Share Wal-mart (established stores county by county and focussed on achieving local dominance) Source :- Slywotzky & Morrison, The Profit Zone
  • 50. Value Capture - Generic Profit Models Value Chain Position Profit • Profit concentrates itself in certain parts 20% Leasing of the value chain • Profit comes from 15% Operating Margin Warranty – participating in the Gasoline more profitable value 10% chain segments OR Auto Loans – capturing downstream5% New Car Dealers Auto margin by leveraging Service / Repair Auto Rental Insurance After- value chain power Auto Used Car market Manufacturing 0 Dealers Parts 0 25% 50% 75% 100% Share of Industry Revenue Source :- Slywotzky & Morrison, The Profit Zone
  • 51. Value Capture - Generic Profit Models Low-Cost Business Design Profit • New entrant trumps the incumbents low cost (through experience) business model with a new model thatCost per Unit – Uses new technology to produce cheaper – Uses different go-to-market or fulfilment systems to deliver better customer value – Deletes unnecessary or obsolete features from Conventional Low Cost Business Business product offer Design Design • Examples Dell in computing, Nucor in steel Source :- Slywotzky & Morrison, The Profit Zone
  • 52. Value Capture - Generic Profit ModelsSwitchboard Profit• In markets characterised by Buyers Sellers multiple sellers communicating with multiple buyers, with each The Profit incurring high costs in doing so, Zone a switchboard can provide a valuable service Intermediary (Switchboard)• A switchboard becomes the single point of communication, reducing the costs of buyers & sellers• It profits through advertising and/or transaction fees• The increase in available information often reduces the premium sellers gain in selling to uninformed buyers• Examples Schwab (investments), Auto-by-tel (on-line car sales), ChemConnect (chemical trading on-line) Source :- Slywotzky & Morrison, The Profit Zone
  • 53. Appendix B Generic Frameworks for Differentiation / Strategic Control
  • 54. What is a Strategic Control Point ?• A Strategic Control point is a mechanism that helps protect the profits flowing from a business model against the corrosive effects of competition and customer power• A business model without a strategic control point is like a ship with a hole in its hull - it will sink much sooner !• Strategic Control Point keep you in the profit zone longer
  • 55. Examples of Strategic ControlPointsBusiness models that have strong ...• Brand, Copyright, Patents• Control of Distribution / the Value Chain• Two year lead in product development• Commodity with 10% - 20% cost advantage
  • 56. Assessing the strength of yourStrategic Control Point(s)• Strength is often different in different industries (e.g. Brand is almost irrelevant in OE Automotive but extremely relevant in carbonated beverages)• Strength is relative to the countervailing strength of your competitors & customers• It is also relative to it’s reach (e.g. if your have patent protected product only has application in a very small segment of the market)• Strength is cumulative i.e. if you have more than one Strategic Control Point you can add their scores together
  • 57. The Template Strength vs. Possession Reach Competitors / Index Value Customers Strategic Control Countervailing What %age of Point Do you Posses it? your Sales does it strength of Index value for my Extended Value (Yes=1, No=0) Competitors / industry apply to? Customers A B C D AxBxCxD Commodity with cost disadvantage 1 0.0 Commodity with cost parity 2 0.0 Commodity with 10% to 20% cost 3 0.0 advantage One Year lead in Product development 4 0.0 Two Year lead in Product development 5 0.0 Strong Brand, Copyright or Patent 6 0.0 protection Own the Customer Relationship 7 0.0 String of super- dominant positions 8 0.0 Control the Value Chain / Distribution 9 0.0 Own the Industry Standard 10 0.0 Total Strategic Control Rating 0.0
  • 58. ExamplesINTEL GE Strength vs. Strength vs. Possession Reach Competitors / Index Value Possession Reach Competitors / Index Value Customers Customers Strategic Control Countervailing Strategic Control Countervailing What %age of What %age of Point Do you Posses it? your Sales does it strength of Index value for my Extended Value Point Do you Posses it? your Sales does it strength of Index value for my Extended Value (Yes=1, No=0) Competitors / industry (Yes=1, No=0) Competitors / industry apply to? apply to? Customers Customers A B C D AxBxCxD A B C D AxBxCxDCommodity with cost Commodity with costdisadvantage 1 0.0 disadvantage 1 0.0Commodity with cost Commodity with costparity 2 0.0 parity 2 0.0Commodity with 10% Commodity with 10%to 20% cost 3 0.0 to 20% cost 1 100% 70% 3 2.1advantage advantageOne Year lead in One Year lead inProduct development 4 0.0 Product development 4 0.0Two Year lead in Two Year lead inProduct development 1 60% 40% 5 1.2 Product development 5 0.0Strong Brand, Strong Brand,Copyright or Patent 1 100% 70% 6 4.2 Copyright or Patent 6 0.0protection protectionOwn the Customer Own the CustomerRelationship 7 0.0 Relationship 1 100% 70% 7 4.9String of super- String of super-dominant positions 8 0.0 dominant positions 8 0.0Control the Value Control the ValueChain / Distribution 1 80% 50% 9 3.6 Chain / Distribution 9 0.0Own the Industry Own the IndustryStandard 10 0.0 Standard 10 0.0Total Strategic Control Rating 9.0 Total Strategic Control Rating 7.0

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