ABDM4233 ENTREPRENEURSHIPFrom Business Model to Strategic Plan :Part 1 : Business Model by Stephen Ong Principal Lecturer (Specialist) Visiting Professor, Shenzhen
The social enterprise Mission statement It should be clear and succinct It should explain: What the enterprise will do How it is entrepreneurial Why it is important This should occur before planning activities A mission statement has goals and measures of progress towards goal
EMBRACE VISION : Every woman and child has an equal chance for a healthy life. MISSION : Advancing Maternal and Child Health … by providing innovative solutions to the worlds most vulnerable populations
What a mission statement should specify What the enterprise will and will not do How it creates and measures value How an enterprise innovates or adapts How success will be measured
MISSIONNIKE 2012 3 KEY WORDS INSPIRATION INNOVATION ATHLETE
One Laptop per Childhttp://one.laptop.org MISSION To empower the worlds poorest We provide aim to each children child with a through rugged, low- cost, low-power, education
Benefits of a good mission statement It provides focus Social entrepreneurs can stay on target as they develop the concept It helps to attract support As a marketing tool, it brings other resources into the enterprise For example, volunteers, donors, partners
From social mission to business model Business model – a plan for how the mission will be achieved and how the enterprise will create value A general description of how the enterprise will operate: Its mission Its strategic resources Its partners How it will serve its beneficiaries
Threats to business models Demand side threats A product or service that finds no market – people don’t want it Its value is not accepted by clients Supply side threats Too much capital needed, or too much ongoing cost to sustain itself Either threat can derail an enterprise
Many social enterprises fail Persistent lack of income is a common reason A supply explanation would be that costs are too high A demand explanation would be that revenues are too low Both flaws can be examined in the business model
What is a Business Model? Model A model is a plan or diagram that’s used to make or describe something. Business Model A firm’s business model is its plan or diagram for how it competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it generates. The term “business model” is used to include all the activities that define how a firm competes in the marketplace.
Dell’s Business Model 1 of 2 Beyond Its Own Boundaries It’s important to understand that a firm’s business model takes it beyond its own boundaries. Almost all firms partner with others to make their business models work. In Dell’s case, it needs the cooperation of its suppliers, customers, and many others to make its business model work.
Dell’s Business Model 2 of 2Dell’s Approach to Selling PCs versus Traditional Manufacturers
The Importance of Business Models Having a clearly articulated business model is important because it does the following:• Serves as an ongoing extension of feasibility analysis. A business model continually asks the question, “Does this business make sense?”• Focuses attention on how all the elements of a business fit together and constitute a working whole.• Describes why the network of participants needed to make a business idea viable are willing to work together.• Articulates a company’s core logic to all stakeholders, including the firm’s employees.
Diversity of Business Models • There is no standard business model for an industry or for a target market within anDiversity or Variety in industry. • However, over time, the most Business Models successful business models in an industry predominate. • There are always opportunities for business model innovation.
How Business Models Emerge 1 of 3 The Value Chain The value chain is the string of activities that moves a product from the raw material stage, through manufacturing and distribution, and ultimately to the end user. By studying a product’s or service’s value chain, an organization can identify ways to create additional value and assess whether it has the means to do so. Value chain analysis is also helpful in identifying opportunities for new businesses and in understanding how business models emerge.
How Business Models Emerge 2 of 3 The Value Chain
How Business Models Emerge 3 of 3 The Value Chain (continued) Entrepreneurs look at the value chain of a product or a service to pinpoint where the value chain can be made more effective or to spot where additional “value” can be added. This type of analysis may focus on: A single primary activity such as marketing and sales. The interface between one stage of the value chain and another, such as the interface between operations and outgoing logistics. One of the support activities, such as human resource management.
Potential Fatal Flaws in Business Models Fatal Flaws Two fatal flaws can render a business model untenable from the beginning: A complete misread of the customer Utterly unsound economics
“JOBS to be Done” Video :“What JOB does a Milkshake Do?” Prof. Clayton M. Christensen, Harvard Business School
9 Components of Business Model (Osterwalder 2010)1. Customer 1. Key Activities Segments 2. Key Resources2. Value 3. Key Partners Propositions3. Customer 1. Revenue Stream Relationships 2. Cost Structure4. Channels
1. Customer Segments For whom are we Customer Gains? creating value? Who are our most important customers? Mass Market/ Niche Customer Pain? Market/ Segmented/ Diversified/ Multi-sided Platform What are JOBS to be done?
2. Value Propositions characteristics What value do we deliver Newness to the customer? Performance Which one of our Customization customer’s problems are “Getting the Job Done” we helping to solve? Design Brand/Status What bundles of products Price and services are we Cost Reduction offering to each Customer Risk Reduction Segment? Accessibility Which customer needs Convenience/Usability are we satisfying? Gain creators? Get the JOBS done? Pain relievers?
3. Customer Relationships What type of relationship Examples does each of our Personal assistance Customer Segments Dedicated Personal expect us to establish and Assistance maintain with them? Self-Service Which ones have we Automated Services established? Communities How are they integrated Co-creation with the rest of our business model? How costly are they?
channel phases:4. Channels 1. Awareness : How do we raise awareness about our Through which Channels do company’s products /services? our Customer Segments 2. Evaluation : How do we help want to be reached? customers evaluate our How are we reaching them organization’s Value now? Proposition? How are our Channels 3. Purchase : How do we allow integrated? customers to purchase specific products/services? Which ones work best? 4. Delivery : How do we deliver Which ones are most cost- a Value Proposition to efficient? customers? How are we integrating them 5. After sales : How do we with customer routines? provide post-purchase customer support?
5. Key Activities What Key Activities categories do our Value Production Propositions Problem Solving require? Platform/Network Our Distribution Channels? Customer Relationships? Revenue streams?
6. Key Resources What Key types of resources Resources do our Physical Value Propositions Intellectual (brand require? patents, copyrights, data) Our Distribution Human Channels? Financial Customer Relationships? Revenue Streams?
7. Key Partners Who are our Key motivations for Partners? partnerships: Optimization and Who are our key suppliers? economy Reduction of risk and Which Key uncertainty Resources are we Acquisition of acquiring from partners? particular resources and activities Which Key Activities do partners perform?
types: 8. Revenue Stream Asset sale Usage fee Subscription Fees For what value are our Lending/ Renting/ Leasing customers really willing to Licensing pay? Brokerage fees Advertising For what do they currently fixed pricing pay? List Price How are they currently Product feature dependent paying? Customer segment dependent Volume dependent How would they prefer to pay? dynamic pricing Negotiation (bargaining) How much does each Yield Management Revenue Stream contribute Real-time-Market to overall revenues?
is your business more: 9. Cost Structure Cost Driven (leanest cost structure, low price value proposition, maximum What are the most automation, extensive important costs outsourcing) Value Driven ( focused on inherent in our value creation, premium value proposition) business model? Which Key characteristics: Resources are most Fixed Costs (salaries, rents, utilities) expensive? Variable costs Which Key Activities Economies of scale are most expensive? Economies of scope
Business Model Test Drive1. How much do switching costs prevent your customers from churning?2. How scalable is your business model?3. Does your business model produce recurring revenues?4. Do you earn before you spend?5. How much do you get others to do the work?6. Does your business model provide built-in protection from competition?7. Is your business model based on a game changing cost structure?
Strategic Business Model (Barringer & Ireland 2012)Four Components of the Business Model
Core Strategy 1 of 3 Core Strategy The first component of a business model is the core strategy, which describes how a firm competes relative to its competitors. Primary Elements of Core Strategy Mission statement Product/market scope Basis for differentiation
Core Strategy 2 of 3 Primary Elements of Core Strategy A firm’s mission, or mission statement, Mission describes why it exists and what its business Statement model is supposed to accomplish.Product/Market A company’s product/market scope defines the Scope products and markets on which it will concentrate.
Core Strategy 3 of 3 Primary Elements of Core Strategy It is important that a new venture differentiate itself from its competitors in some way that is Basis of important to its customers. If a new firm’sDifferentiation products or services aren’t different from those of its competitors, why should anyone try them?
Strategic Resources 1 of 3 Strategic Resources A firm is not able to implement a strategy without resources, so the resources a firm has affect its business model substantially. For a new venture, its strategic resources may initially be limited to the competencies of its founders, the opportunity they have identified, and the unique way they plan to serve their market. The two most important strategic resources are: A firm’s core competencies Strategic assets
Strategic Resources 2 of 3 Primary Elements of Strategic Resources A core competency is a resource or capability that serves as a source of a firm’s competitive advantage. Core Examples include Sony’s competence inCompetencies miniaturization and Dell’s competence in supply chain management. Strategic assets are anything rare and valuable that a Strategic firm owns. They include plant and equipment, Assets location, brands, patents, customer data, a highly qualified staff, and distinctive partnerships.
Strategic Resources 3 of 3 Importance of Strategic Resources New ventures ultimately try to combine their core competencies and strategic assets to create a sustainable competitive advantage. This factor is one that investors pay close attention to when evaluating a business. A sustainable competitive advantage is achieved by implementing a value-creating strategy that is unique and not easy to imitate. This type of advantage is achievable when a firm has strategic resources and the ability to use them.
Partnership Network 1 of 3 Partnership Network A firm’s partnership network is the third component of a business model. New ventures, in particular, typically do not have the resources to perform key roles. In most cases, a business does not want to do everything itself because the majority of tasks needed to build a product or deliver a service are not core to a company’s competitive advantage. A firm’s partnership network includes: Suppliers Other key relationships
Partnership Network 2 of 3 Primary Elements of Partnership Network A supplier is a company that provides parts or Suppliers services to another company. Intel is Dell’s primary suppler for computer chips, for example. Firms partner with other companies to make their business models work. An entrepreneur’s ability to Other Key launch a firm that achieves a competitive advantageRelationships may hinge as much on the skills of the partners as on the skills within the firm itself.
Partnership Network 3 of 3The Most Common Types of Business Partnerships
Customer Interface 1 of 3 Customer Interface The way a firm interacts with its customer hinges on how it chooses to compete. For example, Amazon.com sells books over the Internet while Barnes & Noble sells through its traditional bookstores and online. The three elements of a company’s customer interface are: Target customer Fulfillment and support Pricing model
Customer Interface 2 of 3 Primary Elements of Customer Interface Target A firm’s target market is the limited group of Market individuals or businesses that it goes after or tries to appeal to. Fulfillment and support describes the way a firm’s Fulfillment product or service reaches its customers. It also refersand Support to the channels a company uses and what level of customer support it provides.
Customer Interface 3 of 3 Primary Elements of Customer Interface The third element of a company’s customer Pricing interface is its pricing structure. Pricing modelsStructure vary, depending on a firm’s target market and its pricing philosophy.
Recap: The Importance of Business Models Business Models It is very useful for a new venture to look at itself in a holistic manner and understand that it must construct an effective “business model” to be successful. Everyone that does business with a firm, from its customers to its partners, does so on a voluntary basis. As a result, a firm must motivate its customers and its partners to play along. Close attention to each of the primary elements of a firm’s business model is essential for a new venture’s success.
Further Reading Scarborough, Norman, M. 2011. Essentials of Entrepreneurship and Small Business Management. 6th edition. Pearson. Brooks, Arthur C. (2006) Social Entrepreneurship : A Modern Approach to Social Value Creation. Pearson Barringer, Bruce R. & Ireland, R. Duane, 2011 Entrepreneurship – Successfully launching new ventures 4th edition, Pearson. Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011. Entrepreneurship and Small Business. 3rd Asia Pacific edition. John Wiley. Osterwalder, A. & Piqneur,Y. 2011 Business Model Generation . Business Model Foundry.