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Abdm4223 lecture week 4 part 1 business model 280513
From Business Model toFrom Business Model toStrategic PlanStrategic Plan :Part 1 : Business ModelFrom Business Model toFrom Business Model toStrategic PlanStrategic Plan :Part 1 : Business ModelABDM4233 ENTREPRENEURSHIPABDM4233 ENTREPRENEURSHIPbyStephen OngStephen OngPrincipal Lecturer (Specialist)Principal Lecturer (Specialist)Visiting Professor, ShenzhenVisiting Professor, Shenzhen
The social enterprise MissionThe social enterprise Missionstatementstatement It should be clear and succinctIt should be clear and succinct It should explain:It should explain: What the enterprise will doWhat the enterprise will do How it is entrepreneurialHow it is entrepreneurial Why it is importantWhy it is important This should occur before planningThis should occur before planningactivitiesactivities A mission statement has goals andA mission statement has goals andmeasures of progress towards goalmeasures of progress towards goal
EMBRACEEMBRACE VISION :VISION : Every woman andchild has an equal chance for ahealthy life. MISSION :MISSION : Advancing MaternalAdvancing Maternaland Child Healthand Child Health …… by providingby providing innovativeinnovativesolutionssolutions to the worlds mostto the worlds mostvulnerable populationsvulnerable populations
What a mission statementWhat a mission statementshould specifyshould specify What the enterprise will and will not doWhat the enterprise will and will not do How it creates and measures valueHow it creates and measures value How an enterprise innovates or adaptsHow an enterprise innovates or adapts How success will be measuredHow success will be measured
One Laptop per ChildOne Laptop per Childhttp://one.laptop.orghttp://one.laptop.org MISSIONMISSION ToTo empowerempowerthe worldsthe worldspoorestpoorestchildrenchildrenthroughthrougheducationeducationWe aim toWe aim toprovide eachprovide eachchild with achild with arugged, low-rugged, low-cost, low-power,cost, low-power,
Benefits of a good missionBenefits of a good missionstatementstatement It provides focusIt provides focus Social entrepreneurs can stay on target asSocial entrepreneurs can stay on target asthey develop the conceptthey develop the concept It helps to attract supportIt helps to attract support As a marketing tool, it brings otherAs a marketing tool, it brings otherresources into the enterpriseresources into the enterprise For example, volunteers, donors, partnersFor example, volunteers, donors, partners
From social mission to businessFrom social mission to businessmodelmodel Business model – a plan for howBusiness model – a plan for howthe mission will be achieved andthe mission will be achieved andhow the enterprise will create valuehow the enterprise will create value A general description of how theA general description of how theenterprise will operate:enterprise will operate: Its missionIts mission Its strategic resourcesIts strategic resources Its partnersIts partners How it will serve its beneficiariesHow it will serve its beneficiaries
Business model forBusiness model forEMBRACEEMBRACE
Threats to business modelsThreats to business models Demand side threatsDemand side threats A product or service that finds noA product or service that finds nomarket – people don’t want itmarket – people don’t want it Its value is not accepted by clientsIts value is not accepted by clients Supply side threatsSupply side threats Too much capital needed, or tooToo much capital needed, or toomuch ongoing cost to sustain itselfmuch ongoing cost to sustain itself Either threat can derail anEither threat can derail anenterpriseenterprise
Many social enterprises failMany social enterprises fail Persistent lack of income is a commonPersistent lack of income is a commonreasonreason A supply explanation would be thatA supply explanation would be thatcosts are too highcosts are too high A demand explanation would be thatA demand explanation would be thatrevenues are too lowrevenues are too low Both flaws can be examined in theBoth flaws can be examined in thebusiness modelbusiness model
What is a Business Model?What is a Business Model? ModelModel A model is a plan or diagram that’s used to make orA model is a plan or diagram that’s used to make ordescribe something.describe something. Business ModelBusiness Model A firm’s business model is its plan or diagram for how itA firm’s business model is its plan or diagram for how itcompetes, uses its resources, structures its relationships,competes, uses its resources, structures its relationships,interfaces with customers, and creates value to sustaininterfaces with customers, and creates value to sustainitself on the basis of the profits it generates.itself on the basis of the profits it generates. The term “business model” is used to include all theThe term “business model” is used to include all theactivities that define how a firm competes in theactivities that define how a firm competes in themarketplace.marketplace.
Changing Business ModelsChanging Business Models
Dell’s Business ModelDell’s Business Model1 of 21 of 2 Beyond Its Own BoundariesBeyond Its Own Boundaries It’s important to understand that a firm’s businessIt’s important to understand that a firm’s businessmodel takes it beyond its own boundaries.model takes it beyond its own boundaries. Almost all firms partner with others to make theirAlmost all firms partner with others to make theirbusiness models work.business models work. In Dell’s case, it needs the cooperation of its suppliers,In Dell’s case, it needs the cooperation of its suppliers,customers, and many others to make its business modelcustomers, and many others to make its business modelwork.work.
Dell’s Business ModelDell’s Business Model2 of 22 of 2Dell’s Approach to Selling PCs versus Traditional Manufacturers
The Importance of Business ModelsThe Importance of Business ModelsHaving a clearly articulated business model is importantbecause it does the following:• Serves as an ongoing extension of feasibility analysis. A businessmodel continually asks the question, “Does this business makesense?”• Focuses attention on how all the elements of a business fittogether and constitute a working whole.• Describes why the network of participants needed to make abusiness idea viable are willing to work together.• Articulates a company’s core logic to all stakeholders, includingthe firm’s employees.
Diversity of Business ModelsDiversity of Business ModelsDiversity or Variety inBusiness Models• There is no standard businessmodel for an industry or fora target market within anindustry.• However, over time, the mostsuccessful business modelsin an industry predominate.• There are always opportunitiesfor business model innovation.
How Business Models EmergeHow Business Models Emerge1 of 31 of 3 The Value ChainThe Value Chain The value chain is the string of activities that moves aThe value chain is the string of activities that moves aproduct from the raw material stage, throughproduct from the raw material stage, throughmanufacturing and distribution, and ultimately to themanufacturing and distribution, and ultimately to theend user.end user. By studying a product’s or service’s value chain, anBy studying a product’s or service’s value chain, anorganization can identify ways to create additionalorganization can identify ways to create additionalvalue and assess whether it has the means to do so.value and assess whether it has the means to do so. Value chain analysis is also helpful in identifyingValue chain analysis is also helpful in identifyingopportunities for new businesses and in understandingopportunities for new businesses and in understandinghow business models emerge.how business models emerge.
How Business Models EmergeHow Business Models Emerge2 of 32 of 3The Value Chain
How Business Models EmergeHow Business Models Emerge3 of 33 of 3 The Value Chain (continued)The Value Chain (continued) Entrepreneurs look at the value chain of a product or aEntrepreneurs look at the value chain of a product or aservice to pinpoint where the value chain can be madeservice to pinpoint where the value chain can be mademore effective or to spot where additional “value” canmore effective or to spot where additional “value” canbe added.be added. This type of analysis may focus on:This type of analysis may focus on: A single primary activity such as marketing and sales.A single primary activity such as marketing and sales. The interface between one stage of the value chain and another,The interface between one stage of the value chain and another,such as the interface between operations and outgoing logistics.such as the interface between operations and outgoing logistics. One of the support activities, such as human resourceOne of the support activities, such as human resourcemanagement.management.
Potential Fatal Flaws in Business ModelsPotential Fatal Flaws in Business Models Fatal FlawsFatal Flaws Two fatal flaws can render a business model untenableTwo fatal flaws can render a business model untenablefrom the beginning:from the beginning: A complete misread of the customerA complete misread of the customer Utterly unsound economicsUtterly unsound economics
““JOBS to be Done”JOBS to be Done” Video :“What JOB does a Milkshake Do?”Video :“What JOB does a Milkshake Do?” Prof. Clayton M. Christensen,Prof. Clayton M. Christensen, Harvard Business SchoolHarvard Business School
Osterwalder’s Business ModelOsterwalder’s Business Model
9 Components of Business Model9 Components of Business Model(Osterwalder 2010)(Osterwalder 2010)1.1. CustomerCustomerSegmentsSegments2.2. ValueValuePropositionsPropositions3.3. CustomerCustomerRelationshipsRelationships4.4. ChannelsChannels5.5. Key ActivitiesKey Activities6.6. Key ResourcesKey Resources7.7. Key PartnersKey Partners8.8. Revenue StreamRevenue Stream9.9. Cost StructureCost Structure
1. Customer Segments1. Customer Segments For whom are weFor whom are wecreating value?creating value? Who are our mostWho are our mostimportantimportantcustomers?customers? Mass Market/ NicheMass Market/ NicheMarket/ Segmented/Market/ Segmented/Diversified/ Multi-sidedDiversified/ Multi-sidedPlatformPlatform What are JOBS toWhat are JOBS tobe done?be done? Customer Gains?Customer Gains? Customer Pain?Customer Pain?
2. Value Propositions2. Value Propositions What value do we deliverWhat value do we deliverto the customer?to the customer? Which one of ourWhich one of ourcustomer’s problems arecustomer’s problems arewe helping to solve?we helping to solve? What bundles of productsWhat bundles of productsand services are weand services are weoffering to each Customeroffering to each CustomerSegment?Segment? Which customer needsWhich customer needsare we satisfying?are we satisfying? Get the JOBS done?Get the JOBS done?characteristicscharacteristicsNewnessNewnessPerformancePerformanceCustomizationCustomization““Getting the Job Done”Getting the Job Done”DesignDesignBrand/StatusBrand/StatusPricePriceCost ReductionCost ReductionRisk ReductionRisk ReductionAccessibilityAccessibilityConvenience/UsabilityConvenience/Usability Gain creators?Gain creators? Pain relievers?Pain relievers?
3. Customer Relationships3. Customer Relationships What type of relationshipWhat type of relationshipdoes each of ourdoes each of ourCustomer SegmentsCustomer Segmentsexpect us to establish andexpect us to establish andmaintain with them?maintain with them? Which ones have weWhich ones have weestablished?established? How are they integratedHow are they integratedwith the rest of ourwith the rest of ourbusiness model?business model? How costly are they?How costly are they?ExamplesExamplesPersonal assistancePersonal assistanceDedicated PersonalDedicated PersonalAssistanceAssistanceSelf-ServiceSelf-ServiceAutomated ServicesAutomated ServicesCommunitiesCommunitiesCo-creationCo-creation
4. Channels4. Channels Through which Channels doThrough which Channels doour Customer Segmentsour Customer Segmentswant to be reached?want to be reached? How are we reaching themHow are we reaching themnow?now? How are our ChannelsHow are our Channelsintegrated?integrated? Which ones work best?Which ones work best? Which ones are most cost-Which ones are most cost-efficient?efficient? How are we integrating themHow are we integrating themwith customer routines?with customer routines?channel phases:channel phases:11. Awareness :. Awareness : How do weHow do weraise awareness about ourraise awareness about ourcompany’s products /services?company’s products /services?2.2. Evaluation :Evaluation : How do we helpHow do we helpcustomers evaluate ourcustomers evaluate ourorganization’s Valueorganization’s ValueProposition?Proposition?3.3. Purchase :Purchase : How do we allowHow do we allowcustomers to purchase specificcustomers to purchase specificproducts/services?products/services?44. Delivery :. Delivery : How do we deliverHow do we delivera Value Proposition toa Value Proposition tocustomers?customers?5.5. After sales :After sales : How do weHow do weprovide post-purchaseprovide post-purchasecustomer support?customer support?
6. Key Resources6. Key Resources What KeyWhat KeyResources do ourResources do ourValue PropositionsValue Propositionsrequire?require? Our DistributionOur DistributionChannels?Channels? CustomerCustomerRelationships?Relationships? Revenue Streams?Revenue Streams?types of resourcestypes of resourcesPhysicalPhysicalIntellectual (brandIntellectual (brandpatents, copyrights,patents, copyrights,data)data)HumanHumanFinancialFinancial
7. Key Partners7. Key Partners Who are our KeyWho are our KeyPartners?Partners? Who are our keyWho are our keysuppliers?suppliers? Which KeyWhich KeyResources are weResources are weacquiring fromacquiring frompartners?partners? Which Key ActivitiesWhich Key Activitiesdo partners perform?do partners perform?motivations formotivations forpartnerships:partnerships:Optimization andOptimization andeconomyeconomyReduction of risk andReduction of risk anduncertaintyuncertaintyAcquisition ofAcquisition ofparticular resourcesparticular resourcesand activitiesand activities
8. Revenue Stream8. Revenue Stream For what value are ourFor what value are ourcustomers really willing tocustomers really willing topay?pay? For what do they currentlyFor what do they currentlypay?pay? How are they currentlyHow are they currentlypaying?paying? How would they prefer toHow would they prefer topay?pay? How much does eachHow much does eachRevenue Stream contributeRevenue Stream contributeto overall revenues?to overall revenues?types:types:Asset saleAsset saleUsage feeUsage feeSubscription FeesSubscription FeesLending/ Renting/ LeasingLending/ Renting/ LeasingLicensingLicensingBrokerage feesBrokerage feesAdvertisingAdvertisingfixed pricingfixed pricingList PriceList PriceProduct feature dependentProduct feature dependentCustomer segment dependentCustomer segment dependentVolume dependentVolume dependentdynamic pricingdynamic pricingNegotiation (bargaining)Negotiation (bargaining)Yield ManagementYield ManagementReal-time-MarketReal-time-Market
9. Cost Structure9. Cost Structure What are the mostWhat are the mostimportant costsimportant costsinherent in ourinherent in ourbusiness model?business model? Which KeyWhich KeyResources are mostResources are mostexpensive?expensive? Which Key ActivitiesWhich Key Activitiesare most expensive?are most expensive?is your business more:is your business more:Cost DrivenCost Driven (leanest cost(leanest coststructure, low price valuestructure, low price valueproposition, maximumproposition, maximumautomation, extensiveautomation, extensiveoutsourcing)outsourcing)Value DrivenValue Driven ( focused on( focused onvalue creation, premium valuevalue creation, premium valueproposition)proposition)characteristics:characteristics:Fixed Costs (salaries,Fixed Costs (salaries,rents, utilities)rents, utilities)Variable costsVariable costsEconomies of scaleEconomies of scaleEconomies of scopeEconomies of scope
Business Model Test DriveBusiness Model Test Drive1.1. How much doHow much do switching costsswitching costs prevent yourprevent yourcustomers from churning?customers from churning?2.2. HowHow scalablescalable is your business model?is your business model?3.3. Does your business model produceDoes your business model produce recurringrecurringrevenues?revenues?4.4. Do youDo you earnearn before you spend?before you spend?5.5. How much do you getHow much do you get others to doothers to do the work?the work?6.6. Does your business model provide built-inDoes your business model provide built-inprotection from competitionprotection from competition??7.7. Is your business model based on a gameIs your business model based on a gamechangingchanging cost structurecost structure??
Business Model of FacebookBusiness Model of Facebook
Business Model of ZyngaBusiness Model of Zynga
Strategic Business ModelStrategic Business Model(Barringer & Ireland 2012)(Barringer & Ireland 2012)Four Components of the Business Model
Core StrategyCore Strategy1 of 31 of 3 Core StrategyCore Strategy The first component of a business model is the coreThe first component of a business model is the corestrategy, which describes how a firm competes relativestrategy, which describes how a firm competes relativeto its competitors.to its competitors. Primary Elements of Core StrategyPrimary Elements of Core Strategy Mission statementMission statement Product/market scopeProduct/market scope Basis for differentiationBasis for differentiation
Core StrategyCore Strategy2 of 32 of 3Primary Elements of Core StrategyMissionStatementProduct/MarketScopeA company’s product/market scope defines theproducts and markets on which it willconcentrate.A firm’s mission, or mission statement,describes why it exists and what its businessmodel is supposed to accomplish.
Core StrategyCore Strategy3 of 33 of 3Primary Elements of Core StrategyBasis ofDifferentiationIt is important that a new venture differentiateitself from its competitors in some way that isimportant to its customers. If a new firm’sproducts or services aren’t different fromthose of its competitors, why should anyonetry them?
Strategic ResourcesStrategic Resources1 of 31 of 3 Strategic ResourcesStrategic Resources A firm is not able to implement a strategy withoutA firm is not able to implement a strategy withoutresources, so the resources a firm has affect its businessresources, so the resources a firm has affect its businessmodel substantially.model substantially. For a new venture, its strategic resources may initially beFor a new venture, its strategic resources may initially belimited to the competencies of its founders, the opportunitylimited to the competencies of its founders, the opportunitythey have identified, and the unique way they plan to servethey have identified, and the unique way they plan to servetheir market.their market. The two most important strategic resources are:The two most important strategic resources are: A firm’s core competenciesA firm’s core competencies Strategic assetsStrategic assets
Strategic ResourcesStrategic Resources2 of 32 of 3Primary Elements of Strategic ResourcesCoreCompetenciesStrategicAssetsA core competency is a resource or capability thatserves as a source of a firm’s competitive advantage.Examples include Sony’s competence inminiaturization and Dell’s competence in supply chainmanagement.Strategic assets are anything rare and valuable that afirm owns. They include plant and equipment,location, brands, patents, customer data, a highlyqualified staff, and distinctive partnerships.
Strategic ResourcesStrategic Resources3 of 33 of 3 Importance of Strategic ResourcesImportance of Strategic Resources New ventures ultimately try to combine their coreNew ventures ultimately try to combine their corecompetencies and strategic assets to create a sustainablecompetencies and strategic assets to create a sustainablecompetitive advantage.competitive advantage. This factor is one that investors pay close attention toThis factor is one that investors pay close attention towhen evaluating a business.when evaluating a business. A sustainable competitive advantage is achieved byA sustainable competitive advantage is achieved byimplementing a value-creating strategy that is uniqueimplementing a value-creating strategy that is uniqueand not easy to imitate.and not easy to imitate. This type of advantage is achievable when a firm hasThis type of advantage is achievable when a firm hasstrategic resources and the ability to use them.strategic resources and the ability to use them.
Partnership NetworkPartnership Network1 of 31 of 3 Partnership NetworkPartnership Network A firm’s partnership network is the third component ofA firm’s partnership network is the third component ofa business model. New ventures, in particular, typicallya business model. New ventures, in particular, typicallydo not have the resources to perform key roles.do not have the resources to perform key roles. In most cases, a business does not want to do everythingIn most cases, a business does not want to do everythingitself because the majority of tasks needed to build aitself because the majority of tasks needed to build aproduct or deliver a service are not core to a company’sproduct or deliver a service are not core to a company’scompetitive advantage.competitive advantage. A firm’s partnership network includes:A firm’s partnership network includes: SuppliersSuppliers Other key relationshipsOther key relationships
Partnership NetworkPartnership Network2 of 32 of 3Primary Elements of Partnership NetworkSuppliersOther KeyRelationshipsA supplier is a company that provides parts orservices to another company. Intel is Dell’s primarysuppler for computer chips, for example.Firms partner with other companies to make theirbusiness models work. An entrepreneur’s ability tolaunch a firm that achieves a competitive advantagemay hinge as much on the skills of the partners ason the skills within the firm itself.
Partnership NetworkPartnership Network3 of 33 of 3The Most Common Types of Business Partnerships
Customer InterfaceCustomer Interface1 of 31 of 3 Customer InterfaceCustomer Interface The way a firm interacts with its customer hinges onThe way a firm interacts with its customer hinges onhow it chooses to compete.how it chooses to compete. For example, Amazon.com sells books over the Internet whileFor example, Amazon.com sells books over the Internet whileBarnes & Noble sells through its traditional bookstores andBarnes & Noble sells through its traditional bookstores andonline.online. The three elements of a company’s customer interfaceThe three elements of a company’s customer interfaceare:are: Target customerTarget customer Fulfillment and supportFulfillment and support Pricing modelPricing model
Customer InterfaceCustomer Interface2 of 32 of 3Primary Elements of Customer InterfaceTargetMarketFulfillmentand SupportA firm’s target market is the limited group ofindividuals or businesses that it goes after or tries toappeal to.Fulfillment and support describes the way a firm’sproduct or service reaches its customers. It also refersto the channels a company uses and what level ofcustomer support it provides.
Customer InterfaceCustomer Interface3 of 33 of 3Primary Elements of Customer InterfacePricingStructureThe third element of a company’s customerinterface is its pricing structure. Pricing modelsvary, depending on a firm’s target market and itspricing philosophy.
Recap: The Importance of BusinessRecap: The Importance of BusinessModelsModels Business ModelsBusiness Models It is very useful for a new venture to look at itself in aIt is very useful for a new venture to look at itself in aholistic manner and understand that it must constructholistic manner and understand that it must constructan effective “business model” to be successful.an effective “business model” to be successful. Everyone that does business with a firm, from itsEveryone that does business with a firm, from itscustomers to its partners, does so on a voluntary basis.customers to its partners, does so on a voluntary basis.As a result, a firm must motivate its customers and itsAs a result, a firm must motivate its customers and itspartners to play along.partners to play along. Close attention to each of the primary elements of aClose attention to each of the primary elements of afirm’s business model is essential for a new venture’sfirm’s business model is essential for a new venture’ssuccess.success.
Further ReadingFurther Reading Scarborough, Norman, M. 2011.Scarborough, Norman, M. 2011. Essentials ofEssentials ofEntrepreneurship and Small BusinessEntrepreneurship and Small BusinessManagement.Management. 66ththedition. Pearson.edition. Pearson. Brooks, Arthur C. (2006)Brooks, Arthur C. (2006) Social Entrepreneurship :Social Entrepreneurship :A Modern Approach to Social Value Creation.A Modern Approach to Social Value Creation.PearsonPearson Barringer, Bruce R. & Ireland, R. Duane, 2011Barringer, Bruce R. & Ireland, R. Duane, 2011Entrepreneurship – Successfully launching newEntrepreneurship – Successfully launching newventuresventures 44ththedition, Pearson.edition, Pearson. Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011.Schaper, M., Volery, T., Weber, P. & Lewis, K. 2011.Entrepreneurship and Small Business.Entrepreneurship and Small Business. 33rdrdAsiaAsiaPacific edition. John Wiley.Pacific edition. John Wiley. Osterwalder, A. & Piqneur,Y. 2011Osterwalder, A. & Piqneur,Y. 2011 Business ModelBusiness ModelGenerationGeneration . Business Model Foundry.. Business Model Foundry.