3. TABLE OF CONTENT
1. Osterwalder’s Business Model Canvas
2. Definition of cost structure
3. Types of cost structure
4. Characteristics of cost structure
5. Types of Business by cost structure
6. Case Study
7. Key Questions to ask
4.
5. OSTERWALDER’S BUSINESS MODEL CANVAS BOXES
• Customer segments
• Value propositions
• Channels
• Customer Relationship
• Revenue streams
• Key resources
• Key Activities
• Key Partnership
• Cost structure
This model is given by Mr. Alexander Osterwaldern who is a Swiss business theorist
6. COST STRUCTURE
• A method to determine how much it will cost a company to manufacture a product and how much profit will be
recognized from manufacturing the product.
• The expense that a firm must take into account when manufacturing a product or providing a service.
8. 4 T’S MODEL OF COST STRUCTURE
Tariff
(TAX & DUTIES)
TRANSPORTATION
(LOGISTICS)
TIME COST
TRANSACTION
(BUYING AND SELLING INSTANCE)COST
9. TYPES OF COST STRUCTURES INCLUDES:
• Transaction cost
• Sunk cost
• Marginal cost
• Fixed cost
The cost structure of the firm is the ratio of fixed costs to variable costs.
• One example is ‘no frills’ airlines like South West which are completely focused on reducing costs.
10. CHARACTERISTICS OF COST STRUCTURES
Cost structures have multiple characteristics. These are highlighted below;
• Fixed costs
• Variable costs
• Economies of scale
• Economies of scope
11. ECONOMIES OF SCALE
• The higher the volume, the lower the overall cost per unit.
• Economies of scale is the cost advantage that arises with increased output of a product.
• Economies of scale arise because of the inverse relationship between the quantity produced and
per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed
cost because these costs are spread out over a larger number of goods. Economies of scale may also
reduce variable cost per unit because of operational efficiencies
12. ECONOMIES OF SCOPE
• Economies of scope refer to the reduction of costs when a business invests in multiple markets
or a larger scope of operations. The average cost of production is therefore expected to decrease if a
company opts to increase the number of goods it produces. A company will have a structure in
place already along with all the departments such as Marketing, Finance or HR operating, so the
company can increase their scope and hence economize the entire structure.
• EX:. P&G
13. TYPES OF BUSINESSES BY COST STRUCTURE
Costs will always remain a major concern for all businesses. It is in fact the universal
concern. However, some businesses make it an organizational mission to minimize costs as
much as possible and all their strategies and tactics are derived from this one goal. Hence
businesses can be categorized into two extremes based on the volume of goods produced;
both ends of the spectrum are either cost driven or values driven. Realistically though,
companies usually fall somewhere in the middle of this spectrum
• Cost-driven
• Values-driven
14. COST-DRIVEN
• Business model which is utterly focused on reducing costs. This is essentially a race to the bottom.
This make impact on the other building blocks. A business which is cost-driven focuses on creating
a lean cost structure through offering cheaply priced value propositions, a high degree of
automation, and outsourcing of costly functions. It is important to lower your prices based on
internal costs and expenses rather than in response to what the competition is doing.
15. VALUES-DRIVEN
A value-based pricing company considers the value of its product or service, as opposed to the
cost the company incurred to create and produce it. To do this, the company determines how
much money or value its product or service will generate for the customer. This value could
originate from factors such as increased efficiency, happiness or stability.
Not all companies drive their business based on costs. Some focus completely on the value they
are providing to their customers. This strategy is characterized by complete focus on the creation
and delivery of a high value, value proposition which is highly customized to the customer
segment’s preferences. Luxury hotels opt for a values driven approach.
The Hyatt prides itself on its customer services and amenities. They put a lot of effort into
creating an experience which customers are willing to pay top dollar for. Employees of the hotel
are encouraged to anticipate individual customer’s needs right down to greeting a repeat
customer by name and providing them with a room with their preferences already in place.
17. KEY QUESTIONS TO ASK
When doing a thorough analysis of your business model, it is imperative to ask the
following questionswhen filling in the Cost Structure building block of the business model canvas;
• What are the fundamental costs derived from my business model?
• Which Key Resources represent a significant expense to the business?
• Which Key Activities represent a significant expense to the business?
• How do your Key activities drive costs?
• Are the above mentioned activities matched to the Value Propositions for your business?
• By exploring different permutations of your business model, do the costs remain fixed or become
variable?
• Is your business more values driven or cost driven?
Editor's Notes
a sunk cost is a cost that has already been incurred and cannot be recovered.
a transaction cost is a cost incurred in making an economic exchange of some sort
Marginal cost-the cost added by producing one extra item of a product/variable cost
Proctor & Gamble is another good example of a company that efficiently realizes economies of scope, since it produces hundreds of hygiene-related products, from razors to toothpaste. The company can afford to hire expensive graphic designers and marketing experts who can use their skills across all of the company's product lines, adding value to each one. If these team members are salaried, each additional product they work on increases the company's economies of scope, because the average cost per good decreases. Additionally, the company is able to consolidate and streamline its production process, making it easier to produce both a razor and a tube of toothpaste, further decreasing average unit costs.
Ryanair is another example of a ‘no frills’ airline which provides a cheap solution to its customer segment for air travel by reducing costs incurred by in-flight meals or other amenities traditionally offered by major airlines. Such airlines have increased seats in their planes and have a limit on luggage size. However, the swift takeover of the market airlines like Ryanair have accomplished clearly show an unmet need that these airlines have fulfilled. Conversely, more expensive airlines have aircrafts which now spend more time on the ground than they do in the air.
Another volume specific example is of the transistors used to amplify or switch electronics signals called metal oxide semiconductor field effect transistors or MOSFETs. This is one of the most commonly used transistors in analog and digital circuits. The price per unit is 21 cents. If you buy 10, the price per unit becomes 19 cents and if you buy a hundred the price per unit falls even further to 17 cents. Hence this is a variable cost dependent entirely on the volume you are trying to produce which requires the MOSFETs. There is a price difference depending on how much you buy, leading to economies of scale.
