Lecture 4 - Business Planning

Business Planning
Bringing Order to Operations

HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED

Recap
Ø  Lecture 1 – We covered what keeps entrepreneurship from
growing in Pakistan
Ø  Lecture 2 – We discussed the different types of ideas and how
to classify them
Ø  Lecture 3 – We began structuring how businesses must be
developed – business model first

Ø  Last week – You were supposed to send me your business
ideas via email so that I could provide comments & feedback
– I got 2 business ideas


What We Have Covered So Far
Ø  Customer Segments
–  Defines the different groups of people or organizations a
venture aims to reach and serve
–  Explained that a venture can have multiple customer
segments depending on their business model, products
and services

Ø  The Value Proposition
–  Describes the bundle of products and services that create
value for a specific Customer Segment
–  Value can be defined differently for different customer
segments


Channels


Channels

Channels describe how a venture communicates with and
reaches its Customer Segments to deliver a Value Proposition


Channels

Communication, distribution and Sales channels comprise the way that a
venture interacts with their customers. Channels are customer touch points
that play an important role in the customer experience.


Function of Channels
Ø  Raise awareness among
customers about a company’s
products and services
Ø  Help customers evaluate a
company’s Value Proposition
Ø  Allow customers to purchase
specific products and services
Ø  Deliver a venture’s Value
Proposition to customers
Ø  Provide post-purchase customer
support


Understanding the Different Channels
Ø  There are 5 distinct phases to
channels
Ø  Each channel can cover some or all of Sales Force
these phases
Ø  They are distinguished between direct

Own

Direct
and indirect, owned and partner Web Sites
channels
Ø  Finding the right mix is crucial to Own Stores
delivering your Value Proposition to
market
Partner Stores

Partner

Indirect
Wholesaler


Ø  Owned Channels are direct,
such as in-house sales Sales Force
forces and/or web sites, or
they can be indirect, such

Own

Direct
Web Sites
as retail stores owned and
operated by the Own Stores
organization
Ø  Owned Channels have Partner Stores

Partner
higher margins, but can be

Indirect
costly to put in operation Wholesaler
and operate


Ø  Partner Channels are
indirect and cover a wider Sales Force
range of options, including
wholesale distribution, retail

Own

Direct
Web Sites
and partner-owned web
sites Own Stores
Ø  Partner Channels are also
lower margins, but they Partner Stores

Partner
allow for an expanded reach

Indirect
and benefit from partner Wholesaler
strengths


The trick is to find the right balance
integrating them for great customer
experience and maximize revenues


Understanding the Different Phases
Ø  Awareness Ø  Delivery
–  How do we raise awareness –  How do we deliver a Value
about our company’s products Proposition to customers?
and services?
Ø  After Sales Service
Ø  Evaluation –  How do we provide post-
–  How do we help customers purchase customer support?
evaluate our organization's Value
Proposition

Ø  Purchase
–  How do we allow customers to
purchase specific products and
services?


Customer Relationships



Customer Relationships describes the types of relationships a company establishes with
specific Customer Segments. A venture must clarify the type of relationship it wants to
establish with each Customer Segment. Relationships can range from personal to
automated.



Customer Relationships may be driven by different motivations ranging from Customer
Acquisition and Retention to Increasing Sales (upselling).


What type of relationship does each of our
Customer Segments expect us to establish
and maintain with them?

Which ones have we established?

How costly are they?

How are they integrated with the rest of our
business model?


In the early days, mobile network operator
Customer Relationships were driven by
aggressive acquisition strategies. Some even
involved giving away free mobile phones to
new subscribers.


But when the market became saturated,
operators switched to focusing on
customer retention and increasing
revenue per customer.


The Customer Relationships that
ventures develop must be driven to
increase and influence the overall
customer experience.


Categories of Customer Relationships
Ø  Personal Assistance Ø  Self-Service
–  Based on Human Interaction –  Company maintains no direct
–  Customers communicate with relationship with customers
people to get help during the –  Expects the customers to be able
sales process or after purchase is to help themselves with all the
complete materials provided to them from
–  Point of Sale, Call Centers, e-mail the company

Ø  Dedicated Personal Assistance Ø  Automated Services
–  Dedicating a single representative –  Mixture of a sophisticated form
to a customer of customer self-service with
–  The deepest and most intimate automated processes
type of relationship and usually –  Think online transactions and
develops over a period of time memberships
–  Typically found in private banking
services for high net worth
individuals


Categories of Customer Relationships
Ø  Communities Ø  Co-Creation
–  Company maintained to allow –  Using the customer-vendor
users to exchange knowledge relationship to co-create value
and solve each other’s problems with customers
–  Helps the company to –  Amazon.com invites customers to
understand the customer better write reviews and creates value
for other book lovers
–  Some companies engage
customers to assist with the
design of new and innovative
products
–  Others allows customers to
create content for public
consumption


Revenue Streams


Revenue Streams

Revenue Streams represent the cash a venture generates from each Customer
Segment.


Revenue Streams

You have to ask yourself – “What is each Customer Segment really willing to pay for
the Value Proposition we are offering?”


Revenue Streams

When you successfully answer that question, you are able to define the generation of one
or more Revenue Streams from each Customer Segment. Each Revenue Stream may have
different pricing mechanisms – fixed, bargaining, auction, market, volume, etc.


For what value are our customers really
willing to pay?

For what do they currently pay? How are they
currently paying? How would they prefer to
pay?

How much does each Revenue Stream
contribute to overall revenues?


Two Types of Revenue Streams
Ø  Venture can generate revenue from
two different methods:
–  Transaction revenues resulting
from one-time customer
payments (Single Interaction)
–  Recurring revenues resulting from
ongoing payments to deliver the
Value Proposition or provide
post-purchase customer support.


Ways to Generate Revenue Streams
Ø  Asset Sale Ø  Subscription Fees
–  Selling ownership rights to a –  Generated by selling continuous
physical product access to a service
–  Amazon sells books, music, –  Gyms sell members monthly or
electronics and more online yearly memberships
–  Toyota sells automobiles that –  World of Warcraft allows users to
buyers are free to drive, resell or play its onlne game in exchange
even destroy for a monthly subscription fee
–  Nokia gives access to a music
Ø  Usage Fee library for a subscription fee
–  Generated by the use of a
particular service
–  The more the service is used, the
more the customer pays
–  Telecom operators charge by the
minutes spent on the phone
–  TCS charges customer for the
delivery of a package from one
location to another


Ways to Generate Revenue Streams
Ø  Lending/Renting/Leasing Ø  Licensing
–  Created by temporarily granting –  Generated by giving customers
someone the exclusive right to use permission to use protected
a particular asset for a period of intellectual property in exchange
time in return for a fee for licensing fees
–  Renter enjoy the benefits of limited –  Allows rights holders to generate
expenses rather than the full cost revenues from their property
of ownership without having to manufacturing a
product or commercialize a service
Ø  Brokerage Fees –  Most common in the media
–  Derives revenue from industry, where content owners
intermediation service performed keep the copyright while letting
on behalf of two or more parties others use it
–  Credit cards providers earn –  Technology companies also allow
revenues by taking a percentage of other companies the right to use a
the value of each sales transaction patented technology in return for a
–  Brokers and real estate agents earn license fee
a commission each time they
successfully match a buyer and
seller


Pricing Models
Fixed “Menu” Pricing Dynamic Pricing
Predefined prices based on static variable Prices change based on market conditions
List Price Negotiation (Bargaining)
Fixed prices for individual products, services or Price negotiated between two or more partners
other Value Propositions depending on negotiation power and/or
negotiation skills
Product Feature Dependent Yield Management
Price depends on the number or quality of Price depends on inventory and time of
Value Proposition features purchase
Customer Segment Dependent Real-Time Market
Price depends on the type and characteristic of Price is established dynamically based on
a Customer Segment supply and demand
Volume Dependent Auctions
Price as a function of the quantity purchased Price determined by outcome of competitive
bidding


Key Resources


Key Resources

Key Resources defines the most important assets required to make a business model
work. These resources allow an enterprise to create and offer a Value Proposition,
reach markets, maintain relationships and earn revenues.


Key Resources

Key resources can be physical, financial, intellectual, or human. They can be owned or
leased by the venture or acquired from key partners.


What Key Resources do our Value
Propositions require?

Our Distribution Channels? Customer
Relationships? Revenue Streams?


Understanding Key Resources
Ø  Physical Ø  Intellectual
–  Manufacturing facilities, –  Brands, proprietary knowledge,
buildings, vehicles, machines, patents, copyrights, partnerships,
systems, point of sale systems, and customer databases
and distribution networks –  Difficult to develop but when
–  Wal-Mart has an enormous global successfully created may offer
network of stores and related substantial value
logistics infrastructure –  Nike and Sony rely on brand
–  Amazon.com has an extensive IT, –  Microsoft and SAP depend on
warehouse, and logistics software and other intellectual
infrastructure property
–  Both are capital intensive


Understanding Key Resources
Ø  Human Ø  Financial
–  Human resources are crucial in –  Some business models require
knowledge-intensive and creative financial resources and/or
industries financial guarantees, such as
–  Professional services companies cash, lines of credit, or a stock
rely heavily on human resources option pool for hiring key
– without them business models employees
would collapse –  This is very true for startups who
don’t have capital, but a great
idea or prototype


Key Activities


Key Activities

Key Activities are the most important things that a company must do to make its
business model work. They are the most important actions to operate successfully.


Key Activities

Like Key Resources, they are required to create and offer a Value Proposition, reach
markets, maintain customer Relationships, and earn revenues. They differ depending
on business model type.


What Key Activities do our Value
Propositions require?

Our Distribution Channels? Customer
Relationships? Revenue Streams?


Categories of Key Activities
Ø  Production Ø  Platform/Network
–  Designing, making and delivering –  Networks, matchmaking
a product in substantial platforms, software and even
quantities and/or of superior brands can function as a
quality platform
–  eBay’s business model requires
Ø  Problem Solving that the company continually
–  Coming up with new solutions to develop and maintain its
individual customer problems platform – the website at
–  Consultancies, hospitals and eBay.com
other service organizations are –  Visa’s business model requires
typically dominated by problem activities related to its Visa credit
solving activities card transaction platform
–  Microsoft’s business model
requires managing the interface
between other vendors’ software
and Windows


Key Partnerships


Key Partnerships

Key Partnerships describe the network of suppliers and partners that make the
business model work.


Key Partnerships

Companies create partnerships for many reasons, and partnerships have become the
cornerstone for the success of many business models. Companies create alliances to
optimize their business models, reduce risk, or acquire resources.


Types of Partnerships
Ø  We distinguish partnerships into 4 categories
–  Strategic alliances between non-competitors
–  Cooperation – strategic partnerships between competitors
–  Joint ventures to develop new businesses
–  Buyer-supplier relationships to assure reliable supplies


Who are our Key Partners?

Who are our key suppliers?

Which Key Resources are we acquiring from
partners?

Which Key Activities do partners perform?


Motivations for Creating Partnerships
Ø  Optimization and Economy of Scale Ø  Acquisition of Particular
–  This is the most basic form of Resources and Activities
partnership designed to optimize –  Few companies own all the
the allocation of resources and resources or perform all the
activities activities described in their
–  It is not possible for a venture to business models
own all resources or perform every –  Some extend their capabilities by
activity by itself relying on other firms to furnish
–  Done to reduce costs particular resources or perform
certain activities
Ø  Reduction of Risk and Uncertainty –  These are motivated by needs to
–  Help to reduce risk in a competitive acquire knowledge, licenses or
environment characterized by access to customers
uncertainty
–  It is not unusual for competitors to
form strategic alliance in one area
while competing in another
–  Blu-ray is an example of this


Cost Structure


Cost Structure

The Cost Structure describes all costs incurred to operate a business model. It
describes the most important costs incurred while operating under a particular
business model.


Cost Structure

Creating and delivering value, maintaining Customer Relationships, and generating
revenue all incur costs. Such costs can be calculated relatively easily after defining Key
Resources, Key Activities, and Key Partnerships.


What are the most important costs
inherent in our business model?

Which Key Resources are most
expensive?

Which Key Activities are most expensive?


Of course, costs should be minimized in
every business model. But low Cost
Structures are more important to some
business models than to others.


Broad Classes of Cost Structures
Ø  Cost-Driven Ø  Value-Driven
–  Focus on minimizing costs –  Less concerned with cost
whenever possible implications of particular
–  Aims to create and maintain the business model design and
leanest possible Cost Structure, instead of focus on value
using low price Value creation
Propositions, maximum –  Premium Value Propositions and
automation, and extensive a high degree of personalized
outsourcing service usually characterize
–  No frills – Southwest, easyJet and value-driven business models
Ryanair – are great examples of –  Luxury hotels fall into this
cost-driven business models category


Characteristics of Cost Structures
Ø  Fixed Costs Ø  Economies of Scale
–  Costs that remain the same –  Cost advantages that a business
despite the volume of goods or gains as its output increases
services produced –  Large companies benefit from
–  Salaries, rents, physical bulk rates
manufacturing facilities –  This affects average cost per unit
to fall as output rises
Ø  Variable Costs
–  Costs that vary proportionally Ø  Economies of Scope
with the volume of goods or –  Cost advantages that a business
services produced gains due to larger scope of
–  Businesses like festivals are operations
characterized by a high –  When one marketing or
proportion of variable costs distribution department supports
many products, companies or
services


Writing the Business Model


Business Model Canvas


Efficiency Value


Lecture 4 - Business Planning

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