Abdm4223 lecture week 4 part 1 business model 280513

From Business Model toFrom Business Model to
Strategic PlanStrategic Plan :
Part 1 : Business Model
From Business Model toFrom Business Model to
Strategic PlanStrategic Plan :
Part 1 : Business Model
ABDM4233 ENTREPRENEURSHIPABDM4233 ENTREPRENEURSHIP
by
Stephen OngStephen Ong
Principal Lecturer (Specialist)Principal Lecturer (Specialist)
Visiting Professor, ShenzhenVisiting Professor, Shenzhen

The social enterprise MissionThe social enterprise Mission
statementstatement
 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 planning
activitiesactivities
 A mission statement has goals andA mission statement has goals and
measures of progress towards goalmeasures of progress towards goal

EMBRACEEMBRACE
 VISION :VISION : Every woman and
child has an equal chance for a
healthy life.
 MISSION :MISSION : Advancing MaternalAdvancing Maternal
and Child Healthand Child Health
 …… by providingby providing innovativeinnovative
solutionssolutions to the world's mostto the world's most
vulnerable populationsvulnerable populations

What a mission statementWhat a mission statement
should 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

$80 for 15cents$80 for 15cents

…… Keep it to 3 WordsKeep it to 3 Words

MISSIONMISSION
NIKE 2012NIKE 2012 3 KEY WORDS3 KEY WORDS
INSPIRATIONINSPIRATION
INNOVATIONINNOVATION
ATHLETEATHLETE

One Laptop per ChildOne Laptop per Child
http://one.laptop.orghttp://one.laptop.org MISSIONMISSION
 ToTo empowerempower
the world'sthe world's
poorestpoorest
childrenchildren
throughthrough
educationeducation
We aim toWe aim to
provide eachprovide each
child with achild with a
rugged, low-rugged, low-
cost, low-power,cost, low-power,

Benefits of a good missionBenefits of a good mission
statementstatement
 It provides focusIt provides focus
 Social entrepreneurs can stay on target asSocial entrepreneurs can stay on target as
they 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 other
resources into the enterpriseresources into the enterprise
 For example, volunteers, donors, partnersFor example, volunteers, donors, partners

From social mission to businessFrom social mission to business
modelmodel
 Business model – a plan for howBusiness model – a plan for how
the mission will be achieved andthe mission will be achieved and
how the enterprise will create valuehow the enterprise will create value
 A general description of how theA general description of how the
enterprise 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 for
EMBRACEEMBRACE

Threats to business modelsThreats to business models
 Demand side threatsDemand side threats
 A product or service that finds noA product or service that finds no
market – 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 too
much ongoing cost to sustain itselfmuch ongoing cost to sustain itself
 Either threat can derail anEither threat can derail an
enterpriseenterprise

Many social enterprises failMany social enterprises fail
 Persistent lack of income is a commonPersistent lack of income is a common
reasonreason
 A supply explanation would be thatA supply explanation would be that
costs are too highcosts are too high
 A demand explanation would be thatA demand explanation would be that
revenues are too lowrevenues are too low
 Both flaws can be examined in theBoth flaws can be examined in the
business 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 or
describe 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 it
competes, 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 sustain
itself 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 the
activities that define how a firm competes in theactivities that define how a firm competes in the
marketplace.marketplace.

Changing Business ModelsChanging Business Models

Dell’s Business ModelDell’s Business Model
1 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 business
model 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 their
business 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 model
work.work.

Dell’s Business ModelDell’s Business Model
2 of 22 of 2
Dell’s Approach to Selling PCs versus Traditional Manufacturers

The Importance of Business ModelsThe 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 ModelsDiversity of Business Models
Diversity or Variety in
Business Models
• There is no standard business
model for an industry or for
a target market within an
industry.
• However, over time, the most
successful business models
in an industry predominate.
• There are always opportunities
for business model innovation.

How Business Models EmergeHow Business Models Emerge
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 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 a
product from the raw material stage, throughproduct from the raw material stage, through
manufacturing and distribution, and ultimately to themanufacturing and distribution, and ultimately to the
end user.end user.
 By studying a product’s or service’s value chain, anBy studying a product’s or service’s value chain, an
organization can identify ways to create additionalorganization can identify ways to create additional
value 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 identifying
opportunities for new businesses and in understandingopportunities for new businesses and in understanding
how business models emerge.how business models emerge.

2 of 32 of 3
The Value Chain

3 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 a
service to pinpoint where the value chain can be madeservice to pinpoint where the value chain can be made
more effective or to spot where additional “value” canmore effective or to spot where additional “value” can
be 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 resource
management.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 untenable
from 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

http://www.businessmodelgeneration.com/canvashttp://www.businessmodelgeneration.com/canvas

9 Components of Business Model9 Components of Business Model
(Osterwalder 2010)(Osterwalder 2010)
1.1. CustomerCustomer
SegmentsSegments
2.2. ValueValue
PropositionsPropositions
3.3. CustomerCustomer
RelationshipsRelationships
4.4. ChannelsChannels
5.5. Key ActivitiesKey Activities
6.6. Key ResourcesKey Resources
7.7. Key PartnersKey Partners
8.8. Revenue StreamRevenue Stream
9.9. Cost StructureCost Structure

1. Customer Segments1. Customer Segments
 For whom are weFor whom are we
creating value?creating value?
 Who are our mostWho are our most
importantimportant
customers?customers?
 Mass Market/ NicheMass Market/ Niche
Market/ Segmented/Market/ Segmented/
Diversified/ Multi-sidedDiversified/ Multi-sided
PlatformPlatform
 What are JOBS toWhat are JOBS to
be done?be done?
 Customer Gains?Customer Gains?
 Customer Pain?Customer Pain?

2. Value Propositions2. Value Propositions
 What value do we deliverWhat value do we deliver
to the customer?to the customer?
 Which one of ourWhich one of our
customer’s problems arecustomer’s problems are
we helping to solve?we helping to solve?
 What bundles of productsWhat bundles of products
and services are weand services are we
offering to each Customeroffering to each Customer
Segment?Segment?
 Which customer needsWhich customer needs
are we satisfying?are we satisfying?
 Get the JOBS done?Get the JOBS done?
characteristicscharacteristics
NewnessNewness
PerformancePerformance
CustomizationCustomization
““Getting the Job Done”Getting the Job Done”
DesignDesign
Brand/StatusBrand/Status
PricePrice
Cost ReductionCost Reduction
Risk ReductionRisk Reduction
AccessibilityAccessibility
Convenience/UsabilityConvenience/Usability
 Gain creators?Gain creators?
 Pain relievers?Pain relievers?

3. Customer Relationships3. Customer Relationships
 What type of relationshipWhat type of relationship
does each of ourdoes each of our
Customer SegmentsCustomer Segments
expect us to establish andexpect us to establish and
maintain with them?maintain with them?
 Which ones have weWhich ones have we
established?established?
 How are they integratedHow are they integrated
with the rest of ourwith the rest of our
business model?business model?
 How costly are they?How costly are they?
ExamplesExamples
Personal assistancePersonal assistance
Dedicated PersonalDedicated Personal
AssistanceAssistance
Self-ServiceSelf-Service
Automated ServicesAutomated Services
CommunitiesCommunities
Co-creationCo-creation

4. Channels4. Channels
 Through which Channels doThrough which Channels do
our Customer Segmentsour Customer Segments
want to be reached?want to be reached?
 How are we reaching themHow are we reaching them
now?now?
 How are our ChannelsHow are our Channels
integrated?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 them
with customer routines?with customer routines?
channel phases:channel phases:
11. Awareness :. Awareness : How do weHow do we
raise awareness about ourraise awareness about our
company’s products /services?company’s products /services?
2.2. Evaluation :Evaluation : How do we helpHow do we help
customers evaluate ourcustomers evaluate our
organization’s Valueorganization’s Value
Proposition?Proposition?
3.3. Purchase :Purchase : How do we allowHow do we allow
customers to purchase specificcustomers to purchase specific
products/services?products/services?
44. Delivery :. Delivery : How do we deliverHow do we deliver
a Value Proposition toa Value Proposition to
customers?customers?
5.5. After sales :After sales : How do weHow do we
provide post-purchaseprovide post-purchase
customer support?customer support?

5. Key Activities5. Key Activities
 What Key ActivitiesWhat Key Activities
do our Valuedo our Value
PropositionsPropositions
require?require?
 Our DistributionOur Distribution
Channels?Channels?
 CustomerCustomer
Relationships?Relationships?
 Revenue streams?Revenue streams?
categoriescategories
ProductionProduction
Problem SolvingProblem Solving
Platform/NetworkPlatform/Network

6. Key Resources6. Key Resources
 What KeyWhat Key
Resources do ourResources do our
Value PropositionsValue Propositions
require?require?
 Our DistributionOur Distribution
Channels?Channels?
 CustomerCustomer
Relationships?Relationships?
 Revenue Streams?Revenue Streams?
types of resourcestypes of resources
PhysicalPhysical
Intellectual (brandIntellectual (brand
patents, copyrights,patents, copyrights,
data)data)
HumanHuman
FinancialFinancial

7. Key Partners7. Key Partners
 Who are our KeyWho are our Key
Partners?Partners?
 Who are our keyWho are our key
suppliers?suppliers?
 Which KeyWhich Key
Resources are weResources are we
acquiring fromacquiring from
partners?partners?
 Which Key ActivitiesWhich Key Activities
do partners perform?do partners perform?
motivations formotivations for
partnerships:partnerships:
Optimization andOptimization and
economyeconomy
Reduction of risk andReduction of risk and
uncertaintyuncertainty
Acquisition ofAcquisition of
particular resourcesparticular resources
and activitiesand activities

8. Revenue Stream8. Revenue Stream
 For what value are ourFor what value are our
customers really willing tocustomers really willing to
pay?pay?
 For what do they currentlyFor what do they currently
pay?pay?
 How are they currentlyHow are they currently
paying?paying?
 How would they prefer toHow would they prefer to
pay?pay?
 How much does eachHow much does each
Revenue Stream contributeRevenue Stream contribute
to overall revenues?to overall revenues?
types:types:
Asset saleAsset sale
Usage feeUsage fee
Subscription FeesSubscription Fees
Lending/ Renting/ LeasingLending/ Renting/ Leasing
LicensingLicensing
Brokerage feesBrokerage fees
AdvertisingAdvertising
fixed pricingfixed pricing
List PriceList Price
Product feature dependentProduct feature dependent
Customer segment dependentCustomer segment dependent
Volume dependentVolume dependent
dynamic pricingdynamic pricing
Negotiation (bargaining)Negotiation (bargaining)
Yield ManagementYield Management
Real-time-MarketReal-time-Market

9. Cost Structure9. Cost Structure
 What are the mostWhat are the most
important costsimportant costs
inherent in ourinherent in our
business model?business model?
 Which KeyWhich Key
Resources are mostResources are most
expensive?expensive?
 Which Key ActivitiesWhich Key Activities
are most expensive?are most expensive?
is your business more:is your business more:
Cost DrivenCost Driven (leanest cost(leanest cost
structure, low price valuestructure, low price value
proposition, maximumproposition, maximum
automation, extensiveautomation, extensive
outsourcing)outsourcing)
Value DrivenValue Driven ( focused on( focused on
value creation, premium valuevalue creation, premium value
proposition)proposition)
characteristics:characteristics:
Fixed Costs (salaries,Fixed Costs (salaries,
rents, utilities)rents, utilities)
Variable costsVariable costs
Economies of scaleEconomies of scale
Economies of scopeEconomies of scope

Business Model Test DriveBusiness Model Test Drive
1.1. How much doHow much do switching costsswitching costs prevent yourprevent your
customers 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 recurringrecurring
revenues?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-in
protection from competitionprotection from competition??
7.7. Is your business model based on a gameIs your business model based on a game
changingchanging 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 Strategy
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 Core StrategyCore Strategy
 The first component of a business model is the coreThe first component of a business model is the core
strategy, which describes how a firm competes relativestrategy, which describes how a firm competes relative
to 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

2 of 32 of 3
Primary Elements of Core Strategy
Mission
Statement
Product/Market
Scope
A company’s product/market scope defines the
products and markets on which it will
concentrate.
A firm’s mission, or mission statement,
describes why it exists and what its business
model is supposed to accomplish.

3 of 33 of 3
Primary Elements of Core Strategy
Basis of
Differentiation
It is important that a new venture differentiate
itself from its competitors in some way that is
important to its customers. If a new firm’s
products or services aren’t different from
those of its competitors, why should anyone
try them?

Strategic ResourcesStrategic Resources
1 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 without
resources, so the resources a firm has affect its businessresources, so the resources a firm has affect its business
model substantially.model substantially.
 For a new venture, its strategic resources may initially beFor a new venture, its strategic resources may initially be
limited to the competencies of its founders, the opportunitylimited to the competencies of its founders, the opportunity
they have identified, and the unique way they plan to servethey have identified, and the unique way they plan to serve
their 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

2 of 32 of 3
Primary Elements of Strategic Resources
Core
Competencies
Strategic
Assets
A core competency is a resource or capability that
serves as a source of a firm’s competitive advantage.
Examples include Sony’s competence in
miniaturization and Dell’s competence in supply chain
management.
Strategic assets are anything rare and valuable that a
firm owns. They include plant and equipment,
location, brands, patents, customer data, a highly
qualified staff, and distinctive partnerships.

3 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 core
competencies and strategic assets to create a sustainablecompetencies and strategic assets to create a sustainable
competitive advantage.competitive advantage.
 This factor is one that investors pay close attention toThis factor is one that investors pay close attention to
when evaluating a business.when evaluating a business.
 A sustainable competitive advantage is achieved byA sustainable competitive advantage is achieved by
implementing a value-creating strategy that is uniqueimplementing a value-creating strategy that is unique
and 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 has
strategic resources and the ability to use them.strategic resources and the ability to use them.

Partnership NetworkPartnership Network
1 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 of
a business model. New ventures, in particular, typicallya business model. New ventures, in particular, typically
do 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 everything
itself because the majority of tasks needed to build aitself because the majority of tasks needed to build a
product or deliver a service are not core to a company’sproduct or deliver a service are not core to a company’s
competitive advantage.competitive advantage.
 A firm’s partnership network includes:A firm’s partnership network includes:
 SuppliersSuppliers
 Other key relationshipsOther key relationships

2 of 32 of 3
Primary Elements of Partnership Network
Suppliers
Other Key
Relationships
A supplier is a company that provides parts or
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
launch a firm that achieves a competitive advantage
may hinge as much on the skills of the partners as
on the skills within the firm itself.

3 of 33 of 3
The Most Common Types of Business Partnerships

Customer InterfaceCustomer Interface
1 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 on
how 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 while
Barnes & Noble sells through its traditional bookstores andBarnes & Noble sells through its traditional bookstores and
online.online.
 The three elements of a company’s customer interfaceThe three elements of a company’s customer interface
are:are:
 Target customerTarget customer
 Fulfillment and supportFulfillment and support
 Pricing modelPricing model

2 of 32 of 3
Primary Elements of Customer Interface
Target
Market
Fulfillment
and Support
A firm’s target market is the limited group of
individuals or businesses that it goes after or tries to
appeal to.
Fulfillment and support describes the way a firm’s
product or service reaches its customers. It also refers
to the channels a company uses and what level of
customer support it provides.

3 of 33 of 3
Primary Elements of Customer Interface
Pricing
Structure
The third element of a company’s customer
interface is its pricing structure. Pricing models
vary, depending on a firm’s target market and its
pricing philosophy.

Recap: The Importance of BusinessRecap: The Importance of Business
ModelsModels
 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 a
holistic manner and understand that it must constructholistic manner and understand that it must construct
an 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 its
customers 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 its
partners 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 a
firm’s business model is essential for a new venture’sfirm’s business model is essential for a new venture’s
success.success.

Further ReadingFurther Reading
 Scarborough, Norman, M. 2011.Scarborough, Norman, M. 2011. Essentials ofEssentials of
Entrepreneurship and Small BusinessEntrepreneurship and Small Business
Management.Management. 66thth
edition. 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, 2011
Entrepreneurship – Successfully launching newEntrepreneurship – Successfully launching new
venturesventures 44thth
edition, 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. 33rdrd
AsiaAsia
Pacific edition. John Wiley.Pacific edition. John Wiley.
 Osterwalder, A. & Piqneur,Y. 2011Osterwalder, A. & Piqneur,Y. 2011 Business ModelBusiness Model
GenerationGeneration . Business Model Foundry.. Business Model Foundry.

Abdm4223 lecture week 4 part 1 business model 280513

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