business modeling
TRANSCRIPT
Business Modeling®
Krittabhas Supanyachotesakul
Why are firms different in their profitability?
Industry FactorsCompetitive ForcesCooperative ForcesMacro Environment
Firm-Specific Factors ResourcesActivitiesPositions
Components of a Business Model
IndustryFactors
Activities
Costs
PositionsResources Profitabilityleve- rage
reduce
consistentwith
influence
Fundamental of Business Modeling
How to decide appropriate activities that constitute firm’s
competitive advantage?
Firm needs to identify its …
STRATEGY.
Strategic Management Framework
Business Drivers
ContextModels
StrategyModels
PerformanceModels
ChangeModels
OrganizationalModels
MarketingModels
Sector Analysis Model
Stakeholder Model
5-Forces Model
Value Chain
Generic Strategy
Life Cycle Model
Marketing Mix
Operating Structures
Administrative & Technology Systems
Corporate Cultures
Transition Management
Contingency Models (7’s and Congruence Model)
Accounting Ratios
Economic Value
Shareholder Value
Balanced Scorecard
Business Drivers
Context ModelsSuggest how company must adapt to
environmental circumstances in order to function properly.
Sector ModelThe overall pressure on company to act is
driven by Economic, Technological, Social/Cultural, and Political Sectors.
Economic – Macro/Micro conditionsTechnology – Product/Process trendsSociety/Culture – Demographic forcesPolitic – Legislative & Regulatory constraints
Macro/Micro
Condition
Product/Process Trends
DemographicForces
Legal/Regulatory Constraints
EconomicSector
TechnologicalSector
Socio/CulturalSector
PoliticalSector
OverallPressure
on Company
to Act
Stakeholder ModelDescribe the environment of the company in
terms of specific groups of actors that have a ‘stake’ in what the company does because they control the resources the company needs.
Primary Stakeholders – Customers, Employees, and Investors have greatest influence on the company performance.
Secondary Stakeholders – Regulators, and Pressure groups (e.g., public, activist)
Company’s performance is resulted from strong direct and indirect relationships among stakeholders.
Company
Employees
Investors Customers
PressureGroups
Regulators
Five-Forces ModelCompany’s performance has its roots in its
structural position in an industry. To improve performance is to strengthen the position.
Customers/Buyers’ Bargaining Power(Key Input) Suppliers’ Bargaining Power Substitute ProductsCompetitive Rivalry – Industry structurePotential New Entrants - Entry/Exit Barriers
RivalryAmong
CompetingFirms
KeySuppliers
SubstituteProducts
PotentialNew
Entrants
Buyers
Strategy ModelsSuggest ways firm can create tomorrow’s
competitive advantages faster than competitors mimic the ones you possess today.
Generic Strategy ModelAlternative preferred way to compete in an
industry and across industries.Low Cost LeadershipDifferentiation – in value offeringsFocus – specific group of customers(Focus-Differentiation)
Value Chain ModelCompany’s performance can be improved by
improving value-creating activities along a value chain.
Primary Activities – Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Services
Support Activities – Technology Development, Human Resources Management, Procurement, and Firm Infrastructure (General Administration)
InboundLogistics
OperationsMarketing &
SalesOutboundLogistics
Services
Firm Infrastructure
Procurement
Human Resource Management
Technology Development
Margin
Strategy vs Operational Efficiency
Strategy – involves committing to undertake one set of actions rather than another and, in the process, creating a unique and valuable position that allows the firm to perform better than its competitors.It is about which activities to perform and which ones not to perform
Operational Efficiency – involves performing similar activities better than rivals do.Best practice is NOT strategic but operational.
Strategy Levels
Corporate Strategy – Creating value for the portfolio of businesses
Business Strategy – Creating value within each business (in the portfolio) so called, Competitive Strategy
Functional Strategy – The set of functional activities that a firm performs (operationally efficiently) in supporting of a business’s goal of attaining and maintaining competitive advantages
Corporate Strategy tradeoff b/w Low Synergy (Unrelated businesses) – Financial advantage (Diversification)High Synergy (Related businesses)– Know-how and Staffing advantage (Specialization)
Business Strategy tradeoff b/wLow Price – Cost-based advantagePremium Price – Uniqueness-based advantage (Differentiation)
Functional Strategy design and tradeoff b/w activities to create competitive advantage
Analyzing
Planning
Organizing
Implementing
Controlling
Mission
Objectives/Goals
Strategy
Business Modeling
Performance Measures
Actions
Mission
Objectives/Goals
Strategy
Business Modeling
Organizing
Performance Measures
Actions
e.g.,- Sales ($)- Mkt share (%)- Unit cost ($/unit)- Expense ($)- CusSat score (pt)
QuantitativeIndicators withTime frame, e.g.,-Market share 5% in 1 year-Cost reduction 10% in 6 months-Increase CusSat 12% in 1 year
StrategyImplementation
Business Model
The profit-oriented aspects of firm’s business strategy with the associated operational efficiency and implementation.
The set of activities which a firm performs so as to offer its customers benefits they want and to earn a profit. It involves firm’s decision on which activities to perform, how to perform, and when to perform.
Components of a Business Model
IndustryFactors
Activities
Costs
PositionsResources Profitabilityleve- rage
reduce
consistentwith
influence
Customer Value and Positioning
Customer Value is created in 2 ultimate formsLower CostSuperior Product (Differentiation)
Profitability S
Differentiation Low Cost
T
Market Share
Differentiation With Low CostPath T, firm cannot do either well in contrast with Path S,
where firm can do both well because… Nature of technology – In some cases allows cost
reduction and differentiation to rest on the same activities. E.g., Intel chip smaller and faster
Lower cost does not mean indifferentiated. – E.g., Low cost airline is also different in other aspects, e.g., more flights, etc.
Rate of technology change and imitation rate – Both are generally high which results in short period of being differentiated. Thus to survive firm must operate at low cost as well.
Competitive advantage – If comes from owning valuable, rare, and inimitable resources, allows firm to be able to differentiate and operate at low-cost.
Making More Valuable ProductsStandard ways of delivering value include Product Features – Physical Brand Name Reputation – Psychological Network Externalities – Some products such as
Software are more valuable when more customers use them. Metcalfe’s Law: value of network size n2 to nn where n is # of nodes on the network
Timing – The first to introduce product Location – Availability, Accessibility, Location
reputation Service – Before/After-sale service Product Mix – One-stop shopping. Amazon carried 16
million items at its website as of May 1999
Sources of Revenues and Market Targets
Targeting the right customers with the right value.
Many market targets have more than one sources of revenue, some of which may be more profitable than others.
Sources of Revenue
Understanding its market’s sources of revenues, especially the profitability of each source, enables firm to
be able to make better choices about which activities to perform.
better position itself to understand the threats a technological change can pose to it.
Example: Sources of incomeCredit Card business1. Merchant fee (charge on vendors)2. Intercharge (charge on different card issuers for
using through bank’s EDC)3. Interest income (charge on cardholder’s
outstanding balance)4. Annual fee5. Other charges like late fee, high balance fee,
etc. (was prohibited in Thailand 3 years ago)
Taxonomy of Revenue Sources and Revenue Models
Direct Product/Service Sales – product sales After-Sales Service – complex products, in some
cases more profitable than product sales (auto dealer, computer network, etc.)
Indirect Content Sales – advertising revenue Product Financing – interest charges and other
fees for install payment Collect-early, Pay-later Financing – return on
investment using firm’s credit on suppliers, Dell-Direct Model
Royalties on Intellectual Property – up-front fee and/or per-unit charge
Revenue Models
Production Model – simple produce and sell modelSubscription Model – customer pays a flat fee for the
right to use the product for a period of time whether she uses it or not. E.g., rent, flat-rate phone service, etc.
Fee-for-Service Model – customer pays for only service she uses.
Markup Model – firm buys a product and resells it to the customer at a markup price.
Commission Model – brokerage fee, firm acts as a mediator/match maker/or broker.
Advertising Model – firm’s product can perform a function of a media for other firms to advertise their products on. E.g., ATM slip, bank statement, building surface, internet banner, club magazine, etc.
Targeting Customers
Mass MarketMarket SegmentsIndividual Customers
Activities Customer Target of Firm Mass Market Market Segment Individuals
Needs and One-to-all One-to-segment One-to-onePreferences marketing marketing marketingIdentification
Value creation Mass Mass productionCustomization
and delivery production Mass customization Mass Approach customization
Market Segments
Business Segments Consumer Segments
Business Segments
Benefits Timing of Needs – lead users, e.g., latest
technology mobile, fashion from the catwalk, etc. Industry – different industrial customers demand
differently Customer Size – large and small customer, e.g.,
institutional vs individual customers, more frequently-fly passengers, etc.
Geography
Consumer Segments
Demographics Psychographics Behavior Geography Multidimensional Segmentation
Mapping Value into Targeted Markets
(Positioning)
Matching targeted customers’ needs and firm’s offerings (position)
Evolution of Targets
More sophisticated and smartMore variety of tastesTechnological change alters preferences
Designing Activities for Profitable Business Model
Activities that firms perform to offer value Choice of activities How to perform them When to perform them
Frameworks Business System Value System
Business SystemSequence of activities that firm performs to
produce products.
Ex. Automobile involves key activities:DesignPurchase componentsAssembleMarketDistribute
Generic Business Systems
Value Chain Value Network Value Shop Outsourcing
Value Chain
Activities is classified by functions. Each stage adds value before turning its output to the nest step.
Function Product Manufac./ Sales/ Distn Customer R&D Design Operations Marketing
Support Patent Function Location Pricing Channels
Warranty
Activities Process Quality Assembly Packaging Inventory Speed
Tech. Physical Procurement Advertising Warehouse Infon
etc. etc. etc. etc. etc.etc.
Upstream Downstream
Value Network
Firm acts as a mediator (intermediary) between the clients and performs value-adding activities.
A firm and the clients that it mediates make up a network call Value Network, a property of Network Externality.
Ex. Financial institutions mediates between surplus units (like depositors, investors) and deficit units (like borrowers, issuers)
Value Shop
Firm decides which activities are needed to fulfill customer’s demand. The business whose value is created this way is called a Value Shop.
Hospital, Consulting business, Universities, and etc. involve variety of clients with different needs and thus require a business system that offers flexibility in meeting those needs.
Ex. Hospital has different kinds of clients (patients) who demand different treatments. It is a hospital (by a doctor) who decides which activities are required to respond those needs.
Outsourcing
From outsourcer to outsourcee: When will outsourcer outsource its value activities to the outsourcee? Depends on
Outsourcee’s capabilities Outsourcee’s market power Outsourcer’s integrative or architectural
capability (ability to coordinate) Criticalness of activity’s underpinning
capability (activities critical to firm’s competitive advantage will not be outsourced)
Ex. eBay decided to outsource its back end internet activities to 2 companies: Abovenet and Exodus. These 2 companies would be responsible for the maintenance and performance of web servers, database servers, internet routers, and other technologies that were critical to the availability of eBay’s site for trading. Has eBay done right?
First, identify eBay’s Competitive AdvantageNetwork Size and Brand NameThen checkOutsourcees’ capability: Both are specialists. Market power: There are many and eBay picked 2. Integrative capability: Keeping website up does not
require much integration. Criticalness of activities: Learning how to run a website is
not critical to the eBay’s competitive advantage.
Value System(Supply Chain and Vertical Linkage)
Value System: The chain that stretches from end customers to the firm to its suppliers to their own suppliers and so on.
Ex. Value system for market of PC microprocessors
Semiconductor Microprocessor Computer Distributors Computer
Equipment Makers Makers UsersManufacturersApplied Intel Dell Retail stores BusinessMaterial AMD HP Consumer
Motorola IBM Gateway
Upstream Downstream
Vertical Integration
Vertical Integration (VI): Producing one’s input or disposing of one’s output (perform more activities along the value system)
Backward VI: Firm is vertically integrated into the upstream market.
Forward VI: Firm is vertically integrated into the downstream market.
Tapered integration: Firm produces only some of the quantity of the input that it needs and buys the rest of the input from outside suppliers.
Strategic Alliance
Instead of backward vertical integration where firm produces its own input another way is to form Strategic Alliances or Strategic Collaboration where 2 or more firms agree to combine their resources to carry out a project.
Strategic Alliances can be formed for a specific time and/or specific operations.
Ex. Joint Venture: collaboration creates a separate legal entity.
Which Activities to Perform and NOT to
Activities are chosen from
Business System ActivitiesValue Chain – choose activities at each stage
Value System ActivitiesValue Added Process – integration choice
Activities to perform must strengthen firm’s competitive advantage. Any criteria?
Activities to Perform
Must have the potential to enable a firm to…1. Attain and maintain the right position2. Take advantage of industry factors3. Better build and exploit its resources4. Keep its costs low irrespective of whether
the firm pursues a low-cost or differentiation strategy
The criteria for ensuring firm’s competitive advantage.
1. Attain & Maintain the Right Position
Offer Superior Value – Activities should be consistent with the type of value the firm offers customer
Ex. Southwest Airline, the most profitable low-cost airline in the US, offers low cost value hence its activities to ensure low fare to customer include offer no meal, operate largely from uncongested airports, etc.
Air Asia can save ticket reservation cost through internet system.
Coca-Cola offers differentiation value then activities performed are aimed to create Brand Equity.
Attain Superior Position – Activities to address negative aspects of the industry. For example, if suppliers are powerful firm may decide to eliminate by integrating backward. If distributors are powerful firm may bypass them by innovation.
Ex. Dell at the beginning had little bargain power over PC dealer. Dell bypassed the dealer channel by offering 1800 number and later internet.
Air Asia with no dealer network employed 1800 number and internet for ticket reservation.
Heineken bypasses Singha and Chang monopoly power of distribution by channeling through modern trade and through restaurant channel by “push girls”.
Take Advantage of Industry Factors – Critical industry factors must be identified and exploited.
Ex. Airline industry – capacity utilization is critical. Plane should not be sitting at a terminal but rather should be flying. By choosing to fly out of uncongested airports, Southwest planes can land and take off more quickly.
PC’s short shelf-life is critical. So if they sit on dealers’ shelves too long they will be obsolete. Dell build-to-order attributes take advantage of this characteristic.
Bank’s transaction cost over Teller counters is critical (about 7 Bt./transaction) but with a mass number of customers who make basic transactions, bank then offers e-Banking, m-banking including e-branch with no tellers.
Build and Exploit Resources and Capabilities – Resources that are scarce, difficult to imitate, and can make unusually high contribution to the value that customers perceive in a firm’s product.
Ex. Honda Motor has a reputation for making high-performance, reliable engines. Honda develops and sells cars, motorcycles, lawn mowers, etc. that have reliable engines.
7-11 having developed the largest store network nationwide now expands its business from everyday grocery to counter services.
Keep Costs Low – Firm’s operational efficiency must be achieved inevitably.
Activities NOT to Perform
Each time firm chooses one activity it is forgoing another activity – to undo is costly
Firm has limited resources – choosing one activity some of its resources are tied up in that activities – Opportunity Cost
Firm may delegate some activities to other firms that are more specialized in performing that activities - Outsourcing
How to Perform Activities
After deciding which activities to perform (doing the right things) firm is to decide how to perform them (doing things right).
Process – the patterns of interaction, coordination, communication, and decision making – that a firm uses to perform the activities that transform its resources into customer value and position the firm to appropriate the value.
The appropriate processes are chosen in response to...
Business System ActivitiesChoose processes for each activity at each stage
Cross-Functional and Cross-Firm ProcessesProcess involves more than one stage of business system, and sometimes more than one firm or country.
Process to Implement
Like choosing which activities to perform, the criteria for choosing processes to implement must have the potential to enable a firm to…
1. Attain and maintain the right position2. Take advantage of industry factors3. Better build and exploit its resources4. Keep its costs low irrespective of whether
the firm pursues a low-cost or differentiation strategy
Business System Activities
If firm chooses to perform activities in every stage of business system (else, outsourcing)
R&D Product DesignManufacturing/Operations – interact with
suppliers: work closely or fight over cost, etc.Marketing/SalesDistribution – to own channels or not or
whether to develop new channelsCustomer Services/Support
Cross-Functional and Cross-Firm Processes
If processes involve more than one stage of business system
TQM – get things right the first time and keep improving.
Benchmarking – inside and outside industryBusiness Process Reengineering – rethinking
the whole system
When to Perform Activities
First-Mover AdvantageWindows of OpportunityTiming Options – in each business system
activities
Conclusions
Business modeling involves which, how, and when activities are to perform.
Started by firm’s competitive strategy value-rendering activities are designed.
Processes to perform activities then are immediate.
Taking right timing to perform.
Case Example: Wal-Mart vs Kmart (both founded in 1962 Wal-Mart has become the world largest
company while Kmart has filed for bankruptcy)
Wal-Mart’s strategy is on locating store in the small towns.Kmart’s strategy is on locating store in the cities.
Resources and Capabilities Analysis
Resources – or Assets: both tangibles and intangibles
Capabilities – Competences or firm’s ability to transform its resources into customer value and profit.
Assessing the profitability potential of resources – VRISA Analysis
(Customer) Value – Does the resource provide customers what they value?
Rareness (Uniqueness) – Are you the only one with that capability? If not, are you better or worse than competitors?
Imitability – Is it easy for other firms to acquire the resources?
Substitutability – Are there any other resources that can offer the same value to customers?
Appropriability – Can you make money from it?
Examples: Wal-Mart’s Location in Small Towns
Attributes Key Question AnswerValue Does Wal-Mart’s location in Yes, customers can buy
small towns provide customers low-cost merchandisewhat they value? close to home.
Rareness Is Wal-Mart the only one with Yes, its price are lowerthis resource? If not. Is it better? than competitors’.
Imitability Is it easy for other firms to No, it is hard for others toacquire Wal-Mart’s location come in and build similaradvantage? stores and distn centers.
Substitutability Can other resources offer Yes, for some productscustomer the same value? via e-commerce.
Appropriability Does Wal-Mart make money Yes, there are few rivals,from its location in small and Wal-Mart has
powertowns? over suppliers.
Examples: Pfizer’s Knowledge for making Lipitor
Attributes Key Question AnswerValue Does Pfizer’s knowledge of Yes, Lipitor reduces bad
making Lipitor drug give cholesterol in many
customers what they value? customers.Rareness Is Pfizer the only one with No, but Pfizer’s Lipitor is
this resource? If not. Is it better? better than competitors’.
Imitability Is it easy for other firms to No, Pfizer holds patentacquire Pfizer’s knowledge? for its Lipitor that will
exclude others’ imitation.Substitutability Can other resources offer Yes, but so far Pfizer’s
customer the same value? Lipitor offers the bestbenefit.
Appropriability Does Pfizer make money Yes, suppliers and from its knowledge of making customers have notLipitor? been very powerful.
Examples: Southwest Airlines’ Network of Uncongested Airports
Attributes Key Question AnswerValue Does Southwest’s network of Yes, passengers can select
uncongested airports provides from more frequent flights, customers what they value? low price, on time, and
a lot of parking spots.Rareness Is Souhtwest the only one with Yes, Souhtwest has largest
this resource? If not. Is it better? network with uncongested
airports (largest slots).Imitability Is it easy for other firms to No, it is difficult to replicate
acquire Souhtwest’s network Souhtwest’s completeadvantage? network.
Substitutability Can other resources offer No, it is hard to offer whatcustomer the same value? Souhtwest’s complete
network can provide. Appropriability Does Souhtwest make money Yes, suppliers & customers
from its network? do not have much power.
Competitive Consequences of Resource Characteristics
Characteristics of Resources Competitive AdvantageV R I S A Consequence Sustainable C. A. Temporary C. A. Temporary C. A. Temporary C. A. Competitive parity Competitive disadvantage
Executing a Business Model
Structure – organizational structure firm uses to effect differentiation, integration, and coordination: functional, M-form, matrix, project, and network
Systems and Processes – performance measures, rewards, and information flows. systems spell out how the performance of individuals, groups, etc. is monitored.
People – culture and types of peopleEnvironment
What are left for further studies…
Innovation, Sustainability, and Change Analyzing the Costs of Business Model Analyzing the Sources of Profitability and
Competitive Advantage in a Business Model (7 C’s)