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Session #4&5: Business Session #4&5: Business Model & Market Entry ChoicesModel & Market Entry Choices

BALAGOPAL VISSAINSEAD

1, Ayer Rajah AvenueSingapore 138676

---Office: (65) 67995382

Hand phone: (65) 94244573Email: balagopal.vissa@insead.edu

These notes are intended to support class discussions. They should not be considered a comprehensive set of issues to be dealt with.

The story so far.. Module #1 focused on how

entrepreneurs make decisions while pursuing opportunity

Module #2 shifts our attention to the content of their decisions on business models, entry strategy and positioning

Business Models are…

…Stories + Numbers that explain how a firm creates value & appropriates its share

Storyline = Who is the customer and how to create value for him / her / it

Numbers = How do we make money on this

What is Value Creation in a Supply Chain….

Buyers

Firm

Suppliers

Products/Services

Resources

Source: Adapted from Brandenburger & Stuart (1996)

($)

Value Created

Buyer willingness to buy

Supplier willingness to sell (i.e. Opportunity cost)

Price

Cost

Firm’s appropriation of created value

Value Created & Value Appropriated

Value Appropriated

Value Created

A Business Model Enables

Value creation by Increasing buyer willingness to buy Decreasing supplier opportunity cost

Value appropriation by Enhancing the firm’s bargaining position

Choices underlying a business model

WHO: is our customer? in terms of customer segments in terms of geographic regions

WHAT: do we sell our customers? in terms of products & services

HOW: do we make and distribute products to customers?

in terms of how to get the products to the customers in terms of operations in terms of alliances with vendors & complementors

A good business model entails… Making clear choices Making difficult choices – recognizing

tradeoffs Making consistent choices

Internally – Mutually reinforcing choices Aligned with developing capabilities and

resources Externally –

Realistic about demand and supply conditions Sensible assumptions on competitive conditions

TYING UP P&L NUMBERS WITH ASSUMPTIONS ABOUT USAGE RATES IN THE BUSINESS MODELyear 1 year 2 year 3

Addition to FA - Phones Booth Outstations 2075 1980 990Cumalative FA - Phone Booths Outstations 2075 4055 5045

Asset acquisition cost per booth 5100

Hence no. of booths 406.9 795.1 989.2Rounded off no. of booths 400 800 990

Net Revenues 2033 6217 8629

Hence: Revenues per booth 5083 7771 8716

Assumption: No of operating days/year 350Margin per call 0.5

Hence: Implicit number of 3 minute calls per booth/day 29 44 50Currently, other players have usage of 150 3-minute calls but from 60 working pay phoneSo, ACG has taken into accout expansion of supply by 8 times (60 booths to 460 booths)with a corressponding reduction in usage per booth by 5 times. Since there seems to be huge unmet demand, this is a relatively conservative model

In sum…

ACG’s Business Model seems Clear on the choices underlying the

“who-what-how” Internally consistent Realistic about external assumptions

Critical challenge in market entry

How do you manage the tension between over-investment and premature abandonment?

Planning under uncertainty about market acceptance

1. Break down investments to account for their impact on current / future profitability

2. Evaluate the major risks / uncertainties underlying each investment

3. Identify the timing of market signals that will resolve uncertainties

4. Develop contingency plans

Key principles underlying the framework

Test products / processes through “toe-hold” stakes

Invest early in assets with high salvage values

Defer investments in assets that are specialized to a particular group of customers or suppliers

SESSION 4 & 5: ACG CASE - BREAK OUT GROUPS

First Name GROUP NUMBER LOCATION

Jan 1

Olav 1

Wan Fai (Eddie) 1 ROOM 235

Kane 1

Philip 1

Ronald 1

Julia 2

Yuk-Yee (Mary) 2 ROOM 236

Hian 2

Nicolas 2

Daniel 2

Vicente 2

Cynthia 3

Li (Lily) 3

Micheal 3

Ian 3 AMPHI R

Angus 3

Nishith 3

Maria-Christina 3

Key takeaways – “Transient” Opportunity Industry is attractive because it

has formidable entry barriers>> Entrepreneur wants to enter but

can’t

Industry is unattractive because it’s too easy to enter>>Entrepreneur doesn’t want to enter

Re-frame the entry question as : How do I make money in the meantime (i.e.

before equilibrium)?

Key Takeaways – Risks Vs Return in Market Entry

Enter through toe-hold stakes wherever possible

Classify investments based on how they impact profitability – present & future

Identify & look out for “GO-NO GO” market signals on your investment

ACG renamed Adesemi in 1998

Went bankrupt in 2000. Monique cites following reasons:

–TTCL’s incompetence–Later, (after privatization) TTCL’s hard negotiations on

margins–Technical integration with TTCL’s network affected

operating days–Cultural differences–Pre-mature attempts at expansion

How it ended…..

What happened to ACG?

“Central to our business model was the assumption that Adesemi would receive a commission on the thousands of additional phone calls it generated each day on the network of the national phone company, Tanzania Telecommunications Company Limited (TTCL).

Such an arrangement is the industry norm throughout the world.

But no matter how much we pleaded or cajoled, TTCL refused to pay us any commission...”

Monique Maddy, 2000