Week 4: Analysing Buss

Model and BMC

CHAPTER OBJECTIVES

• Explain what a business model is and what it accomplishes.

• Discuss the process for developing and testing a business model.
• Explore how to innovate on a business model.
 THE BUSINESS MODEL (slide 1 of 2)

• A substantial amount of thought must take place and a great deal of

effort must be put forth before a company’s products or services ever
successfully reach the market.
• That thought process includes developing a business concept or idea that meets
a real market need and a business model that can create and capture value.
 THE BUSINESS MODEL (slide 2 of 2)

• Peter Drucker, often referred to as the greatest management thinker of

the last century, regularly challenged entrepreneurs and corporate C E
Os alike to answer five important questions about their business model:
1. What is our mission?
2. Who is our customer?
3. What does our customer value?
4. What are our results?
5. What is our plan?
 UNDERSTANDING THE
5.1
BUSINESS MODEL
• The term business model has been conceptualized in a number of
different ways:
• As the activities or tasks that a business undertakes as an “analytical device for
evaluation and action.”
• As a “blueprint” for running a business.
• At its essence, the business model reflects the strategic decisions and
trade-offs that entrepreneurs make to earn a profit.
 Entrepreneur’s
FIGURE 5.1
Business Model Canvas
 5.1a Value Proposition

• The value proposition is the benefit that the customer derives from the product or service you are
offering; in other words, the reason the customer will buy.
• It is the unique mix of product, price, service, relationship, and image that a company offers to a
group of targeted clients.
• It must explain what the company thinks it is capable of doing for its clients better or differently
from its competitors.
• When designing their value proposition, entrepreneurs often confuse features with benefits.
• In general, benefits are intangibles such as better health, saving time and money, or reliability, whereas
features reflect attributes of the product such as design and physical characteristics or functions.
 5.1b Customer Segments

• If you have done your research properly, you will find that you have
more than one type of customer for whatever you are offering.
• Therefore, you will need to segment your market.
• Segmenting a market is dividing it into meaningful and measurable parts based on needs,
buyer behaviors, and demographics (age, education, income, ethnicity, etc.).
• One way to do that is to create a matrix that contains all the variables on which you want to
compare your customers down the left side of the matrix and your customer segments across the
top.
FIGURE 5.2 Customer Segmentation Matrix
 5.1c Distribution Channels

• The distribution channel answers the question “How do you deliver the benefit to
the customer?”
• Many options exist, but in general, the best option is the one that fulfills the customer’s
expectations about where and how they want to purchase your product or service.
• Most services are delivered direct to customers, but products often go through channel
intermediaries such as distributors and retailers.
• If you use an intermediary, then that intermediary is your direct customer and the end user or
consumer is the beneficiary.
• There are a number of pros and cons involved in going direct to the customer versus selling
through an intermediary or partner.
 Direct to the Customer versus
TABLE 5.1
Indirect through an Intermediary (slide 1 of 2)

DIRECT TO CUSTOMER
ADVANTAGES
• Entrepreneur has large upside potential.
• Entrepreneur has control over branding, pricing, and relationship with customer.
• Entrepreneur is able to manage user data and experience.
DISADVANTAGES
• Entrepreneur has greater risk.
• Cash flow may be unpredictable.
• Entrepreneur must do build-out and initial investment.
• Entrepreneur is responsible for billing and service.
 Direct to the Customer versus
TABLE 5.1
Indirect through an Intermediary (slide 2 of 2)

INDIRECT THROUGH INTERMEDIARY

ADVANTAGES
• Partner does the build-out and capital investment.
• Partner handles billing and customer service.
• Cash flow is more predictable if the entrepreneur has a licensing agreement.
DISADVANTAGES
• Partner gets the upside potential.
• Partner controls branding, pricing, and customer relationship.
• Partner owns the user data and manages the user experience.
 5.1d Strategic Partners

• Today it is very common for startups to partner with existing

companies to tap into expertise and resources the entrepreneur doesn’t
have.
• One of the most common types of partnerships is the buyer–supplier
relationship, which is used to reduce costs or share facilities like
manufacturing or warehousing.
• In some industries such as electronics, partnerships often involve
competitors who may agree to share resources in one area while
competing in another.
 5.1e Business Activities
and Resource Requirements

• Depending on the value proposition and where the entrepreneur’s

business is positioned on the value chain, business activities could
involve manufacturing, distribution, R & D, or a network or technology
platform.
• Each type of business has different functions and hence unique
resource requirements that are critical to delivering the value
proposition.
 5.1f Resource Sources (slide 1 of 2)

• One of the most important components of the business model is

identifying the revenue streams that will flow from the products and
services being offered.
• A healthy business model always supports revenue streams from
multiple types of customers and multiple products and services.
 5.1f Resource Sources (slide 2 of 2)

• The revenue model describes the various ways that you plan to make
money.
• In general, the following categories of revenue models comprise the most
common ways to monetize a product or service.
• Subscription or membership.
• Volume or unit-based.
• Licensing and syndication.
• Transaction fee.
• Advertising.
 5.1g Cost Drivers (slide 1 of 3)

• The business that can keep its costs low enjoys a significant advantage
and will bring more dollars to the bottom line.
• Every business has costs that produce the biggest impact on the cost
structure.
• They are known as key cost drivers because they impact total costs.
• These costs can be fixed (rent), variable (manufacturing), or nonrecurring, such as a one-
time expense.
 5.1g Cost Drivers (slide 2 of 3)

• Depending on the type of business, the cost structure may take on one
of the following forms:
• Marketing or advertising cost structure.
• Inventory cost structure.
• Office or retail space cost structure.
• Support center cost structure.
• Direct cost structure.
 5.1g Cost Drivers (slide 3 of 3)

• You will also need to decide whether your business will be cost-driven
or value-driven.
• Cost-driven model: The emphasis is on keeping costs as low as possible
because margins are narrow.
• Value-driven model: Entrepreneurs want to create premium experiences for
their customers that typically involve personalized service and luxury facilities
and products.
 5.1h Business Models Change

• Business models evolve and sometimes radically change over time due to
circumstances often beyond the control of the entrepreneur.
• Change can occur in a number of ways.
• Businesses can:
• Incrementally expand the existing model geographically, enter new markets, modify pricing, or
change product/service lines and distribution channels.
• Revitalize an established model to give it new life and stave off competition.
• Take an existing model into new areas.
• Add new models via acquisition.
• Use existing core competencies to build new business models.
 TESTING AND VALIDATING
5.2
BUSINESS MODEL FEASIBILITY (slide 1 of 2)

• Feasibility analysis involves the testing, evaluation, and validation of a proposed

business model for a new venture.
• It is a tool that is used to assess and reduce risk at startup.
• To more accurately assess the future for an opportunity, you must understand:
• Your capabilities.
• The capabilities and intentions of your competition.
• The needs and desires of customers.
• The bargaining power that you have in the value chain.
TABLE 5.2 Feasibility Analysis (slide 1 of 3)
AREAS TO BE ANALYZED AND SOME QUESTIONS TO ASK

Industry and Market/Customer (Chapter 4)

1. What are the demographics, trends, patterns of change, and life-cycle stage
of the industry?

2. What are the barriers to entry, and are there any barriers you can set up?

3. What is the status of technology and R & D expenditures, and what is the
level of innovation?
TABLE 5.2 Feasibility Analysis (slide 2 of 3)

AREAS TO BE ANALYZED AND SOME QUESTIONS TO ASK

Product/Service (Chapter 6)
1. What are the features and benefits of the product or service?
2. What product development tasks must be undertaken to achieve a marketable
product, and what is the timeline for completion and the associated costs?
3. What is the window of opportunity for this product?
4. Is there potential for intellectual property rights?
5. How is the product or service differentiated from others in the market?

Founding Team (Chapter 8)

1. What experience and expertise does the team have?
2. What are the gaps, and how will you fill them?
TABLE 5.2 Feasibility Analysis (slide 3 of 3)

AREAS TO BE ANALYZED AND SOME QUESTIONS TO ASK

Financial Needs Assessment (Chapter 9)
1. What are your startup capital requirements?
2. What are your working capital requirements?
3. What are your fixed cost requirements?
4. How long will it take to achieve a positive cash flow from the revenues generated?
5. What is the break-even point for the business?
6. What are your funding requirements? Timeline and milestones?
 TESTING AND VALIDATING
5.2
BUSINESS MODEL FEASIBILITY (slide 2 of 2)

• The more information you acquire during the process of feasibility

analysis, the higher the chance that:
• Your predictions will be close to the mark.
• Risk will be reduced.
• Uncertainty will be managed.
• To accomplish this, you will need to develop hypotheses about the
components of your business model and test them in the market.
 5.2a Developing and Testing Hypotheses
(slide 1 of 3)

• In the beginning stages of developing a business model, you will probably be

filling in the blanks with information based on current knowledge.
• That information will be in the form of hypotheses about what you believe to be true.
• Most hypotheses are proven wrong when tested on real customers in the market.
• Once you have your hypotheses in place, you then have to decide how you are
going to test each of them to see if your judgment had been correct.
 Initial Unvalidated Business Model for Waiting-in-Line App
FIGURE 5.3
FIGURE 5.4 Validating the Business Model
 5.2a Developing and Testing Hypotheses
(slide 2 of 3)

• In addition to testing the business model components, feasibility

analysis also addresses three critical success factors for any business.
• The three questions you want to answer are:
1. Is there a customer and market of sufficient size to make the concept viable and able to
grow?
2. Do the capital requirements to start and operate to a positive cash flow make sense?
3. Can an appropriate startup or founding team be assembled to effectively execute the
concept?
 5.2a Developing and Testing Hypotheses
(slide 3 of 3)

• Upon completion of feasibility analysis, you should be able to

determine whether the conditions are right to go forward with the
business concept.
• If conditions are not favorable, the areas tested, such as industry, market,
product, pricing, and so forth, will need to be reviewed to discover whether
another approach might make the business viable.
 5.2b Considering the Impact of the
Macro Environment (slide 1 of 4)

• Factors outside the control of the entrepreneur also impact the business
model:
• Industry factors and trends.
• Market factors and trends.
• Global economic factors.
 Macro Environmental Factors
FIGURE 5.5
and the Business Model
 5.2b Considering the Impact of the
Macro Environment (slide 2 of 4)

• No business model completely survives first contact with the market or

the industry, and even effective models have to change over time to
meet the pressures of the industry, market, and global economy.
• The key is not to wait until change happens before you rethink your business
model.
 5.2b Considering the Impact of the
Macro Environment (slide 3 of 4)

• Philosopher-mathematician Nassim Taleb proposed that we think of businesses like

barbells to represent the duality of playing it safe in some areas of the business to
avoid high-impact negative events and taking small risks in others to be able to
benefit from unexpected positive events.
• He calls businesses antifragile when they guard what they cannot afford to lose (i.e., perhaps
90 percent of the business) and take risks with 10 percent of the business, meaning they
benefit from the positive aspects of uncertainty without suffering from the negative side of
uncertainty.
FIGURE 5.6 Taleb’s Risk Barbell
 5.2b Considering the Impact of the
Macro Environment (slide 4 of 4)

• The bottom line is every business needs to take risk to grow.

• Sometimes that risk is changing the business model to remain competitive.
• Other times you change the business model because of events in the macro environment that
threaten the sustainability of the model.
• Still other times, you will change your business model to opportunistically take advantage of
change in the business environment.
• Figuring out how much risk your business can afford to take is part of designing an
effective business model.
 INNOVATING WITH
5.3
BUSINESS MODELS (slide 1 of 2)
• Entrepreneurs should view the uncertainty of the future as an
opportunity to find new places to compete.
• Kim and Mauborgne called this “blue ocean strategy,” seeking the white spaces
(“blue ocean”) where no one is playing, where opportunity is found at the
intersection of value and cost.
• They suggest four actions entrepreneurs can take to think about where those white spaces
might lie.
1. Eliminate something that the industry has traditionally done.
2. Reduce something below the industry standard.
3. Raise something above the industry standard.
4. Create something the industry has never done.
 INNOVATING WITH
5.3
BUSINESS MODELS (slide 2 of 2)
• The types of business models that entrepreneurs can generate are
endless, but within specific contexts, some models are more
appropriate than others.
• Two industries with challenging business models are:
1. Where the customer doesn’t want to pay.
2. Where the startup is facing dominant players.
 5.3a When the Customer Doesn’t Want to Pay (slide 1 of 2)

• Many social networking sites provide a two-sided platform where users

can upload and edit content, and share it with others.
• The platform is the intermediary, and the users become the content providers
who contribute to the value of the platform provider.
• Because this content creation is contributed freely, entrepreneurs now have the
problem of figuring out how to monetize the platform given that users do not
expect to pay for something to which they freely contributed even if the
platform reduced their personal costs for connecting with others.
 5.3a When the Customer Doesn’t Want to Pay (slide 2 of 2)

• Traditionally, advertising has been the model that most social

networking sites have chosen.
• However, recently, this model has come under attack from both the advertisers
and the users.
• Instead of advertising, some sites have used a freemium model where users can take
advantage of the basic functionality of the site for free and pay a subscription fee for
enhanced features and benefits.
• Others have sought sponsorships where an entity provides resources, both financial and
other types, to the social network so that the network can offer its value proposition free to
users.
 5.3b Facing Dominant Players

• Startups that find themselves trying to compete for value with large, established
firms that have strong negotiating power often struggle to correctly position
themselves in the value chain.
• Each position has pluses and minuses as well as long-term ramifications for the
startup.
• Because of the power of dominant players, startups in these types of industries
often focus on the acquisition of intellectual property and know-how that they can
control and develop to where it is attractive to one of the dominant firms.
FIGURE 5.7 Sample Value Chain for Devices
 DRAWING CONCLUSIONS
5.4
FROM FEASIBILITY ANALYSIS
• The process of feasibility analysis is designed to convert an uncertain opportunity that has a specific
level of risk associated with it.
• Uncertainty is reduced by acquiring more information and answering the questions that contributed
to that uncertainty.
• At each point in the feasibility analysis, entrepreneurs are able to make a judgment about whether to
proceed with the analysis.
• Each step in the analysis provides information about the conditions that are necessary to make the
business feasible.
• The sum total of these conditions should give you a level of confidence about the risk associated
with the concept and your ability to execute the concept given that risk.
Business Model Canvas
2. BUSINESS MODEL CANVAS- WHAT IS
IT?

• A strategic management template for

developing new or documenting
existing business models.
• It is a visual chart with elements
describing a firm's value proposition,
infrastructure, customers, and
finance.
• It has at least 9 building blocks.
 WHY BUSINESS CANVAS?
1.To understand the external influences that affect the decision-making
process of social investors who will be using state funds to shape their
market place.
2. To be able to appreciate the unmet social need that needs to
addressed.
3. To be able to tell a compelling story about the social impact the
market it operates in, their financial performance and their
implementation plan.
4. To be able to design a business model for the company
5. Interconnect elements in creating values and catch the values that can
be seen in one page
THE ADVANTAGE OF BMC

Completeness

Focus

Speed and Agility

Common Language

Center on the value proposition

1. VALUE PROPOSITION

○ What is the unique about your service to the customers?

○ Does your value proposition satisfying customers need or solve
their problem?
○ Always ask a question: how my customers live without my
product or service?

○ Example: Unique in terms features, design, quality

and others
: Solving problem and fulfill
customers need
2.CUSTOMER RELATIONSHIP

○ What relationship that the target customer expect you to

establish
○ What kind of step have you taken to establish and maintain
with your customer?

○ Example: Discounts, promotion, personal assistance, friendly

service, vouchers, membership cards and others.
○ These bring revenue to the company
○ What costs incurred here.
3. CHANNELS
○ How the Customer Segments will be reach or connected ?
○ How will you distributed the product or service that you
offer?

○ Example: Direct selling, Outlets, Booth, Online service,

postage, customers service and others
○ What costs incurred here?
4. REVENUE STREAMS
○ What value do your customers willing
to pay?
○ What kind of activities and service that
you offer that generate income for
your company?

○ Example: Direct selling, service

charge, consultation fee and others
licensing fee
5.KEY PARTNERS
○ Who is your partner, suppliers, key recourses, management
control and others
○ With whom you are acquaintance to boost your company

○ Example: Upper Staff Management, Government Agency,

University, Institutions and others
6.KEY ACTIVITIES

○ What is your key activities

○ What is your activities to generate revenue?

○ Example: Direct Sales, Online booking, Consultation,

Customers support and others
7.KEY RESOURCE

○ What kind of resource that you need to

generate your business
○ Resource that you needed to develop
and improve your business

○ Example: Human resource, input,

machine and others
8. COST STRUCTURE

○ What is the most important cost to generate your business

○ List the cost based on your activity's

○ Example: Input, Worker, Marketing, Maintenances, Traveling

Cost, Rental and others
9. Revenue
HOW TO USE THE BMC?
○ Participants are group in team of 4-5 members depending on the number
of participants.
○ Each group will discuss the 9 items in the BMC.
○ Members will present the;

○ Value proposition
○ Customer segment
○ Customer relationships
○ Channels
○ Value propositions
○ Key activities
○ Key resources
○ Partners
○ Cost structures
○ Revenue streams
Business Model Canvas (BMC)
Social Business Model Canvas
Exercise

• Please convert your project idea into BMC

https://www.youtube.com/
watch?v=Tvu34s8iMZw
Step 4
Selection of business opportunities and preparation of business plan

Organisation plan
Marketing plan
Production/operations plan
Financial plan