BUSINESS MODEL DESIGN AND IMPLEMENTATION. Professor Evan Douglas, Griffith Business School Logan campus, August 16, 2016

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1 BUSINESS MODEL DESIGN AND IMPLEMENTATION Professor Evan Douglas, Griffith Business School Logan campus, August 16, 2016

2 Different strokes for different folks The business model describes the way a firm conducts its business What (products) does it make/sell/repair, etc Who does it deal with? - Customers, suppliers, employees Where is it located, serving what geography? Business models differ widely within and across industries Different customers, different resources, different strategies - E.g. High-rise Hotels vs Motels vs Bed & Breakfasts The Individual-Opportunity nexus The entrepreneur s preferences are important As are their entrepreneurial self-efficacies

3 Business Models and Strategy The business model should reflect the firm s chosen strategy A business model can be deduced by observation of the strategies and decisions made: How/where is the firm s product or service produced, sold, warranted, and serviced? How does the firm deal with competition from rivals and substitute products? How does the firm exploit its strengths & opportunities? What action does it take to reduce threats and weaknesses? Rather than strategy being viewed retrospectively (as the path the firm has taken through the jungle) it is better to have a strategy (viewed prospectively) as the best way to get through the jungle

4 Generic Competitive Strategies Cost Leadership Strategy Increase profit margin by being lowest-cost supplier. Differentiation Strategy Increase profit margin with quality improvements that allow price to increase more than costs increase. Focus Strategy Serve the needs of market segments or niches Either geographic regions of product categories/lines - via either cost leadership or differentiation For SMEs a focused-differentiation strategy is usually preferred - And should be supported by your business model

5 Six elements of the business model 1. How will the firm create value? 2. For whom will it create value? 3. What is the internal source of advantage? 4. How will the firm differentiate itself? 5. How will the firm make money? 6. What time, scope, and size ambitions? For each of these, the entrepreneur makes specific choices And thus creates a unique business model Morris, Schindehutte & Allen The Entrepreneur s Business Model... Journal of Business Research, 2005

6 1. How will the firm create value? What is the firm s Value Proposition? Value = Quality/Price Quality is multi-dimensional - For goods: Functionality, design, durability, no negatives - For services: Timeliness, understanding, attention to detail.. These things differentiate your product or service Price is also multi-dimensional - Ticket price + search, delivery, installation, service costs This total price positions your value proposition Is it a competitive value proposition? A bargain? A rip-off? Your firm must offer value innovation(s) to reduce rivalry Offer quality features not offered by rivals - To avoid downward pressure on price

7 Finer details of the value proposition Primarily products, or primarily services, or heavy mix? Standardized, or some customization, or high customization? Broad line, or medium line, or narrow line? Deep lines, or medium depth, or shallow lines? Access to product, or sales of product itself, or bundled with other firm s product or service? Reselling a product, value-added reselling? Internal manufacturing, or outsourced production Direct distribution, or indirect distribution? Don t try to be all things to all people

8 2. For whom will we create value? Who is the target customer? i.e. Who will appreciate your value proposition? - What qualitative features of your product do they really want? And can they afford your (total) price tag? Market factors: Type of buyer: B2C or B2B or B2G? Geographic reach: Local, or Regional, or International? Where are they in the value chain: Upstream buyer? Downstream user? Wholesaler? Retailer? Broad or general market, or Niche market? Transactional/Relational purchase?

9 3. Source of internal advantage? What are the firm s strategic resources? What resources do you have that are: - Valuable? They add value for the customer - Rare? Few if any rivals currently have access to these resources - Hard-to-copy? It will take a lot of time and/or money to replicate them - Non-substitutable? They cannot be replaced by a different technology? Inimitability of resources is the key To continued differentiation in the market place - To continued profitability in the market place

10 Resource Categories Physical - Plant, equipment, location, and the amenities available Reputational - Brand loyalty, product quality, financial soundness Organisational - Cost and Quality efficiency Financial: - Monetary assets; Ability to generate cash, or to raise capital. Intellectual and Human Resources - Knowledge, training and experience of managers and employees. Technical: - IPP (patents, designs, trademarks, copyrights, licenses) - Contracts with key stakeholders, legal agreements Dollinger, Entrepreneurship Strategies and Resources, 3 rd ed. Prentice-Hall, 2003

11 Organisational Capability The O in PROFIT is necessary for competitive advantage Without it, other strategic resources will be squandered Physical, Financial and Technical are the hardware Usually not inimitable can be copied or invented around - May confer short-medium term barriers to entry Organisational, Reputational, & Intellectual are the software The interactions amongst the stakeholders in your business - Employees, suppliers, and customers Responsible for the quality of your goods and services Is SMEs, you are the face and the reputation of your firm

12 4. How are you differentiated? What do your strategic resources allow you to do that others cannot do? Differentiation will be based on core competencies Production & operating systems - Image of operational excellence, consistency, dependability Selling & Marketing - Product/service quality, selection, features, availability - Customer relationship, customer experience Innovation & technical leadership - Technology or innovative/intellectual capability Cost Efficiency - Supply chain management; Information management; Financial management; Resource leveraging.

13 5. How will you make money? Where does the money come from? Who pays us? - Customer, consumer, advertiser, database builder? How much? - Price positioning? Penetration pricing vs skimming - Promotional pricing? To offset buyer s quality-risk aversion & switching costs When do they pay us? - In advance? Website sales - On delivery? - In arrears (credit)? Beware of the liquidity problems

14 Pricing Issues Pricing factors Pricing is fixed, flexible, mixed? - One size fits all (standard) price - Menu pricing - Allow the customer to co-create the product Operating leverage is high, medium, low? - High Operating Leverage means Fixed costs are a large fraction of Total costs (and CoGS is a small part of price) Each sale makes a large contribution to overheads & profit - Low Operating Leverage means Variable costs are a large fraction of Total costs (and CoGS is a large part of price) Each sale makes a relatively large contribution to overheads Gross Margins: high, medium, low? Volumes: high, medium, low?

15 6. Time, size & scope ambitions What are the entrepreneur s aspirations? Subsistence model - Earn minimal income, perhaps operate only part-time Salary-replacement model - Earn about the same as employment but be one s own boss Lifestyle entrepreneurship model - Earn less than in employment, but have more work enjoyment Speculative model - Get rich quick (shorter time horizon) Growth model - Re-invest profits for longer-term growth and business success

16 Three levels of the Business Model Foundation level Proprietary level Rules level What are we going to do? Who we are going to deal with? Where are we going to do it? What strategic resources do we control? How can we do business differently (to reduce rivalry and increase profit) What rules should be put in place to ensure we remain on track? Adapted from Morris et al., The Entrepreneur s Business Model... JnlBusRes, 2005

17 The business model of your business? Value innovation Foundation level Proprietary level Rules level Target customer Strategic resources Basis for differentiation Financial model Time, size, scope ambitions

18 The business model of your business? Foundation level Proprietary level Rules level Value innovation Target customer Strategic resources Basis for differentiation Financial model Time, size, scope ambitions An increased functionality widget B2Bs who use this widget Physical proximity to customers Locally made, rapid supply Customer pays within 30 days Growth business

19 The business model of your business? Foundation level Proprietary level Rules level Value innovation Target customer Strategic resources Basis for differentiation Financial model Time, size, scope ambitions Increased functionality widget B2Bs who use this widget Physical proximity to customers Local made, rapid supply Customer pays within 30 days Growth business Patented technology, Registered design Long term sales agreement with incentives Organisation Reputation People Product quality Customer service Frequent-buyer plan Long term lease & supply agreem ts

20 The business model of your business? Foundation level Proprietary level Rules level Value innovation Increased functionality widget Patented technology, Registered design Maintain inhouse R&D function Target customer B2Bs who use this widget in their businesses Long term sales agreement with incentives Liaise to cocreate product improvements Strategic resources Physical proximity to customers Organisation Reputation People Build brand by consistent quality & service Basis for differentiation Local made, rapid supply Product quality Customer service Under-promise and over-deliver Financial model Customer pays within 30 days Frequent-buyer plan Incentives for early payment, Time, size, scope ambitions Growth business Long term lease & supply agreem ts Focus on growth markets

21 Isolating Strategies Capturing strategic (inimitable) resources Gaining Initial Competitive Advantage in the first place Keeping strategic (inimitable) resources Transforming ICA into SCA Building strategic (inimitable) resources Physical, Financial, Technical (tangible) Reputation, Organization, Intellectual (intangible) Resource inimitability is usually temporary - Rivals imitate by inventing around - Disruptive new technologies are invented Relentless innovation is the key

22 Growth Strategy Assuming the firm does want to grow Some entrepreneurs are content for firm to remain small Product rollout sequence Product-line extensions and new technology platforms Geographic rollout sequence Other markets to be entered after the launch market R&D strategy should align with growth strategy Technology R&D for new products and extensions Market research for new products and new markets

23 Summary The business model can be summarised as What is our value innovation? Who is our target market? What is our source of competitive advantage? How do we differentiate our product and services? How do we make money? What are our growth aspirations? Strategy Competitive, Isolating and Growth strategies If Growth-oriented, plan in advance your - Product line extensions - Geographic expansion & Internationalisation strategy - New products based on new technology platforms

24 Thank You! Questions?