lecture 4 - business planning

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Business Planning Bringing Order to Operations

HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED

Recap Ø  Lecture 1 – We covered what keeps entrepreneurship from

growing in Pakistan Ø  Lecture 2 – We discussed the different types of ideas and how

to classify them Ø  Lecture 3 – We began structuring how businesses must be

developed – business model first Ø  Last week – You were supposed to send me your business

ideas via email so that I could provide comments & feedback – I got 2 business ideas


What We Have Covered So Far Ø  Customer Segments –  Defines the different groups of people or organizations a

venture aims to reach and serve –  Explained that a venture can have multiple customer

segments depending on their business model, products and services

Ø  The Value Proposition –  Describes the bundle of products and services that create

value for a specific Customer Segment –  Value can be defined differently for different customer

segments


Channels


Channels

Channels describe how a venture communicates with and reaches its Customer Segments to deliver a Value Proposition


Channels

Communication, distribution and Sales channels comprise the way that a venture interacts with their customers. Channels are customer touch points that play an important role in the customer experience.


Function of Channels Ø  Raise awareness among

customers about a company’s products and services

Ø  Help customers evaluate a company’s Value Proposition

Ø  Allow customers to purchase specific products and services

Ø  Deliver a venture’s Value Proposition to customers

Ø  Provide post-purchase customer support


Understanding the Different Channels Ø  There are 5 distinct phases to

channels Ø  Each channel can cover some or all of

these phases Ø  They are distinguished between direct

and indirect, owned and partner channels

Ø  Finding the right mix is crucial to delivering your Value Proposition to market

Own

Part

ner

Sales Force

Web Sites

Own Stores

Partner Stores

Wholesaler

Dire

ct

Indi

rect


Understanding the Different Channels Ø  Owned Channels are direct,

such as in-house sales forces and/or web sites, or they can be indirect, such as retail stores owned and operated by the organization

Ø  Owned Channels have higher margins, but can be costly to put in operation and operate

Own

Part

ner

Sales Force

Web Sites

Own Stores

Partner Stores

Wholesaler

Dire

ct

Indi

rect


Understanding the Different Channels Ø  Partner Channels are

indirect and cover a wider range of options, including wholesale distribution, retail and partner-owned web sites

Ø  Partner Channels are also lower margins, but they allow for an expanded reach and benefit from partner strengths

Own

Part

ner

Sales Force

Web Sites

Own Stores

Partner Stores

Wholesaler

Dire

ct

Indi

rect


The trick is to find the right balance integrating them for great customer experience and maximize revenues


Understanding the Different Phases Ø  Awareness

–  How do we raise awareness about our company’s products and services?

Ø  Evaluation

–  How do we help customers evaluate our organization's Value Proposition

Ø  Purchase

–  How do we allow customers to purchase specific products and services?

Ø  Delivery –  How do we deliver a Value

Proposition to customers?

Ø  After Sales Service –  How do we provide post-

purchase customer support?


Customer Relationships



Customer Relationships describes the types of relationships a company establishes with specific Customer Segments. A venture must clarify the type of relationship it wants to establish with each Customer Segment. Relationships can range from personal to automated.



Customer Relationships may be driven by different motivations ranging from Customer Acquisition and Retention to Increasing Sales (upselling).


What type of relationship does each of our Customer Segments expect us to establish and maintain with them? Which ones have we established? How costly are they? How are they integrated with the rest of our business model?


In the early days, mobile network operator Customer Relationships were driven by aggressive acquisition strategies. Some even involved giving away free mobile phones to new subscribers.


But when the market became saturated, operators switched to focusing on customer retention and increasing revenue per customer.


The Customer Relationships that ventures develop must be driven to increase and influence the overall customer experience.


Categories of Customer Relationships Ø  Personal Assistance

–  Based on Human Interaction –  Customers communicate with

people to get help during the sales process or after purchase is complete

–  Point of Sale, Call Centers, e-mail

Ø  Dedicated Personal Assistance –  Dedicating a single representative

to a customer –  The deepest and most intimate

type of relationship and usually develops over a period of time

–  Typically found in private banking services for high net worth individuals

Ø  Self-Service –  Company maintains no direct

relationship with customers –  Expects the customers to be able

to help themselves with all the materials provided to them from the company

Ø  Automated Services

–  Mixture of a sophisticated form of customer self-service with automated processes

–  Think online transactions and memberships


Categories of Customer Relationships Ø  Communities

–  Company maintained to allow users to exchange knowledge and solve each other’s problems

–  Helps the company to understand the customer better

Ø  Co-Creation –  Using the customer-vendor

relationship to co-create value with customers

–  Amazon.com invites customers to write reviews and creates value for other book lovers

–  Some companies engage customers to assist with the design of new and innovative products

–  Others allows customers to create content for public consumption


Revenue Streams


Revenue Streams

Revenue Streams represent the cash a venture generates from each Customer Segment.


Revenue Streams

You have to ask yourself – “What is each Customer Segment really willing to pay for the Value Proposition we are offering?”


Revenue Streams

When you successfully answer that question, you are able to define the generation of one or more Revenue Streams from each Customer Segment. Each Revenue Stream may have different pricing mechanisms – fixed, bargaining, auction, market, volume, etc.


For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each Revenue Stream contribute to overall revenues?


Two Types of Revenue Streams Ø  Venture can generate revenue from

two different methods: –  Transaction revenues resulting

from one-time customer payments (Single Interaction)

–  Recurring revenues resulting from ongoing payments to deliver the Value Proposition or provide post-purchase customer support.


Ways to Generate Revenue Streams Ø  Asset Sale

–  Selling ownership rights to a physical product

–  Amazon sells books, music, electronics and more online

–  Toyota sells automobiles that buyers are free to drive, resell or even destroy

Ø  Usage Fee

–  Generated by the use of a particular service

–  The more the service is used, the more the customer pays

–  Telecom operators charge by the minutes spent on the phone

–  TCS charges customer for the delivery of a package from one location to another

Ø  Subscription Fees –  Generated by selling continuous

access to a service –  Gyms sell members monthly or

yearly memberships –  World of Warcraft allows users to

play its onlne game in exchange for a monthly subscription fee

–  Nokia gives access to a music library for a subscription fee


Ways to Generate Revenue Streams Ø  Lending/Renting/Leasing

–  Created by temporarily granting someone the exclusive right to use a particular asset for a period of time in return for a fee

–  Renter enjoy the benefits of limited expenses rather than the full cost of ownership

Ø  Brokerage Fees

–  Derives revenue from intermediation service performed on behalf of two or more parties

–  Credit cards providers earn revenues by taking a percentage of the value of each sales transaction

–  Brokers and real estate agents earn a commission each time they successfully match a buyer and seller

Ø  Licensing –  Generated by giving customers

permission to use protected intellectual property in exchange for licensing fees

–  Allows rights holders to generate revenues from their property without having to manufacturing a product or commercialize a service

–  Most common in the media industry, where content owners keep the copyright while letting others use it

–  Technology companies also allow other companies the right to use a patented technology in return for a license fee


Pricing Models

Fixed “Menu” Pricing Predefined prices based on static variable

Dynamic Pricing Prices change based on market conditions

List Price Fixed prices for individual products, services or other Value Propositions

Negotiation (Bargaining) Price negotiated between two or more partners depending on negotiation power and/or negotiation skills

Product Feature Dependent Price depends on the number or quality of Value Proposition features

Yield Management Price depends on inventory and time of purchase

Customer Segment Dependent Price depends on the type and characteristic of a Customer Segment

Real-Time Market Price is established dynamically based on supply and demand

Volume Dependent Price as a function of the quantity purchased

Auctions Price determined by outcome of competitive bidding


Key Resources


Key Resources

Key Resources defines the most important assets required to make a business model work. These resources allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships and earn revenues.


Key Resources

Key resources can be physical, financial, intellectual, or human. They can be owned or leased by the venture or acquired from key partners.


What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams?


Understanding Key Resources Ø  Physical

–  Manufacturing facilities, buildings, vehicles, machines, systems, point of sale systems, and distribution networks

–  Wal-Mart has an enormous global network of stores and related logistics infrastructure

–  Amazon.com has an extensive IT, warehouse, and logistics infrastructure

–  Both are capital intensive

Ø  Intellectual –  Brands, proprietary knowledge,

patents, copyrights, partnerships, and customer databases

–  Difficult to develop but when successfully created may offer substantial value

–  Nike and Sony rely on brand –  Microsoft and SAP depend on

software and other intellectual property


Understanding Key Resources Ø  Human

–  Human resources are crucial in knowledge-intensive and creative industries

–  Professional services companies rely heavily on human resources – without them business models would collapse

Ø  Financial –  Some business models require

financial resources and/or financial guarantees, such as cash, lines of credit, or a stock option pool for hiring key employees

–  This is very true for startups who don’t have capital, but a great idea or prototype


Key Activities


Key Activities

Key Activities are the most important things that a company must do to make its business model work. They are the most important actions to operate successfully.


Key Activities

Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain customer Relationships, and earn revenues. They differ depending on business model type.


What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams?


Categories of Key Activities Ø  Production

–  Designing, making and delivering a product in substantial quantities and/or of superior quality

Ø  Problem Solving

–  Coming up with new solutions to individual customer problems

–  Consultancies, hospitals and other service organizations are typically dominated by problem solving activities

Ø  Platform/Network –  Networks, matchmaking

platforms, software and even brands can function as a platform

–  eBay’s business model requires that the company continually develop and maintain its platform – the website at eBay.com

–  Visa’s business model requires activities related to its Visa credit card transaction platform

–  Microsoft’s business model requires managing the interface between other vendors’ software and Windows


Key Partnerships


Key Partnerships

Key Partnerships describe the network of suppliers and partners that make the business model work.


Key Partnerships

Companies create partnerships for many reasons, and partnerships have become the cornerstone for the success of many business models. Companies create alliances to optimize their business models, reduce risk, or acquire resources.


Types of Partnerships Ø  We distinguish partnerships into 4 categories –  Strategic alliances between non-competitors –  Cooperation – strategic partnerships between competitors –  Joint ventures to develop new businesses –  Buyer-supplier relationships to assure reliable supplies


Who are our Key Partners? Who are our key suppliers? Which Key Resources are we acquiring from partners? Which Key Activities do partners perform?


Motivations for Creating Partnerships Ø  Optimization and Economy of Scale

–  This is the most basic form of partnership designed to optimize the allocation of resources and activities

–  It is not possible for a venture to own all resources or perform every activity by itself

–  Done to reduce costs

Ø  Reduction of Risk and Uncertainty –  Help to reduce risk in a competitive

environment characterized by uncertainty

–  It is not unusual for competitors to form strategic alliance in one area while competing in another

–  Blu-ray is an example of this

Ø  Acquisition of Particular Resources and Activities –  Few companies own all the

resources or perform all the activities described in their business models

–  Some extend their capabilities by relying on other firms to furnish particular resources or perform certain activities

–  These are motivated by needs to acquire knowledge, licenses or access to customers


Cost Structure


Cost Structure

The Cost Structure describes all costs incurred to operate a business model. It describes the most important costs incurred while operating under a particular business model.


Cost Structure

Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships.


What are the most important costs inherent in our business model? Which Key Resources are most expensive? Which Key Activities are most expensive?


Of course, costs should be minimized in every business model. But low Cost Structures are more important to some business models than to others.


Broad Classes of Cost Structures Ø  Cost-Driven

–  Focus on minimizing costs whenever possible

–  Aims to create and maintain the leanest possible Cost Structure, using low price Value Propositions, maximum automation, and extensive outsourcing

–  No frills – Southwest, easyJet and Ryanair – are great examples of cost-driven business models

Ø  Value-Driven –  Less concerned with cost

implications of particular business model design and instead of focus on value creation

–  Premium Value Propositions and a high degree of personalized service usually characterize value-driven business models

–  Luxury hotels fall into this category


Characteristics of Cost Structures Ø  Fixed Costs

–  Costs that remain the same despite the volume of goods or services produced

–  Salaries, rents, physical manufacturing facilities

Ø  Variable Costs

–  Costs that vary proportionally with the volume of goods or services produced

–  Businesses like festivals are characterized by a high proportion of variable costs

Ø  Economies of Scale –  Cost advantages that a business

gains as its output increases –  Large companies benefit from

bulk rates –  This affects average cost per unit

to fall as output rises

Ø  Economies of Scope –  Cost advantages that a business

gains due to larger scope of operations

–  When one marketing or distribution department supports many products, companies or services


Writing the Business Model


Business Model Canvas


Efficiency Value