Business Model Learning Guide

 

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Learning Objectives and Outcomes

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Business Models

 

Rationale

Business Development encompasses a number of techniques designed to grow an economic, enterprise. Such techniques include, but are not limited to, assessments of marketing opportunities and target markets, intelligence gathering on customers and competitors, generating leads for possible sales, follow-up sales activity, formal proposal writing and business model design. Business development involves evaluating a business and then realizing its full potential, using such tools as marketing, sales, information management and customer service. For a sound company able to withstand competitors, business development never stops but is an ongoing process.

 

Successful business development often requires a multidisciplinary approach beyond just "a sale to a customer." A detailed strategy for growing the business in desirable ways is frequently necessary, which may involve financial, legal and advertising skills. Business development cannot be reduced to simple templates applicable to all or even most situations faced by real-world enterprises. Creativity in meeting new and unforeseen challenges is necessary to keep an enterprise on a path of sustainable growth.

Small to medium-sized companies often do not establish procedures for business development, instead relying on their existing contacts. Other times they assume that because they know people in high places that their business development problems are solved and that somehow new business will come to them. The ramifications of such thinking can be significant in the event they are unable to leverage those relationships, which very often are personal or weak. Then they will have no new business in the pipeline.

The pipeline refers to flow of potential clients whom the company is in the process of developing. Each potential client in the pipeline is given a percent chance of success with projected sales volumes attached. The weighted average of all the potential clients in the pipeline can be used for staffing to manage the new business when it comes in.
Business Development Model

For larger and more well-established companies, especially in technology-related industries, business development often refers to creating and managing strategic relationships and alliances with other, "third party" companies. In these instances the companies will leverage one anothers' expertise, technologies or other intellectual property to expand their products, services, functionality and/or market reach without having to invest in building or acquiring these with internal resources. Revenues are typically shared in some sort of royalty arrangement. For example, a company with a successful technology will partner with a company that has an existing customer base and sales force, and together they will penetrate that market, sharing the proceeds.

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Learning Objectives and Outcomes

This is a non-taught unit designed for self-directed study by those intending to enhance their professional or managerial competence, knowledge, understanding, and skills in business business modelling.

Knowledge

After completing the course, students will understand

1. the components and concepts, definitions and various themes of a business model

2. the importance the content emphasis of a business model design, for example

 

Skills

After completing the course, student will be able to

1. apply the concepts, components and themes appropriate to his/her own company business model design

 

 

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Introduction and Overview

Tutorials

 

Readings

 

 

The term Business Model is relatively recent. Though it appeared for the first time in the 1950s it rose to prominence and reached the mainstream only in the 1990s. Thus far, the definitions have mostly come from the popular literature. These authors define business model in terms of what they think it should cover. For example, a definition from Osterwalder, Pigneur and Tucci (2005) is that a business model is:

a conceptual tool that contains a big set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.

Basic Business Model

 

More recently, researchers build definitions based on economic and organisational theories and show that the definitions are econometrically sound. For example, Malone, et al. (2006) at MIT propose an operational definition of business model, based on theories such as those from transaction cost economics. Zott and Amit (2002) from INSEAD and Wharton based their definition on boundary-spanning transactions.

Components of a business model

Many different conceptualizations of business models exist (Chesbrough and Rosenbloom 2000; Hamel 2000; Linder and Cantrell 2000; Petrovic, Kittl et al.; Weill and Vitale 2001; Gordijn 2002; Afuah and Tucci 2003; Osterwalder 2004; Fetscherin & Knolmayer 2005). They all have various degrees of resemblance or difference. The model proposed by Osterwalder (2004) synthesises the different conceptualizations into a single reference model based on the similarities of a large range of models. The author's conceptualization describes a business model as consisting of nine related business model building blocks. Thus, a business model describes a company's business:

1. value propositions: The company's offers which bundle products and services into value for the customer. A value proposition creates utility for the customer.

2. target customer segments: The customer segments a company wants to offer value to. This describes the groups of people with common characteristics for which the company creates value. The process of defining customer segments is referred to as market segmentation.

3. distribution channels: The various means of the company to get in touch with its customers. This describes how a company goes to market. It refers to the company's marketing and distribution strategy.

4. customer relationships: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.

5. value configurations: The configuration of activities and resources.

6. core capabilities: The capabilities and competencies necessary to execute the company's business model.

7. partner network: The network of cooperative agreements with other companies necessary to efficiently offer and commercialize value. This describes the company's range of business alliances.

8. cost structure: The monetary consequences of the means employed in the business model.

9. revenue model: The way a company makes money through a variety of revenue flows.

 

These 9 business model building blocks constitute a business model design template which allows companies to describe their business model.

 

Simple Business Model Framework

 

See also

 

External Links

 

eBusiness Models

 

In general, the economic Value of something is how much a product or service is worth to someone relative to other things (often measured in money).

It can be either an evaluation of what it could or should be worth, or an explanation of its actual market value (price).

There are various ways to give those valuations or explanations. They are the subject of the "Theory of Value."

 

See also

 

External links

 

Value added refers to the additional value created at a particular stage of production or through image and marketing. In modern neoclassical economics, especially in macroeconomics, it refers to the contribution of the factors of production, i.e., land, labor, and capital goods, to raising the value of a product and corresponds to the incomes received by the owners of these factors. The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of intermediate goods used up in the production of X.

Value-added Worl

Input and Output Channels

 

 

See also

 

 

 

A Core Competency is something that a firm can do well and that meets the following three conditions specified by Hamel and Prahalad (1990):

  1. It provides customer benefits
  2. It is hard for competitors to imitate
  3. It can be leveraged widely to many products and markets.

 

A core competency can take various forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers (Mascarenhas et al. 1998). It may also include product development or culture such as employee dedication. Modern business theories suggest that most activities that are not part of a company's core competency should be outsourced.

 

The competency diagram and the core competencies

 

If a core competency yields a long term advantage to the company, it is said to be a sustainable competitive advantage.

 

See also

 

The term Process Model (usually Business Process Model) is used in different contexts. Process models are concepts which can belong in the area of Process Engineering.

 

Modeling and analysing processes of methods of doing business

 

 

Abstraction level for processes
Enlarge

Abstraction level for processes [Rolland1993]

 

A description of what process models are is provided by Colette Rolland: “Processes of the same nature are classified together into a process model. Thus, a process model is a description of a process at the type level. Since the process model is at the type level, a process is an instantiation of it. The same process model is used repeatedly for the development of many applications and thus, has many instantiations. […] One possible use of a process model is to prescribe ‘how things must/should/could be done’ in contrast to the process itself which is really what happens. A process model is more or less a rough anticipation of what the process will look like. What the process shall be will be determined during actual system development” [Rolland1998]

 

 

See also

 

 Supply-cain Operations Reference Model: Process Definitions

External links

 

Case

Viagra
Enlarge

Viagra is available as blue pills with a characteristic shape

 

 

Customer Value and Relative Positioning

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Readings

 

In marketing, a customer value proposition (CVP) consists of the sum total of benefits which a vendor promises a customer will receive in return for the customer's associated payment (or other value-transfer).

A customer value proposition is a business or marketing statement that describes why a customer should buy a product or use a service. It is specifically targeted towards potential customers rather than other constituent groups such as employees, partners or suppliers. It is a clearly defined statement that is designed to convince customers that one particular product or service will add more value or better solve a problem than others in its competitive set.[1].

 

 

See also

 Strategy Maps - Kaplan Norton

 

External links

 

 

Pricing to Optimise Revenues

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Readings

Revenue is a business term for the amount of money that a company receives from its activities in a given period, mostly from sales of products and/or services to customers. It is not to be confused with the terms "profits" or "net income" which generally mean total revenue minus total expenses in a given period. In Europe (including the UK) the term is turnover. For individuals, the equivalent term is income. For government, revenues refers to the gross proceeds received from taxes, fees, and the like. For non-profit organizations, revenue from products and services can be expanded to include proceeds from donations, grants, trade in lieu of cash, and other liquid assets.

 

Revenue and sales optimisation

 

Revenue is often referred to as the “top line” due to its position on the income statement at the very top. This is to be contrasted with the “bottom line” which denotes net income, revenues after all applicable costs. At times, the term “Sales” is used interchangeably, but is only accurate when the amount described is denoted in currency as opposed to units ($100,000 of computer sales vs. 300 computers sold).

Revenue is basically "price x quantity" (the price for one, times the number of them, or the price per kg times the mass in kg, etc.), summed over all goods; if the price per unit varies with the quantity then for each price per unit this multiplication is done, and the results are summed. Net revenue (revenue – returns) is used when sales returns are a factor in the business.

Revenue, like all income statement accounts, can only be presented in terms of a period, for example, the revenues a company earned between January 1, 2005 and December 31, 2005. Alternatively, one could express it in terms of the following examples: 2005 revenue, Q1 (1st quarter) revenue, or March revenue. This periodicity is in contrast to a balance sheet account, which would be given as of the date of the statement. To simply say that a company earned revenue of $5 million without giving a period is meaningless (however, saying that a company has $5 million cash certainly has meaning).

Internally, companies break revenue down by operating segment, geographic region, and product line.

External links

 

 

Sources of Revenues and Market Targets

Tutorials

 

Readings

Target Market may be defined as a market which an organisation sets its views on, either because it is witnessing an increasing demand for the product produced by the organisation, either because it represents a "blue ocean" for the organisation to exploit before its competitors get there, so as to create a competitive advantage. A target market also is, in marketing, the market segment to which a particular product is marketed. It's often defined by age, gender, geography, and/or socio-economic grouping.

 

Targeting strategy is the selection of the customers you wish to service. The decisions involved in targeting strategy include:

  • which segments to target
  • how many products to offer
  • which products to offer in which segments

 

There are three steps to targeting:

 

Targeting strategy decisions are influenced by:

  • market maturity
  • diversity of buyers' needs and preferences
  • strength of the competition
  • the volume of sales required for profitability

 

Targeting can be selective (eg.: focus strategy, market specialization strategy or niche strategy), or extensive (eg.: full coverage, mass marketing, or product specialization).

 Strategic Target Market Segments

 

See also

 

 

Connected Activities for a Profitable Business Model

Tutorials

 

Readings

 

How to design an innovative business model

 

 

Resources and Capabilities: The Roots of Business Models

Tutorials

 

Readings

 

 

The Resource-based view (RBV) is an economic tool used to determine the strategic resources available to a firm. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal (Wernerfelt, 1984, p172; Rumelt, 1984, p557-558). To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile (Barney, 1991, p105-106; Peteraf, 1993, p180). Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort (Hoopes, 2003, p891; Barney, 1991, p117). If these conditions hold, the firm’s bundle of resources can assist the firm sustaining above average returns.

 

Intellectual Capital Management

 

See also

 

 

Executing a Business Model

Tutorials

 

Readings

Strategic Management is the art and science of formulating, implementing and evaluating cross-functional decisions that will enable an organization to achieve its objectives[1]. It is the process of specifying the organization's objectives, developing policies and plans to achieve these objectives, and allocating resources to implement the policies and plans to achieve the organization's objectives. Strategic management, therefore, combines the activities of the various functional areas of a business to achieve organisational objectives. It is the highest level of managerial activity, usually formulated by the Board of directors and performed by the organization's Chief Executive Officer (CEO) and executive team. Strategic management provides overall direction` to the enterprise and is closely related to the field of Organization Studies.

“Strategic management is an ongoing process that assesses the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. regularly] to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment.” (Lamb, 1984:ix)[2]

Strategic management is a combination of three main processes namely; 1) strategy formulation 2) strategy implementation and 3) strategy evaluation

Strategy formulation involves:

 

Processes of strategy formulation and implementation

 

Performing a situation analysis, self-evaluation and competitor analysis: both internal and external; both micro-environmental and macro-environmental.

Concurrent with this assessment, objectives are set. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.

These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives.

This three-step strategy formulation process is sometimes referred to as determining where you are now, determining where you want to go, and then determining how to get there. These three questions are the essence of strategic planning. SWOT Analysis: I/O Economics for the external factors and RBV for the internal factors.

 

Strategy implementation involves:

1. Allocation of sufficient resources (financial, personnel, time, technology support)

2. Establishing a chain of command or some alternative structure (such as cross functional teams)

3. Assigning responsibility of specific tasks or processes to specific individuals or groups

4. It also involves managing the process. This includes monitoring results, comparing to benchmarks and best practices, evaluating the efficacy and efficiency of the process, controlling for variances, and making adjustments to the process as necessary.

5. When implementing specific programs, this involves acquiring the requisite resources, developing the process, training, process testing, documentation, and integration with (and/or conversion from) legacy processes.

 

Strategy evaluation involves:

Measuring the effectiveness of the organisational strategy.

 

See also

 

External links

 

 

Innovation, Sustainability, and Change

Tutorials

 

Readings

 

 

The classic definitions of innovation include:

  1. the process of making improvements by introducing something new
  2. the act of introducing something new: something newly introduced (The American Heritage Dictionary).
  3. the process of translating new ideas into tangible societal impact (Krisztina Holly, Vice Provost, University of Southern California)
  4. the introduction of something new. (Merriam-Webster Online)
  5. a new idea, method or device. (Merriam-Webster Online)
  6. the successful exploitation of new ideas (Department of Trade and Industry, UK).
  7. change that creates a new dimension of performance Peter Drucker (Hesselbein, 2002)
  8. A creative idea that is realized [(Frans Johansson)] (Harvard Business School Press, 2004)
  9. "The capability of continuously realizing a desired future state" ([John Kao, The Innovation Manifesto, 2005])
  10. "The staging of value and/or the conservation of value." (Daniel Montano 2006.)[1]

 

What is Sustainability?

 

In economics, business and government policy,- something new - must be substantially different, not an insignificant change. In economics the change must increase value, customer value, or producer value. Innovations are intended to make someone better off, and the succession of many innovations grows the whole economy.

The term innovation may refer to both radical and incremental changes to products, processes or services. The often unspoken goal of innovation is to solve a problem. Innovation is an important topic in the study of economics, business, technology, sociology, and engineering. Since innovation is also considered a major driver of the economy, the factors that lead to innovation are also considered to be critical to policy makers.

In the organisational context, innovation may be linked to performance and growth through improvements in efficiency, productivity, quality, competitive positioning, market share, etc. All organisations can innovate, including for example hospitals, universities, and local governments.

While innovation typically adds value, innovation may also have a negative or destructive effect as new developments clear away or change old organisational forms and practices. Organisations that do not innovate effectively may be destroyed by those that do. Hence innovation typically involves risk. A key challenge in innovation is maintaining a balance between process and product innovations where process innovations tend to involve a business model which may develop shareholder satisfaction through improved efficiencies while product innovations develop customer support however at the risk of costly R&D that can erode shareholder returns.

Four commonly accepted types of innovation are Product, Process, Position and Paradigm (Tidd, Bessant and Pavitt, 2005)

 

Strategy & Innovation Leadership

 

 

See also

 

Innovation Links

SPRU Science and Technology Policy Research - Origin of the concept of 'Systems of Innovation' and centre of research and learning on innovation policy and innovation management.

Innovation Studies at Centre for Technology, Innovation and Culture (TIK), University of Oslo - One of the world's leading research centres on Innovation Studies.

TIK working papers on Innovation studies at RePec.

Research effort in Understanding Innovation (Centre for Advanced Study).

PREST: now part of Manchester Institute of Innovation Research, centre for research, consultancy and teaching on innovation (especially in services), innovation policy, and related topics such as research evaluation and Technlogy Foresight.

Welcome to the DTI's Innovation Home Page - Department of Trade and Industry, UK.

Innovation and Technology Policy - Organisation for Economic Co-operation and Development (OECD).

Welcome to The Innovation Unit's homepage - The Innovation Unit - one of the UK's leading organisations for promoting innovation to improve education.

Academic article on Being a Systems Innovator on SSRN

European Union:

 

External links

News, commentary and events on EU innovation policy, R&D and technology transfer

A white paper on Collaboration's Role in Innovation

Urban and Regional Innovation Research Unit

KAM - the interactive database provides data on innovation and other “pillars” of the knowledge economy for more than 130 countries.

ISPIM - The International Society for Professional Innovation Management

An interview with Larry Keeley, an innovation guru , 4 March 2007

Ambidextrous Innovation article profiling tactical versus strategic requirements for corporations

http://upload.wikimedia.org/wikipedia/en/7/75/The_Industry_Standard_Open_Platform.pdf

 

 

Analysing the Cost of a Business Model

Tutorials

 

Readings

 

Pricing, Licensing, and Business Models

 

Business model and Strategy

 

 

Analysing the Sources of Profitability and Competitive Advantage in a Business Model

Tutorials

 

Readings

 

 

Competitive Advantage (CA) is a position that a firm occupies in its competitive landscape. Michael Porter posits that a competitive advantage, sustainable or not, exists when a company makes economic rents, that is, their earnings exceed their costs (including cost of capital). That means that normal competitive pressures are not able to drive down the firm's earnings to the point where they cover all costs and just provide minimum sufficient additional return to keep capital invested. Most forms of competitive advantage cannot be sustained for any length of time because the promise of economic rents drives competitors to duplicate the competitive advantage held by any one firm.

 

Building Competitive Advantage

 

A firm possesses a Sustainable Competitive Advantage (SCA) when it has value-creating processes and positions that cannot be duplicated or imitated by other firms that lead to the production of above normal rents. An SCA is different from a competitive advantage (CA) in that it provides a long-term advantage that is not easily replicated. But these above-normal rents can attract new entrants who drive down economic rents. A CA is a position a firm attains that lead to above-normal rents or a superior financial performance. The processes and positions that engender such a position is not necessarily non-duplicable or inimitable.

Analysis of the factors of profitability is the subject of numerous theories of strategy including the five forces model pioneered by Michael Porter of the Harvard Business School.

 

In marketing and strategic management, sustainable competitive advantage is an advantage that one firm has relative to competing firms. The source of the advantage can be something the company does that is distinctive and difficult to replicate, also known as a core competency - for example Procter & Gamble's ability to derive superior consumer insights and implement them in managing its brand portfolio. It can also be an asset such as a brand (e.g. Coca Cola) or a patent, such as Viagra. It can also simply be a result of the industry's cost structure - for example, the large fixed costs that tend to create natural monopolies in utility industries. To be sustainable, the advantage must be:

  1. distinctive, and
  2. proprietary

 
Competitive Advantage

 

See also

 

 

 

Financing and Valuing a Business Model

Tutorials

 

Readings

Business Valuation is a process applied by qualified valuation experts to determine the fair market value of an owner’s interest in a business. Business valuation is often used to resolve disputes related to estate and gift taxation, divorce litigation, allocation of business purchase price, and many other business and legal disputes.

 

Economic Quality of a Reserve

 

 

External links

 

 

Business Model Planning Process

Tutorials

 

Readings

Business Model Design refers to the activity of designing a company's business model. It is part of the business development and business strategy process and involves design methods.

 

‘Business Model Map’

 

Business model design includes the modelling and description of a company's:

 

Business model design is distinct from business modelling The former refers to defining the business logic of a company at the strategic level, whereas the latter refers to business process design at the operational level.

A business model design template can facilitate the process of designing and describing a company's business model.

 

See also

Strategic Planning Process

 

In economics, a Model is a theoretical construct that represents economic processes by a set of variables and a set of logical and quantitative relationships between them. As in other fields, models are simplified frameworks designed to illuminate complex processes.

 

IS/LM model
Enlarge
A diagram of the IS/LM model

 

TECHNOLOGY INFRASTRUCTURE DEFINED

 

 

 

Corporate Social Responsibility and Governance

Tutorials

 

Readings

 

 

Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business/ Responsible Business) [1] is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby businesses monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. The goal of CSR is to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere.

The term "corporate social responsibility" came into common use in the late 1960s and early 1970s after many multinational corporations formed the term stakeholder, meaning those on whom an organization's activities have an impact. It was used to describe corporate owners beyond shareholders as a result of an influential book by R. Edward Freeman, Strategic management: a stakeholder approach in 1984.[2] Proponents argue that corporations make more long term profits by operating with a perspective, while critics argue that CSR distracts from the economic role of businesses. Others argue CSR is merely window-dressing, or an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations.

CSR is titled to aid an organization's mission as well as a guide to what the company stands for and will uphold to its consumers. Development business ethics is one of the forms of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business environment. ISO 26000 is the recognized international standard for CSR. Public sector organizations (the United Nations for example) adhere to the triple bottom line (TBL). It is widely accepted that CSR adheres to similar principles but with no formal act of legislation. The UN has developed the Principles for Responsible Investment as guidelines for investing entities.

The Business in Society

 

 

See also

 

External links

 

 

Recommended Texts

 

Business Models - A strategic Management Approach

Business Models : A Strategic Management Approach

Allan Afuah, University of Michigan Business School

ISBN: 0072883642
Copyright year: 2003

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Manage Your Business Model For Better Revenue

 

 

 

 

 

Strategy Formulation & Implementation