Self-Understanding for Opportunity Creation
wakinbb
Neck1ePPT08.pptxChapter 8: Building Business Models
8.1
Define the business model.
8.2
Identify the four core areas of a business model.
Neck, Entrepreneurship. © SAGE Publications, 2018.
3
Learning Objectives
8.3
Explore the importance of the Customer Value Proposition in further detail.
8.4
Describe the different types of Customer Value Propositions and show how to identify your target customers.
Neck, Entrepreneurship. © SAGE Publications, 2018.
4
Learning Objectives
8.5
Identify the nine components of the business model canvas.
Neck, Entrepreneurship. © SAGE Publications, 2018.
5
Learning Objectives
Notable Quote
“Today countless innovative business models are emerging. Entirely new industries are forming as the old ones crumble. Upstarts are challenging the old guard, some of whom are struggling feverishly to reinvent themselves.”
Alexander Osterwalder & Yves Pigneur
Neck, Entrepreneurship. © SAGE Publications, 2018.
6
Alexander Osterwalder & Yves Pigneur authors of Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers
6
8.1 What Is a Business Model?
7
Neck, Entrepreneurship. © SAGE Publications, 2018.
8
Business Model
A conceptual framework describes how a company creates, delivers, and extracts value.
What Is a Business Model?
Business models help entrepreneurs generate value and scale. They do this in several ways: by fulfilling unmet needs in an existing market, by delivering existing products and services to existing customers with unique differentiation, and by serving customers in new markets.
Peter Skarzynski & Rowan Gibson. Innovation to the Core: A Blueprint for Tranforming the Way Your Company Innovates (Boston, MA: Harvard Business School Press, 2008, p.112).
8
Neck, Entrepreneurship. © SAGE Publications, 2018.
9
Business Plan
Formal document
Provides background and financial information about the company
Outlines goals for the business and steps to attain these goals
Key: focusing on what customers want
What Is a Business Model?
8.2 The Four Parts of a Business Model
10
Neck, Entrepreneurship. © SAGE Publications, 2018.
11
Four Parts of the Business Model
The offering
The customer
The infrastructure
The financial viability
The Four Parts of a Business Model
Neck, Entrepreneurship. © SAGE Publications, 2018.
12
The Offering
Identifies potential customers
Lists resources required
Customer Value Proposition (CVP)
The Four Parts of a Business Model
The first part of the business model is the offering, which identifies the type of customers to whom you think the offering might be useful, as well as the resources you need to meet this demand. The offering constitutes the customer value proposition (CVP) which describes exactly what products or services your business offers and sells to customers. It explains how you can help customers do something more inexpensively, easily, effectively or quickly than before. We will explore the concept of the CVP in greater detail later in this chapter.
12
Neck, Entrepreneurship. © SAGE Publications, 2018.
13
The Customer
Determine target market
Plan to reach the target market
Plan to maintain relationships with the market segment
The Four Parts of a Business Model
Customers include the segments of a market that your offering is serving. Entrepreneurs typically can’t service everyone in a market so you have to choose who best to target. In addition, you have to determine how you will reach those segments and how you will maintain a relationship the customer. Remember Niari Keverian and Kristina Tsipouras, founders of Greek Iced Teas, featured in Chapter 1? Keverian and Tsipouras created a Facebook page to collate information about their potential customers to eventually define a target market which included mostly young, health-conscious professionals, college students, and older teens, as well as moms-to-be and new moms.
13
Neck, Entrepreneurship. © SAGE Publications, 2018.
14
The Infrastructure
People
Technology
Products
Suppliers
Facilities
Cash
(resources needed to deliver the CVP)
The Four Parts of a Business Model
The infrastructure generally includes all the resources (people, technology, products, suppliers, partners, facilities, cash, etc.) that an entrepreneur must have in order to deliver the CVP. For example, when Anna Haupt and Terese Alstin, wanted to make their idea for the invisible bicycle helmet become a reality, they enlisted investors, cycling experts, designers, suppliers, and retailers to support the creation, promotion, and sales of the product.
14
Neck, Entrepreneurship. © SAGE Publications, 2018.
15
Financial Viability
Discusses revenue
Outlines cost structure
Addresses CVP
The Four Parts of a Business Model
Financial viability defines the revenue and cost structures: how will the firm make money given the cost structures of the resources and processes? For example, when the founders of Parlor Skis featured in Chapter 7 failed to get their skis into brick and mortar stores, they had to ensure that their custom-made skis were still profitable by being sold primarily online.
People often make a mistake in thinking that the business model is just about revenue and costs, but a business model is more than a financial model. It has to describe more than how you intend to make money; it needs to explain why a customer would give you money in the first place and what’s in it for the customer. This is where the CVP comes in.
15
8.3 The Customer Value Proposition (CVP)
16
Neck, Entrepreneurship. © SAGE Publications, 2018.
17
What is the CVP?
Most important part of business model
Must offer better value than the competition
Must be measurable in monetary terms
Must be sustainable
The Customer Value Proposition (CVP)
James Anderson, James Narus, and Wouter van Rossum, “Customer Value Propositions in Business Markets,” Harvard Business Review, (March 2006, pp 91-99).
17
Neck, Entrepreneurship. © SAGE Publications, 2018.
18
Getting the Job Done
Requires a deep understanding of the customers’ goals and needs.
You can resolve your customers’ needs in ways they do not expect.
The Customer Value Proposition (CVP)
Figure 8.1: Four Problems Experienced by Customers
Neck, Entrepreneurship. © SAGE Publications, 2018.
19
Credits:
a: iStockphoto.com/diego_cervo, b: ©iStockphoto.com/-Oxford-, c: ©iStockphoto.com/svetikd,
d: iStockphoto.com/Terraxplorer
Neck, Entrepreneurship. © SAGE Publications, 2018.
20
Addressing Customers’ Problems
Lack of time—CVS MinuteClinic
Lack of money—IKEA
Lack of skills—Quickbooks
Lack of access—23andMe
The Customer Value Proposition (CVP)
Typically, customers face at least one of four problems that prevent them from getting a job done. These problems include: lack of time, lack of money, lack of skills, and lack of access (see Figure 8.2). As an entrepreneur, if you can find a new way to solve one of these problems, you’re on your way to creating a good CVP.
20
8.4 Different Types of CVPs and Customer Segments
21
Neck, Entrepreneurship. © SAGE Publications, 2018.
22
Types of Value Propositions
All-benefits (focus on the product)
Points-of-difference (focus on competition)
Resonating-focus (focus on the customer)
Different Types of CVPs and Customer Segments
Figure 8.2: Three Types of Value Propositions
Neck, Entrepreneurship. © SAGE Publications, 2018.
23
Neck, Entrepreneurship. © SAGE Publications, 2018.
24
Defining Your Target Customer
Who are your customers?
For whom are you creating value?
Why would customers buy from you?
Different Types of CVPs and Customer Segments
Table 8.1: Identifying Your Target Customer
Neck, Entrepreneurship. © SAGE Publications, 2018.
25
Different Types of CVPs and Customer Segments
Source: Retrieved from http://www.slideshare.net/leslieforman/customer-segments-value-proposition-based-on-business- model-canvas-framework-presented-to-chile-startup-school-on-october-12-2011-leslie-forman
Neck, Entrepreneurship. © SAGE Publications, 2018.
26
Types of Customer Segments
Mass market
Niche market
Segmented market
Diversified market
Multi-sided market
Different Types of CVPs and Customer Segments
A mass market comprises a large group of customers with very similar needs and problems. You may have heard of the phrase “it’s gone mass market,” which means a product or a service is being purchased by an enormous proportion of customers all looking for the same thing. A few examples of mass market products include computers, soap, cars, insurance, and health care. Coke and Pepsi are products that are considered mass market because they target a wide range of large groups, from youths to families.
A niche market is a small market segment comprising customers with specific needs and requirements. The CVP is tailored to meet these particular needs. For example, Canadian entrepreneur, Nicole Smith, set up her business, Flytographer, in response to people who wanted high quality vacation photos as keepsakes of their time abroad. Through the Flytographer website, travelers can connect with professional photographers from all over the world who meet the vacationers at their destinations to capture special moments – at affordable prices starting at $250 for a 30-minute photo session.
A segmented market involves breaking customer segments into groups according to their different needs and problems. For example, a bank might provide different services to its wealthier clients than they would to people with an average income, or offer different products for small versus large businesses. Segmenting customers is a good way of generating more business.
A diversified market offers a variety of services to serve two or more customer segments with different needs and problems, which bear no relationship to each other. Amazon is a good example of an organization which diversified from its retail business—selling books and other tangible products—to sell cloud computing services, online storage space, and on-demand server usage. In short, Amazon adapted its CVP to cater for a whole new wave of customers, such as web companies, who would buy these computing services.
Multi-sided markets describe two or more customer segments that are mutually dependent of each other. For example, a free newspaper caters for its readership customer base by providing commuters with newsworthy content, but also needs to prove to advertisers that it has a large readership in order to get the funding to produce and distribute the free publication. The newspaper is dependent on both segments in order to be successful.
Matching the right CVP to your targeted customer segment is essential to the success of your business.
Page 21, Alexander Osterwalder & Yves Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (Hoboken, NJ: John Wiley & Sons, 2010.)
Page 21, Alexander Osterwalder & Yves Pigneur, Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers (Hoboken, NJ: John Wiley & Sons, 2010.)
26
8.5 The Business Model Canvas (BMC)
27
What Is the BMC?
A type of visual plan that depicts the business on one page by filling in nine blocks of a business model.
The Business Model Canvas (BMC)
Neck, Entrepreneurship. © SAGE Publications, 2018.
29
Nine Components of the BMC
CVP
Customer segments
Channels
Customer relationships
Key activities
The Business Model Canvas (BMC)
CVP: As described earlier in this chapter, the CVP is designed to solve a customer problem or meet a need. With regard to your new T-shirt business, ask yourself the following: What value do we deliver? What bundle of products and services are we offering? What are we helping customers achieve by providing a new range of T-shirts?
Customer Segments: As defined above, a customer segment is a part of the customer grouping of a market. For example, gluten-free is a segment of the grouping of customers who buy food; another segment would be customers who are lactose intolerant. In Chapter 1 we saw that the caffeine-free ZOOS Greek Iced Tea would appeal to pregnant and new moms. The customer segmentation questions for the T-shirt business are: Who are your most important customers? What segment of the market would be most likely to buy your T-shirts?
Channels: The value proposition is delivered through communication, distribution, and sales channels. The core question here is: What are all the ways in which you can reach your customer? For example, you could reach your customers online, through a brick and mortar store, and/or through word of mouth.
Customer Relationships: Relationships can be developed on a one-to-one basis in a brick and mortar T-shirt store and/or through a purely automated process of selling the T-shirts online. Customer relationships go beyond just buying and selling; they depend on engendering positive feelings about your business, building a sense of customer identity (“I am a so-and-so T-shirt customer”), and motivating customers to want to bring their friends into the relationship. The key here is one of the most important questions an entrepreneur can answer: How do you establish and maintain relationships with your customers?
Key Activities: What are the most important activities that the company participates in to get the job done? When running a T-shirt business you will need to consider such activities as stock management, sales management, and T-shirt design selection.
Key Resources: Resources are what you need to develop the business, create products and services, and deliver on your CVP. Resources take many forms and include people, technology, information, and physical and financial resources. How much and which resources will you need if your company has 1,000 customers or 1,000,000? What resources do you need to accomplish the key activities? If you’re opening up a store, then you need to figure out the location and size; you also need people who are going to sell your T-shirts; space to store inventory; and a range of artists who will provide the designs for your T-shirts. You will also need to calculate how much money you will need to set up, as well as accumulating the skills, knowledge and information you need to start your own business.
Key Partners: Entrepreneurs are not able to do everything by themselves, so partnering with suppliers, associates, and distributors is a logical option, not only for strategic purposes but also for efficiency needs. For example, you could partner with a designer who could advise you on the artwork of the T-shirts as well as providing you with a network into other designers. You could ask the questions around outsourcing: Could some activities be outsourced? Do you have a network of suppliers/buyers you could tap into or negotiate with?
Revenue Streams: Revenue is generated if a successful value proposition is delivered. Here you need to ask: How much are my customers willing to pay? How many customers do I need? How much cash can be generated through T-shirt sales in the store or T-shirt sales online? How much does each stream contribute to the total? (We will explore revenue models in further detail in Chapter 10).
Cost Structure: The cost structure represents all the expenses required to execute and run the business model. What are the most important costs inherent in the business model? Which resources are the most expensive to get? Which activities are the most expensive? Store rental, employee salaries, the cost of purchasing T-shirt materials and designs, and the cost of sales and marketing are all factors to consider when formulating a cost structure.
29
Neck, Entrepreneurship. © SAGE Publications, 2018.
30
Nine Components of the BMC
Key resources
Key partners
Revenue streams
Cost structure
The Business Model Canvas (BMC)
CVP: As described earlier in this chapter, the CVP is designed to solve a customer problem or meet a need. With regard to your new T-shirt business, ask yourself the following: What value do we deliver? What bundle of products and services are we offering? What are we helping customers achieve by providing a new range of T-shirts?
Customer Segments: As defined above, a customer segment is a part of the customer grouping of a market. For example, gluten-free is a segment of the grouping of customers who buy food; another segment would be customers who are lactose intolerant. In Chapter 1 we saw that the caffeine-free ZOOS Greek Iced Tea would appeal to pregnant and new moms. The customer segmentation questions for the T-shirt business are: Who are your most important customers? What segment of the market would be most likely to buy your T-shirts?
Channels: The value proposition is delivered through communication, distribution, and sales channels. The core question here is: What are all the ways in which you can reach your customer? For example, you could reach your customers online, through a brick and mortar store, and/or through word of mouth.
Customer Relationships: Relationships can be developed on a one-to-one basis in a brick and mortar T-shirt store and/or through a purely automated process of selling the T-shirts online. Customer relationships go beyond just buying and selling; they depend on engendering positive feelings about your business, building a sense of customer identity (“I am a so-and-so T-shirt customer”), and motivating customers to want to bring their friends into the relationship. The key here is one of the most important questions an entrepreneur can answer: How do you establish and maintain relationships with your customers?
Key Activities: What are the most important activities that the company participates in to get the job done? When running a T-shirt business you will need to consider such activities as stock management, sales management, and T-shirt design selection.
Key Resources: Resources are what you need to develop the business, create products and services, and deliver on your CVP. Resources take many forms and include people, technology, information, and physical and financial resources. How much and which resources will you need if your company has 1,000 customers or 1,000,000? What resources do you need to accomplish the key activities? If you’re opening up a store, then you need to figure out the location and size; you also need people who are going to sell your T-shirts; space to store inventory; and a range of artists who will provide the designs for your T-shirts. You will also need to calculate how much money you will need to set up, as well as accumulating the skills, knowledge and information you need to start your own business.
Key Partners: Entrepreneurs are not able to do everything by themselves, so partnering with suppliers, associates, and distributors is a logical option, not only for strategic purposes but also for efficiency needs. For example, you could partner with a designer who could advise you on the artwork of the T-shirts as well as providing you with a network into other designers. You could ask the questions around outsourcing: Could some activities be outsourced? Do you have a network of suppliers/buyers you could tap into or negotiate with?
Revenue Streams: Revenue is generated if a successful value proposition is delivered. Here you need to ask: How much are my customers willing to pay? How many customers do I need? How much cash can be generated through T-shirt sales in the store or T-shirt sales online? How much does each stream contribute to the total? (We will explore revenue models in further detail in Chapter 10).
Cost Structure: The cost structure represents all the expenses required to execute and run the business model. What are the most important costs inherent in the business model? Which resources are the most expensive to get? Which activities are the most expensive? Store rental, employee salaries, the cost of purchasing T-shirt materials and designs, and the cost of sales and marketing are all factors to consider when formulating a cost structure.
30
Figure 8.3: The Business Model Canvas
Neck, Entrepreneurship. © SAGE Publications, 2018.
31
Credit: BMC is from the book Business Model Generation by Osterwalder and Pigneur, 2010. http://www.businessmodelgeneration.com/canvas/bmc
Neck, Entrepreneurship. © SAGE Publications, 2018.
32
The BMC in Action
Southwest, to be the low-cost airline, built processes to fulfill their CVP.
No set of processes is best.
Each company needs to make decisions based on their CVP.
The Business Model Canvas (BMC)
In what ways does the division between value creation and value delivery help to clarify the process of refining the business model?
Neck, Entrepreneurship. © SAGE Publications, 2018.
33
Create Your Own BMC
Neck, Entrepreneurship. © SAGE Publications, 2018.
34
Mindshift: Create Your Own BMC
Download a free copy of the Business Model Canvas from: http://www.businessmodelgeneration.com/ canvas/bmc
Yes, we want you to fill out the canvas with one of the many business ideas you probably have at this stage of the book. But most students don’t know where to start. Do you start with the value proposition, key resources, or customer segments first?
Neck, Entrepreneurship. © SAGE Publications, 2018.
35
Mindshift: Create Your Own BMC
To answer this question, fold the canvas in half so there is a crease down the middle of the canvas. Now open the page to its original position. The area of the canvas to the right of the crease is all about creating value. The area of the canvas to the left of the crease is all about delivering that value in an efficient way.
Neck, Entrepreneurship. © SAGE Publications, 2018.
36
Mindshift: Create Your Own BMC
In order to build an innovative and sustainable business model, always focus on the right (value creation) side of the canvas first. The left (value delivery) side of the canvas is operational and process-oriented. Don’t spend too much time on the left until you have established something truly valuable for customers.
Neck, Entrepreneurship. © SAGE Publications, 2018.
37
Mindshift: Create Your Own BMC
Again, every completed box is just a guess. Once your canvas is completed, your job is to begin testing. Start with testing the value proposition with the customer segment you’ve identified—the product-market fit. Are you offering something people want?
Now you are ready to complete your first canvas. Take an idea, and complete a canvas using the example in Figure 8.3 as a guide.
Neck, Entrepreneurship. © SAGE Publications, 2018.
38
1. Why do you think this tool is called the Business Model Canvas?
Neck, Entrepreneurship. © SAGE Publications, 2018.
39
MINDSHIFT: CRITICAL THINKING
2. In what ways does the division between value creation and value delivery help clarify the process of refining the business model?
Neck, Entrepreneurship. © SAGE Publications, 2018.
40
MINDSHIFT: CRITICAL THINKING
3. In completing a BMC for your idea, which boxes were more difficult to fill out? Why? What are you going to do now with your completed BMC?
Neck, Entrepreneurship. © SAGE Publications, 2018.
41
MINDSHIFT: CRITICAL THINKING
