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Business Models For Hi-Tech Products (MT 5016): What is a Business Model? A/Prof Jeffrey Funk Division of Engineering and Technology Management National University of Singapore

Biz model 1.1 summary

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These slides summarize the concept of a business model for a course that i teach on business models for hi-tech products.

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Page 1: Biz model 1.1   summary

Business Models For Hi-Tech

Products (MT 5016):

What is a Business Model?

A/Prof Jeffrey Funk

Division of Engineering and

Technology Management

National University of Singapore

Page 2: Biz model 1.1   summary

Module Objectives

• To understand

– business models

– their impact on competition between firms

– how different business models are needed for different

situations

– what drives need for change in business models

– similarities/differences between business models and

strategies

• To develop a business model for a specific firm

and a new technology in a group project (5-6

students)

Page 3: Biz model 1.1   summary

Outline: Elements of a Business Model

• Customer selection: whom to serve and not serve

• Value proposition: what to offer and how to

differentiate

• Value capture: what are dominant sources of

revenues

• Scope of activities: what activities to carry out

and what relationships to have

• Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

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Customer Selection

• Who are the potential customers? – How do we segment the market (see following slides)

– What is the potential size, growth, profitability

• Are there collaborators who can also be thought of as customers?

• What are the customer needs and wants?

• How do they make decisions and purchases?

• What are broad trends that affect customers

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What is a Need?

Today’s

Business

Customer Needs

Unarticulated

Articulated

Customer Types

Served Unserved

Page 6: Biz model 1.1   summary

Segmentation

• Categorize customers in groups that have distinct

needs

– How many types of customers are there?

– What differentiates them, how are their needs distinct?

– How valuable might they be (size of market and

potential profitability)?

– Which segments will be the first adopters of the new

technology?

– How will segments evolve as a new technology diffuse?

• Understand the differences between product and

market segments

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Targeting

• Select the segment (s) that have the best

short and long-term prospects for the firm

– If a new technology, they must be early

adopters of new technology

– have a large potential value (Present/Future)

– fit with the company’s core competency

– preferably not fit with the competitor’s core

competency

• You must justify your choice of target

segment(s)

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What About Collaborators?

• Many products have multiple customers or

collaborators who might be considered

customers

• Who are they?

• They might be

– retail outlets

– providers of complementary products or

complementary services

• How does the business model fit with

these collaborators?

Page 9: Biz model 1.1   summary

Outline: Elements of a Business Model

• Customer selection: whom to serve and not serve

• Value proposition: what to offer and how to

differentiate

• Value capture: what are dominant sources of

revenues

• Scope of activities: what activities to carry out

and what relationships to have

• Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

Page 10: Biz model 1.1   summary

Value Proposition

Value to

the

target

market

Benefits to

the

target

market

Price to

the

target

market

= Relative

to

A simple and clear statement of the intended target market, the

benefits of the offering, and the price

But you must provide more details than just a simple and clear

statement!!

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Value Proposition

• But what constitutes a good value proposition?

– Benefits for customers reflect satisfaction of needs

– But what are the needs? What are the important

dimensions of performance, key features?

– Do we have to redefine the product?

• Value Proposition is closely related to customer

selection

– Different value propositions are appropriate for

different customers

– One must consider a lot of customers and a lot of

value propositions

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For Your Group Presentation (1)

• Choose a new technology that has recently been

introduced or will soon be introduced

– Don’t look too far into the future

• Choose an existing firm that might or should

introduce the technology because the technology

is consistent with the firm’s core competencies

Page 13: Biz model 1.1   summary

For Your Group Presentation (2)

• Defining a value proposition technology should

help you segment and target markets

• Some segments will adopt a new technology

faster than will other segments

• You must identify and target those segments

• Ideally you will know the order in which

segments/users adopt the new technology

• Then you must contrast your firm’s product or

service with the competitors’ product or service

for the target segment(s)

Page 14: Biz model 1.1   summary

For Your Group Presentation (3)

• Contrast the new technology with the old

technology

– What is the value proposition for the new vs. the old

technology

• Contrast your firm’s product with other products

or services

– Firm’s product or service vs. other firms’ product or

service

• You also need to provide some quantitative data

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The Strategy Canvas of Southwest Airline

Low Price

Meals Lounges

Seating Class

choices

Hub connectivity Friendly

service

Speed Frequent point- to-point departure (new

dimension)

High

Average Airline

Southwest

Car Transport

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Quantitative Data

• You must justify your data

• Don’t just create a strategy canvas without

justification

• The justification is more important than the data

• Make sure you consider all the important

dimensions

• Finding a new dimension is often a major source

of advantage in the market

• All dimensions aren’t created equal

Page 17: Biz model 1.1   summary

Outline: Elements of a Business Model

• Customer selection: whom to serve and not serve

• Value proposition: what to offer and how to

differentiate

• Value capture: what are dominant sources of

revenues

• Scope of activities: what activities to carry out

and what relationships to have

• Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

Page 18: Biz model 1.1   summary

Types of Value Capture in Business Models

Dominant Revenue

Model

Basic Idea

Commission Fees levied on transactions where fees

are based on level of transaction

Advertising End users subsidized by advertising

Markup Value added in sales

Production Value added in production

Referral Fees for referring customers to a

business

Subscription Fees for unlimited use

Fee for Service Fee for metered service

Page 19: Biz model 1.1   summary

Large Changes for Revenue Models

in Many Industries

• As with other elements of business models, you

can’t just summarize the dominant source of

revenues, you need to

– analyze other methods

– Justify your choice

• Creativity is an important part of a group

presentation’s grade! Propose and analyze a new

method of value capture

Page 20: Biz model 1.1   summary

Outline: Elements of a Business Model

• Customer selection: whom to serve and not serve

• Value proposition: what to offer and how to

differentiate

• Value capture: what are dominant sources of

revenues

• Scope of activities: what activities to carry out

and what relationships to have

• Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

Page 21: Biz model 1.1   summary

Scope of Activities

• What do you make or do versus what do you buy or outsource?

• Partly a cost decision, partly a strategic decision

– Want to reduce costs

– But also • want to develop capabilities

• don’t want to become dependent on a single firm for a key component

– Thus, make versus buy decisions determine the areas in which a firm intends to compete

Page 22: Biz model 1.1   summary

Other Strategic Issues

• Part of the decision involves whether you can

buy or outsource something – this depends on

the degree to which independent suppliers of

components and services (i.e., vertical

disintegration) have emerged

• This is why one must consider the levels of

vertical (dis) integration in the industry using

value chains, etc when considering the scope of

activities

Page 23: Biz model 1.1   summary

Vertical (Dis)integration

• Represents the extent to which work is shared

among different organizations

• Changes in vertical (dis)integration can come from

technological, institutional, or social changes that

impact on how economic agents divide up work

• In particular, reductions in transaction cost (cost of

different firms working together) can reduce

– costs of having work done by multiple agents

– importance of integrative capabilities

– and thus facilitate the emergence of vertical disintegration

(and entrepreneurial opportunities)

Page 24: Biz model 1.1   summary

Source: Christensen & Raynor, 2003

Vertical Disintegration

Page 25: Biz model 1.1   summary

Outline: Elements of a Business Model

• Customer selection: whom to serve and not serve

• Value proposition: what to offer and how to

differentiate

• Value capture: what are dominant sources of

revenues

• Scope of activities: what activities to carry out

and what relationships to have

• Strategic control: how to sustain profitability

Source: Stephen Bradley’s “Capturing the Value,” HBS Video

Page 26: Biz model 1.1   summary

Strategic Control

• Control key resource, capability, Intellectual Property

(IP), “assets,” bottleneck

• Might control key resource or asset through

economies of scale

– Manufacturing

– Distribution

– R&D

• Control the way work is divided up among economic

agents (e.g., through control of interface standards)

• Must create barriers to entry, without barriers to entry

profits will fall to very low levels

Page 27: Biz model 1.1   summary

Must Connect Customer Needs

with Company’s Capabilities

Require the effective and

efficient reconciliation of

any differences and result

in a

Market Pull

What the market

indicates it

needs/wants and is

willing to pay for

Company

Pull

What the firm

is capable of

and willing to

provide to the

market

Voice of the

Market Voice of

the Firm

Market-Based

Firm

Page 28: Biz model 1.1   summary

Barriers to Entry Determine Profitability

• As firms enter, prices fall to a level at which “marginal

prices equal marginal revenues” where

– Profits barely support business

• So creating barriers to entry is critical for achieving

having above average profits

– Control key resource, Intellectual Property (IP), etc.

– Might control key resource or asset through economies of

scale

– Control the way work is divided up among economic agents

(e.g., through control of interface standards)

• Whether a firm(s) can create barriers to entry largely

determined economic viability of project

Page 29: Biz model 1.1   summary

Consistency Among Elements is

Critical

• How to achieve consistency?

• By using an iterative process:

– Customer selection: whom to serve and not

serve

– Value proposition: what to offer and how to

differentiate

– Value capture: dominant source of revenue

– Scope of activities: what activities and what

relationships to have

– Strategic control: how to sustain profitability

Page 30: Biz model 1.1   summary

For your presentations

• Tell me about the business model

– Customer selection: whom to serve and not serve

– Value proposition: what to offer and how to differentiate

– Value capture: dominant source of revenues

– Scope of activities: what activities to carry out and what

relationships to have

– Strategic control: how to sustain profitability

• You must justify your choices!

• Consistency

– among elements is critical

– between business model and company capabilities