Transcript No Slide Title

Creating the Business Model
www.bradford.ac.uk/management
Session Outline
•Review
•Defining the Problem/Opportunity
•Assessing the Opportunity
•Extracting Value from the Opportunity
Creating and exploring the opportunity
Is it an idea or
opportunity?
Exploring the
opportunity
Who are the customers,
suppliers, partners?
What are their
expectations?
How does the opportunity
create new value?
How is it different?
Demand?
Innovation?
Feasibility?
Attraction?
What is the
opportunity?
why? who for? how to
realise it? where?
when? scale?
Drawing a problem/opportunity map
Gains
Problem
Where,
when ,how
OPPORTUNITY
Causes
Who
Costs
Rae (2007)
Effects
Time wasted by missed appointments
Every year, many hours are wasted by people to
turn for appointments with professionals whose
time is at a premium and costed by the hour. This
especially affects doctors in the UK National Health
Service, where it is estimated to cost £162million a
year, but it is also experienced in other profession
such as law, accounting, and consultancy.
Problem map of ‘timesaver’ problem of people failing
to keep appointments, e.g. in NHS
More productive use of time
Predictable workload
Meet more client needs
No fixed pattern
Cause: client
Less downtime
People fail to keep prebooked appointments
Gains
People dont think it matters
Problem
Unable to advise cancellation
Where,
when ,how
Time saver
Their needs change
Causes
May be late-running
Affected: professional
Intermediary:
receptionist or secretary
Who
Little or no cost to them
Costs
Effects
Time based on £80/hour min
Missed appointments
Decision maker:
practice manager
Time wasted
Costs NHS
£162m./year
5% appointments missed
£160/week, £8000/year min
per person
Client needs not met
Over-booking aims to reduce impact
Extra waiting time
Have to be re-arranged
Rae (2007)
Time Saver - Options
1. Introducing or raising charges for missed
appointments
2. Confirming appointments by email/text
3. Downgrading or dropping clients who missed
more than two appointments
4. Informing clients about the negative effects of
missed appointments
Opportunity map for the ‘timesaver’ application
Makes client responsible
Gives options
Reminds client
Saves 5% time minimum
Why it will
work
Enables appointments to be reallocated
Manages workload more productively
Automated diary system to
make & monitor appointments
Confirms appointment to
client by text, email or auto phone call
Solution
Requires response by client
Gains
Time saver
How it will
work
Frees up spaces for 'urgent' clients
Who
Offers rearrangement or cancel options
Can be internet or intranet enabled
Resources
Can be self administered by professional
or administrator
Disadvantages
For GP, professional practice managers
Clients dont respond
Clients cannot be contacted
Rae (2007)
Uses existing diary management
& email/text technology repackaged
as new product
Assessing Opportunities
• Investment:
None
High
• Risk:
Certain
Unpredictable
• Return:
None
High
• Impact of
change:
None
Great
• Time:
Now
Future
Rae (2007)
Opportunity assessment – Pentagon model
Investment – Financial, Non Financial, Intangible
(Knowledge, Information, Expertise) IP, Reputation,
Branding, Social Capital.
Risk – Knowledge, Economy, Technology,
Financials, Customers, Competition, Supply Chain,
Management.
Return – Amount, Timescale, Form, Exit Strategy.
Change – disruptive technologies
Timescale – Duration, Leadtime, Return
Opportunity assessment – Pentagon model
20
INVESTMENT
TIME
RISK
20
20
CHANGE
20
20
RETURN
Opportunity selection
Market
Strategy
Innovation
OPPORTUNITY
SELECTION
Investment
People
Learning
• Selection criteria between high- and low-value opportunities
• Used in strategic decision-making on opportunities
Rae (2007)
Opportunity evaluation: Summary of key factors
• Why there is a perceived opportunity; what and where it is
• The market opportunity for the business; its size, value and
duration
• Key market segments and customer groups, their
preferences and how to reach them
• The industry structure, driving forces and competition
• The dynamic effects of change on the industry
• Who is likely to support or invest in the business
• The options, resources and key factors for the business
project
Rae (2007)
What is a Business Model?
• Model
– A model is a plan or diagram that is used to make or
describe something.
• Business Model
– A firm’s business model is its plan or diagram for how
it competes, uses its resources, structures its
relationships, interfaces with customers, and creates
value to sustain itself on the basis of the profits it
generates.
– The term “business model” is used to include all the
activities that define how a firm competes in the
marketplace.
Defining the Business Model
• A description of how your company will intends to
create value in the market place, It includes the that
unique combination of products, services, image, and
distribution that your company carries forward. It also
includes the underlying organisation of people, and the
operational infrastructure that they use to accomplish
their work.
Kaplan (2007) Patterns of Entrepreneurship
• A business model is the way that a company applies
knowledge to capture value.
IBM definition to convey the concept of business model
innovation to its executives.
The Start Up Stages
People
Initial ideas
Business proposition
modify
Owner Motivations
Ownership etc
Business model
The business case
Identify income and cost streams,
Operations and market connection
Feasibility study and
justification of the plan
Forming the organisation and launch
Growing the venture to achieve a
sustainable business
Lowe (2006)
How Business Models Emerge
The Value Chain
Dell v ‘Traditional’ Business Model
Traditional Manufacturer
Dell
(e.g) HP or IBM
Forecasts demand
Customer order via phone or internet
Obtains subcomponents from suppliers
Instantly contact manufacturers, view
order information & ship parts
Makes basic component
Assembles complete PC
Dell assembles computer from parts as
they arrive and maintains CRM
Stores PCs in warehouse
Customer is shipped PC via courier
Ships PCs to retailer
In hands of consumer
PCs sit on retailer’s shelf until sold
In hands of consumer
Barringer (2006)
Examples of Business Model Breakpoints
Business Models
Examples
Bait and hook
Low margin basic product with high margin
refill, eg razor and blades, mobile phone
and air time, computer printer and
cartridges
‘No frills’ airlines
Yield management processes to maximise
revenue from a flight, using flexible pricing,
rather than relying on a fixed seat price at
South West Air, easyjet and Ryanair
Online retailing
Easy purchasing on line with customised
recommendations at Amazon
On line auctions
Organiser takes percentage from advertiser
and completed deal, eg eBay and Betfair
www.en.wikipedia.org/wiki/Business_model
Lowe (2006)
Creating a Business Model
•
•
•
•
•
Who are your target customers?
What value will you create for them?
Why will they buy from you?
How is this superior to customers?
How will the business generate cash flow through
sales?
• How will the business generate profits?
• What financial investment does the business
require?
• Can you draw a simple diagram to show the
business model?
Business Model Template
Sales
Income
Customer
Group
Total =
Projected
Growth
Variable Costs
Sales
Yr 2 =
Yr 3 =
Total =
Customer
Benefits
Gross Profit Margin:
(Per customer)
Net Profit Margin:
Breakeven Sales:
Fixed Costs
Finance Costs
Premises, Facilities,
Insurance, Salaries,
Other Fixed Costs.
Total =
Total Costs:
Gross Profit:
Net Profit before tax:
Evaluating Business Models
• Are the assumptions and information on which
the model is based realistic and reliable? E.g.
Customer acquisition and sales growth)
•Are fixed costs kept as low as possible?
•At what point is break-even reached?
•Are the gross and net profit levels realistic and
attractive?
Activity
1. Examine the business model provided, which
is for a IT services business to be set up by
two people.
2. What problems or weaknesses can you
identify in the business model?
3. What suggestions would you make to improve
it?
A simple business model
BUSMODE LTD
CUSTOMER GROUP
Micro-small businesses buy
integrated
web/e-business/comms/CRM service
They pay £50 month flat fee + traffic
charges on 1 year contract
PROJECTED GROWTH
Gain 300 customers/year in
years 2-3
Lose 25% past customers/year
Increase charges 5%/year
Sales
Year 2 = £425000
Year 3 = £634000
SALES INCOME
200 customers in year 1
£50 month each = £120,000
+ £25 month average traffic = £60,000
Total income= £180,000
CUSTOMER BENEFITS
200 x improved communications
systems
100 x start e-business
100 x managed CRM system
100 x time saved within businesses
VARIABLE COSTS
Marketing costs £100 to attract each
customer = £20,000
Variable costs £50 per customer = £10,000
Total variable costs = £30,000
Gross profit margin: 83%
Net profit margin: 32%
Breakeven sales: £110844
FIXED COSTS
Repayment on £100,000 financing of IT
system = £28,000
Premises, facilities, insurance = £24,000
Salaries (2 people) = £40,000
Total fixed costs = £92,000
Total costs: £122,000
Gross profit: £150,000
Net profit before tax: £58,000
Rae (2007)
Importance of a Business Model
Having a clearly articulated business model
is important because it does the following:
• Serves as an ongoing extension of feasibility analysis. A business
model continually asks the question, “Does this business make sense?”
• Focuses attention on how all the elements of a business fit together and
constitute a working whole.
• Describes why the network of participants needed to make a business
idea viable are willing to work together.
• Articulates a company’s core logic to all stakeholders, including the
firm’s employees.
Potential Fatal Flaws in Business Models
• Fatal Flaws
– Two fatal flaws can render a business model
untenable from the beginning:
• A complete misread of the customer.
• Utterly unsound economics.
Pets.com sported an
unsound business model,
and failed.
Take Away’s
Defining the
Opportunity
Assessing the
Opportunity
Extracting Value from
the Opportunity
Problem - Opportunity Map
Pentagon
Business Model
Useful Websites
www.en.wikipedia.org/wiki/Business_model
Definitions plus examples.
www.searchenginelowdown.com/2006/10/colinangles-14-failed-robot-business.html
iRobot story