BUSINESS MODEL

DEVELOPMENT
Module – 3
Harshith C S – 18BEC0585
Business Model. What is it?
◦ The concept of a Lean Startup business is all about finding a gap in the market in the most efficient way
possible in terms of time and money spent.
◦ A business model is a conceptual framework to describe how a any company, here a start-up creates,
captures and delivers value in the market in an efficient way.
◦ A Business Model consists of customer segments, value propositions, (distribution) channels, customer
relationships, revenue streams, key resources, key activities, key partnerships and cost structure of a
start-up.
The Business Model Canvas
◦ Business Model Canvas is a strategic management template used for developing new business models
and documenting existing ones.
◦ It offers a visual chart with elements describing a firm's or product's value proposition, infrastructure,
customers, and finances,[1] assisting businesses to align their activities by illustrating potential trade-
offs.
◦ There are nine building blocks in a business model canvas and it was proposed by Alexander Osterwalder
in 2005.
 Key Activities
◦ Key Activities - The most important activities in executing a company's value proposition.
◦ An example for Bic, the pen manufacturer, would be creating an efficient supply chain to drive down costs.
◦ The revenue streams that is available for your start-up and customer relationships with your company needs
to be defined.
◦ There needs to be categorization between problem solving, production and platforms to conduct the business
smoothly.
Key Resources
◦ Key Resources - The resources that are necessary to create value for the customer.
◦ They are considered assets to a company that are needed to sustain and support the business. These
resources could be human, financial, physical and intellectual.
◦ We need to prioritize the resources based on what our value proposition requires. For example, a service
company would need more human resource while and R&D company would need more intellectual
resources.
 Key Partners
◦ Key Partners – For any start-up to work and succeed it is important to have partners that same the same
goal as that of your start-up.
◦ The motivations for partnerships would be to optimize the product or service that you are both interested in
and to be economic. To reduce risk and uncertainty and to share efficiently resources.
◦ Partners can be suppliers of goods and services, vendors who provide infrastructure, investors etc.
◦ In a business model canvas, it is important to answer all these questions of who will be our partners and
suppliers.
◦ What are the resources that you are acquiring from partners and what on your own.
◦ What activities and actions do the partners perform.
 Value Proposition
◦ Value Proposition - The collection of products and services a business offers to meet the needs of its
customers.
◦ According to Osterwalder (2004), a company's value proposition is what distinguishes it from its
competitors.
◦ The value proposition provides value through various elements such as newness, performance,
customization, "getting the job done", design, brand/status, price, cost reduction, risk reduction,
accessibility, and convenience/usability.
◦ Value propositions maybe either qualitative, meaning the overall customer experience and outcome or can
be quantitative, meaning the price and efficiency of a product.
Customer Segments
◦ Customer Segments - To build an effective business model, a company must identify which customers it
tries to serve.
◦ Various sets of customers can be segmented based on their different needs and attributes to ensure
appropriate implementation of corporate strategy to meet the characteristics of selected groups of clients.
◦ The different types of customer segments include: mass market, niche market, segmented markets,
diversified markets, multi-sided platforms.
 Channels
◦ Channels - A company can deliver its value proposition to its targeted customers through different channels.
Effective channels will distribute a company's value proposition in ways that are fast, efficient and cost-
effective.
◦ An organization can reach its clients through its own channels (store front), partner channels (major
distributors), or a combination of both.
◦ In the modern day world, especially with the pandemic of 2020, store front channels are declining and
online, digital based channels are at the forefront.
◦ Realizing the right channel can make or break a company. For example, if Big Basket chose to have a
storefront channel for their customers.
 Customer Relationship
◦ Customer Relationship - To ensure the survival and success of any businesses, companies must identify the
type of relationship they want to create with their customer segments.
◦ That element should address three critical steps on a customers relationship: How the business will get new
customers, how the business will keep customers purchasing or using its services and how the business will
grow its revenue from its current customers.
◦ Various forms of customer relationships include: Personal assistance, Self-service, Automated Services,
Communities, Co-Creation
 Cost Structure
◦ Cost Structure - This describes the most important monetary consequences while operating under different
business models.
◦ Classes of business structures include cost-driven, focused on minimising costs and value-driven, focusing
on the quality of product or service.
◦ There some characteristics of cost structures. Fixed costs – Costs are unchanged across different
applications, Variable costs – Costs vary depending on the amount of production of goods or services,
Economies of scale – Costs go down as the amount of goods are ordered or produced, Economies of scope –
Costs go down due to incorporating other businesses which have a direct relation to the original product.
 Revenue Streams
◦ Revenue Stream - The way a company makes income from each customer segment. Several ways to
generate a revenue stream.
◦ These include: Asset sale – (the most common type) Selling ownership rights to a physical good: e.g. retail
corporations, Usage fee – Money generated from the use of a particular service: e.g. UPS, Subscription fees
– Revenue generated by selling access to a continuous service: e.g. Netflix, Lending/leasing/renting –
Giving exclusive right to an asset for a particular period of time: e.g. leasing a car,
◦ Licensing – Revenue generated from charging for the use of a protected intellectual property, Brokerage fees
– Revenue generated from an intermediate service between 2 parties: e.g. broker selling a house for
commission, Advertising – Revenue generated from charging fees for product advertising.
STEPS TO DEVELOP A BUSINESS
MODEL
◦ Understanding your business model is crucial for evaluating the ability of the company to support a new
product idea.
◦ Too often, companies taking on a new product development project are late to discover the process. The
company might be missing key infrastructure, such as the appropriate distribution channels, expertise in
key technologies or the ability to finance large product purchases for customers, etc.
◦ These steps can be followed to avoid the same
 Steps 1-4
1. Choose a particular target segment and describe it. A segment is a group of customers with similar needs,
behaviors or other attributes that the company chooses to serve.
2. Next, what channels are used to market to, sell to, distribute to and support this segment? Are there any
partners we need to establish or maintain relationships with?
3. What products and/or services are offered to this segment, and are there any differences by channel? If
so, make that clear.
4. What are the revenue streams? How are prices set? How are customers charged for products and
services? How is revenue collected?
 Steps 5-7
5. Now, what is the value proposition delivered by each product. Think not only of value propositions for
the customer (including the end-customer and any intermediaries), but also partners. Remember that the
value proposition is from the perspective of the customer and can vary by customer segment; that is why
we focus on one segment at a time.
6. What are the key activities the company must perform to ensure the value proposition is delivered? This
can include activities supporting partners and channels that are key to the value proposition. This may
also involve outsourcing.
7. What are key inputs and resources that must be acquired and maintained? This can include human,
physical, financial and intellectual assets, as well as suppliers and vendors.
Steps 8-10
8. Next, what implications do the elements defined so far have for the infrastructure of the business? They
may not have been captured already. Is there significant investment required in maintaining certain
technologies, skills or branding, for example?
9. The cost structure includes the fixed costs of maintaining the value chain, as well as variable costs.
Where are the biggest or most volatile costs?
10. Finally, have you adequately identified what the company does differently to deliver on the competitive
strategy (how the company differentiates itself from the competition)?
If it’s not evident in the activities or resources identified you’ll need to take another pass at it. It may take
several iterations to get something you are comfortable with.
 Business Models vs. Strategy vs. Tactics
◦ No three concepts are of as much use to managers or as misunderstood as strategy, business models, and
tactics. Many use the terms synonymously, which can lead to poor decision making.
◦ Whereas business models refer to the logic of the company—how it operates and creates and captures value
for stakeholders in a competitive marketplace—strategy is the plan to create a unique and valuable position
involving a distinctive set of activities.
◦ The system of choices and consequences is a reflection of the strategy, but it isn’t the strategy; it’s the
business model.
 Business Model
◦ A business model can be thought as if it were a car. Different car designs function differently. Conventional
engines operate quite differently from hybrids, and standard transmissions from automatics and create
different value for drivers. The way the automobile is built places constraints on what the driver can do; it
determines which tactics the driver can use.
◦ A small car like the TATA Nano could be suitable to navigate on Indian roads than a big SUV like Range
Rover.
◦ Imagine that the driver could modify the features of the car: shape, power, fuel consumption, seats. Such
modifications would not be tactical; they would constitute strategies because they would entail changing the
machine (the “business model”) itself.
Startergy
◦ All in all, strategy is designing and building the car, the business model is the car, and tactics are how
you drive the car.
◦ Strategy focuses on building competitive advantage by defending a unique position or exploiting a
valuable and distinctive set of resources.
◦ Those positions and resources are created by virtuous cycles, so start-ups should develop business
models that activate those cycles.
Thank You
Harshith C S – 18BEC0585