MODULE 2: From Business Idea to Model

• It describes the rationale of how an organization creates, delivers, and captures value.

  Business Model
• It is a strategic management tool that lets you visualize and assess your business idea or concept.

  Business Model Canvas
• It’s a one-page document containing nine boxes that represent different fundamental elements of a business.

  Business Model Canvas
• NINE COMPONENTS OF BUSINESS MODEL CANVAS

  • Key Partners
  • Key Activities
  • Key Resources
  • Customer Segments
  • Customer Relationships
  • Cost Structure
  • Value Proposition
  • Distribution Channels
  • Revenue Streams
• It is devised by Michael Porter and is a framework for analyzing the nature of competition within an industry.

  Porter's Five Forces
• Every industry is different due to its:

  • Size
  • Structure
  • Distribution channels
  • Customer needs and wants
  • Profitability
  • Growth
  • Product life cycle
  • Alternatives for the customer
• High industry profits are associated with:

  • Weak suppliers
  • Weak customers or buyers
  • High entry barriers
  • Few opportunities for substitutes
  • Little rivalry
• Low industry profits associated with:

  • Strong suppliers
  • Strong customers or buyers
  • Low entry barriers
  • Many opportunities for substitutes
  • Intense rivalry
• FIVE FORCES FRAMEWORK consists of:

  • Threat of New Entry
  • Buyer Power
  • Threat of Substitution
  • Supplier Power
  • Competitive Rivalry
• If new entrants move into an industry, they will gain market share & rivalry will intensify.

  Threat of New Entrants
• The position of existing firms is stronger if there are barriers to entering the market

  Threat of New Entrants
• If barriers to entry are low then the threat of new entrants will be high, and vice versa.

  Threat of New Entrants
• BARRIERS TO ENTRY include:

  • Investment cost
  • Economies of scale available to existing firms
  • Regulatory and legal restrictions
  • Product differentiation
  • Access to suppliers and distribution channels
  • Retaliation by established products
• High cost will deter entry. Thus, high capital requirements might mean that only large businesses can compete.

  Investment Cost
• Lower unit costs make it difficult for smaller newcomers to break into the market and compete effectively.

  Economies of scale available to existing firms
• Each restriction can act as a barrier to entry. In example, patents provide the patent holder with protection, at least in the short run.

  Regulatory and legal restrictions
• Existing products with strong USP’s increase customer loyalty and make it difficult for newcomers to gain market share.

  Product differentiation
• A lack of access will make it difficult for newcomers to enter the market.

  Access to suppliers and distribution channels
• E.g., the threat of price war will act to discourage new entrants – But competition law outlaws' actions like predatory pricing.

  Retaliation by established products
• FACTORS affecting the threat of new entrants

  • Cost advantages
  • Brand recognition
  • Access to inputs and loyalty
  • Government policy
  • Access to distribution
  • Economies of scale
  • Expected retaliation
  • Capital requirements
  • Proprietary products
• It's easy to enter if there is:

  • Common technology
  • Access to distribution know-how
  • Low capital requirements
  • No need to have high channels capacity and output
  • Absence of strong brands
• It's difficult to enter if there is:

  • Patented or proprietary
  • Well-established brands
  • Restricted distribution
  • High capital requirements
  • Need to achieve and customer loyalty economies of scale for acceptable unit costs
• If a firm’s suppliers have bargaining power they will exercise that power, sell their products at a higher price, and squeeze industry profits.

  Bargaining Power of Suppliers
• If the supplier forces up the price paid for inputs, profits will be reduced.

  Bargaining Power of Suppliers
• The more powerful the customer (buyer) the lower the price.

  Bargaining Power of Suppliers
• Determinants of supplier power

  • Uniqueness of the input supplied
  • Number and size of firms supplying the resources
  • Competition for the input from other industries
  • Cost of switching to alternative sources
• If the resource is essential to the buying firm and no close substitutes are available, suppliers are in a powerful position.

  Uniqueness of the input supplied
• A few large suppliers can exert more power over market prices that many smaller suppliers each with a small market share.

  Number and size of firms supplying the resources
• If there is great competition, the supplier will be in a stronger position.

  Competition for the input from other industries
• Suppliers are powerful when

  • Only a few large suppliers
  • The resource they supply is scarce
  • The cost of switching to an alternative supplier is high
  • The product is easy to distinguish, and loyal customers are reluctant to switch
  • The supplier can threaten to integrate vertically
  • The customer is small and unimportant
  • There are no or few substitute resources available
• Powerful customers can exert pressure to drive down prices. In an example, supermarket business is increasingly dominated by a small number of large retail chains able exert great power over supply firms.

  Bargaining Power of Customers
• Determinants of Customer Power

  • Number of customers
  • Volume of their order sizes
  • Number of firms supplying the product
  • The threat of integrating backwards
  • The cost of switching
• The smaller the number of customers, the greater their power.

  Number of customers
• The larger the volume the greater, the bargaining power of customers.

  Volume of their order sizes
• The smaller the number of suppliers, the less opportunity customers have for shopping around.

  Number of firms supplying the product
• If customers pose a threat of integrating backwards, they will enjoy increased power.

  The threat of integrating backwards
• Customers are strong if...

  • There are only a few of them
  • If the customer purchases a significant proportion of output of an industry
  • They possess a credible backward integration threat – that is they threaten to buy the producing firm or its rivals
  • If they can choose from a wide range of supply firms
  • If they find it easy and inexpensive to switch to alternative suppliers
• A substitute product can be regarded as something that meets the same need.

  Threat of Substitute Products
• Substitute products are produced in a different industry –but crucially satisfy the same customer need.

  Threat of Substitute Products
• If there are substitutes to a firm’s product, they will limit the price that can be charged and will reduce profits

  Threat of Substitute Products