This week we look at the design of your business model. In the previous three weeks we have identifed whether your potential product or service will have a market, and developed the value proposition. This activity has helped you create a detailed specification of what your product will look like. Now we will create your business model – how you will produce, distribute, price and position your product or service.
We will examine the approach that you will take to your competition, based on whether you adopt a Blue Ocean approach or Porter’s Five Forces. We’ll introduce the Strategy Canvas which is used to understand your own competitive advantage and that of your competitors and well learn about the ERRC framework that is used to strengthen your competitive position.
We’ll look at the options available to you for the development and presentation of your business model, highlighting the traditional approach and the Lean Canvas approach that is used in the course that this blog supports. Some elements of the Lean Canvas have been introduced in previous course weeks and others will be discussed in more detail in future weeks. This week we look at using partnerships, designing distribution and establishing your pricing model. Finally, we look forward to the use of your business model in your marketing strategy and product launch.
1. Blue Ocean Strategy vs. Porter’s Five Forces
Blue Ocean Strategy focuses on making the competition for your product irrelevant because your product is such an obvious choice. The following video introduces the concepts that underlie Blue Ocean Strategy:
Blue Ocean is contrasted with Porter`s Five Forces model and it is argued that competition can be a more profitable approach than Blue Ocean. This video illustrates the contrast between the Blue Ocean approach and Porter’s Five Forces approach to how organisations compete.
2. Competition and the Strategy Canvas
There are two types of competition – reference competition and economic competition. Reference (or direct) competition is where you are competing with products that are similar to yours and your efforts are focused on your product being perceived as better than theirs. Economic competition is where you are competing for the same budget as other products – the other products are not the same as yours but they serve a similar need for the purchaser. You compete with them by having a clearly superior product – by achieving product supremacy. With a start up you are often competing against the additional option of doing nothing – does the purchaser understand the value of your product to them?
The following chart is a Strategy Canvas for the circus industry and shows how Cirque Du Soleil has differentiated it self from the traditional circus:
The following video explains the strategy canvas concept:
The strategy canvas allows you to understand how competition takes place inside your industry and to plan how your own product will compete. The horizontal axis of the chart shows the factors that create value for the customer in your industry. A value curve can be plotted on the chart to show how each competitor rates against these value factors. In order to develop your own canvas consider your competition and whether they are reference or economic and what their strengths and weaknesses are. Understand how you will differentiate yourself by considering why customers will buy your product and what factors differentiate you from your competition. Use your SWOT Analysis and Buyer Utility Map. Look for value that you can offer that your competition doesn’t. This will help you to plot your value curve.
This video shows how to create a strategy canvas:
3. The Four Actions or ERRC Framework
As you develop your strategy canvas you may find that your product is not sufficiently different from your competitors to be successful in your market. A framework has been developed to help you think about ways that you can develop your product differentiation. It is called the Four Actions or ERRC framework and originates in the Blue Ocean concept.
The Four Actions Framework involves four questions that you can apply to the value factors in your Strategy Canvas, to understand what you might do to differentiate your product further. You should consider whether there are value factors that the industry provides but are not important to buyers which can be eliminated and reduce cost. Other factors may be reduced below industry standards and cost reduced, while others may be raised above industry standards, providing increased value to the customer. New factors may be created that are not provided by other suppliers and which will be valued by the buyer. These changes will probably require you to review your whole product concept and revise it if needed.
4. Business Model Approaches
There are two main approaches that can be taken to the development of your business model – a traditional approach and a lean approach. Both create single page diagrams that allow your business model to be quickly understood by potential investors and customers. They show the capabilities and resources that are needed to create your product, get it to market and deliver value. They show how you will generate profitable sustainable revenue. Previous blog posts have provided guidance on the creation of some parts of the models. The following video describes the traditional Business Model Canvas:
The model layout is illustrated below and can be downloaded from BusinessModelGeneration.com.:
An example of the application of the Business Model Canvas in Groupon is provided:
5. The Lean Canvas
An alternative to the traditional canvas is known as the Lean Canvas. The Lean Canvas is intended to reduce the time taken to create your business model. It is used as part of the Lean Start Up approach which is based on a more iterative style of start-up development. Ideas are quickly developed, work proceeds and changes are made as businesses develop. This is contrasted with the traditional approach that very carefully plans the business before work to create it commences – a more time consuming effort at the beginning of the start-up process.
Experts say that the Lean Canvas should be completed in the following order:
1. Customer segments
2. Problem
3. Unique Value Proposition
4. Solution
5. Channels
6. Revenue Streams
7. Cost Structure
8. Key Metrics
9. Unfair Advantage
Guidance has been provided in previous posts on the completion of the Customer segments, Problem, Unique Value Proposition and Solution. In this post we will look at the use of partnerships, distribution channels and pricing.
6. Partnerships
The next area that we will examine is the use of partnerships. This area is not highlighted in the Lean Canvas but is an important aspect of your business. These are often part of your whole product strategy and using partners as part of that can help you to gain market leadership faster. They can also help you to differentiate your product to gain market leadership and sustain it. Getting your whole product to the market quicker can be a significant advantage over your competition.
The next videos describe partnerships that some larger organisations have entered into. First Cisco and Oracle:
then SAP and IBM:
and finally Topshop and Facebook:
The approach that you take to partnering will depend on where you are on the Technology Adoption Life Cycle. In the Early Market your partnering will focus on a number of areas. It may help you establish credibility for your business or product, it may reduce the risk of people implementing the technology incorrectly by supplying more support, it may help you gain access to expertise that you need, particularly with your whole product solution. It may also give you access to more customers and to expertise, not just in technical areas but also in systems integration, business consulting skills and project management. At this point you will also want to ensure that you have relationships with appropriate legal, financial and accounting advice.
Once you enter the Chasm and move into the Niche Market area you become more focused on whole product solutions. Now you are looking for partners that will help you create a stable whole product that is of value to your customers. You will be focused on a market segment and may need partenrs to help you deliver to it. Partners may also add additional value to your whole product solution that will make your product more attractive to customers. As you consider the relationships that you will have with partners you will also want to ensure that the partner benefits, in order to ensure a lasting relationship.
7. Distribution or Channels
The next area that we will look at is the distribution of your product or service. Here you are aiming to make it easy for your buyer to buy and use your product. There are two areas that you will consider – solution complexity which is about the ease of product installation, deployment and usage and marketing complexity which is about how customers source and buy your product and gain access to product support. It is usually thought that there should be a balance between ease of use and ease of buying.
The following chart represents the relationship between marketing and solution complexity and comes from MaRS:
This video looks at channels of distribution:
As you develop your distribution channels you should consider the size of your market and how much your customers vary from each other – this will influence the complexity of your distribution network. You will also look at distribution costs, your product type, the degree of risk and control that you and your market will tolerate and the amount of flexibility that you require.
8. Your Pricing Model
Your pricing model will influence whether your business model is possible – whether your company will be profitable. Your price needs to be realistic and it also needs to be appropriate for your product positioning, to allow you to achieve the quality of the product that you desire, the distribution operations you need and the product promotion that will help it to sell. Usually your pricing model should be simple and easily understood by your customers and your staff so that they can explain it simply.
Your pricing should reflect the value of your product to your customer. How important is it to their business and how many alternatives are there to it? What value does your product provide to the buyer, by increasing sales of their products, reduce their product costs etc? Is it possible to measure this value to demonstrate to the buyer? Does the value recur over time or is it a one time benefit? Are there costs associated with the servicing or maintenance of your product that the buyer will have to pay for? All of these factors can influence the price that a buyer will beleive that youir product is worth to them?
The price that you set for your product will also be influenced by factors that are external to your business. The customers own cost structure and how your product aligns with their business will be important – your product will need to fit their business model. What your competition do with their pricing will also be important – if there is a standard industry pricing model you may have to follow it to win business. You will also want to consider your partners and whether your pricing model is consistent with their business model. This will also influence the pricing model you choose.
Having considered the value of your product to your customer and examined the external factors that may constrain your pricing model options you can now create your pricing model. Most technology oriented businesses use a value-based pricing model that is based on the value of your product to the customer. As you develp your pricing model you will also need to consider whether you are selling your product for a one time fee or whether there will be a continuing relationship with the customer that might, for example, use a subscription model. What will you include in the product when the customer first buys it and what extras will you offer for an additional fee?
The following video provides advice on pricing your product:
9. Next Steps
Next, having completed the work to create your Business Model Canvas or Lean Canvas, you should consider the assumptions about your business that underlie the canvas – are these realistic? If they are not you may need to revise the canvas.
The Marketing Strategy Statement
The work that you have done to create your SWOT analysis, your Value Proposition and your Business Model can now be used to develop your overall Marketing Strategy. The Marketing Strategy describes your whole approach to the Marketing elements of your business and includes the following.
First, who is your target customer, why will they buy your product and what is your whole product solution that is focused on their reason to buy from you?
Next, who are the partners that you might work with in your whole product solution and what is your ideal distribution system? It will also include the price that will be affordable for the customer, delivering value to them and profit to your business.
Finally it will include information about your competition, the positioning of your product and your next target market segment. Philip Kotler describes the integrated approach that is now taken to business marketing:
The Go-To-Market Program
The final step here is your Go-To-Market program. This details the activity that you will undertake to get your product into the market. It details who you will sell to, what you will sell and how you will sell it. The following video details this:
Anthony Praile of the Boston Consulting Group stresses the importance of the integration of sales, marketing and pricing, with a focus on the needs of the customer. He argues that a wider range of skills is required than in the past:
Summary
This week we have developed your Business Model which is displayed on your Business Model Canvas. This has included considering competition, your product positioning, distribution, partnerships and pricing. The Business Model Canvas, combined with your SWOT analysis and Value Proposition allow you to create your Marketing Strategy which will inform your Go-To-Market Program which will take your product from concept to the market and making sales.
Technology Innovation and Entrepreneurship 