2. The Elements Of Business Models

Question 1

What is a business model?

Answer 1

Concerned with how an organisation is structured, the customers and the market it serves, the products and services it provides, and how it creates values for stakeholders over time

Question 2

What is strategy?

Answer 2

The long-term direction of an organisation

Question 3

What is value?

Answer 3

Value is about people. It is about how their needs are met. It is created by people, with people, and for people

Question 4

What are the four key stages of the business model

Answer 4

1. Define value: determining who an organisation is creating value for (stakeholders)
2. Create value: focus on resources and relationships, and activities needed to be undertaken to develop products and services
3. Deliver value: the “how”; determining the best way of getting value to those groups it was intended for
4. Capture value: taking a slice of the value that they have created (e.g., dividends for shareholders)

Stages 1 and 4: Strategic focus
Stages 2 and 3: Operational focus

Question 5

What are stakeholders?

Answer 5

People, groups and organisations that can affect or be affected by the actions or policies of an organisation. Each stakeholder group has different expectations about what it wants and therefore has different claims upon the organisation.

Question 6

What is the importance of changing environments to business models?

Answer 6

Business models must keep relevant to the needs of key stakeholder groups. Factors such as technology and opposing moves by competitors will ultimately affect how an organisation creates value.

PESTEL is used for macro-environment.
Porter’s five forces are used for micro-environment.

Question 7

What are VUCA environments and how can organisations respond to them?

Answer 7

VUCA: volatile, uncertain, complex and ambiguous environments.

Organisations can:
1. Be innovative and disruptive by shaping events in the environment
2. Become agile by recognising change is inevitable
3. Build resilience by being prepared for bad times ahead

Question 8

How does Kaplan and Norton’s Balanced Scorecard define value?

Answer 8

Kaplan and Norton (1992) recommend organisations should consider their business model from four perspectives:
1. Financial: how we look at shareholders
2. Customer: how customers see us
3. Internal Business: what we must excel at
4. Innovation and Learning: continuing to improve and create value

Question 9

How does the Balanced Scorecard link to the four key stages of a business model?

Answer 9

Financial perspective = capturing and sharing value
Customer perspective = defining and delivering value
Internal business perspective = creating value
Innovation and learning perspective = creating value

Question 10

What is the four step process to defining value?

Answer 10

1. Identify relevant stakeholders
2. Ranking and prioritisation
3. Identify needs of the highest priority stakeholders
4. Formulation of value propositions

Question 11

What are the three components of stakeholder analysis?

Answer 11

1. Power: the degree of power one group has over another
2. Legitimacy: whether or not the actions of the groups are considered appropriate in terms of the values of the organisation
3. Urgency: whether the group’s demands require immediate action

Question 12

What is Mendelow’s Power-Interest Matrix?

Answer 12

Alternative approach to stakeholder analysis.

High power / high interest: Key player (major customer)
High power / low interest: Treat with care (large institutional shareholders)
Low power / high interest: Keep informed (community representatives)
Low power / low interest: Minimal effort (temporary staff)

Question 13

What are the five main features to create value?

Answer 13

1. Partners: orgs need to create relationships and incentivise them (ultimately, must be adequately rewarded)
2. Resources: threshold resources (meet customer’s minimum requirements); unique resources (underpin competitive advantage)
3. Processes: turning resources into outputs
4. Activities: threshold competencies (meet customer’s minimum requirements); core competencies (achieve competitive advantage)
5. Outputs: products / services that are created from activities and processes that form value proposition. Attributed of outputs include design, quality and price

Question 14

How is customer segmentation used to deliver value?

Answer 14

Different customer may be grouped into segments. An organisation will take a different marketing approach for each market segment. Segmentation makes it easier for organisations to identify needs and target them with products / services that provide value.

Bases of segmentation include: geographic, psychographic (lifestyle), behavioural (attitudes), socio-demographic

Question 15

What is the process of segmentation?

Answer 15

1. Break down the market into measurable segments
2. Calculate the profit potential or gain
3. Target segments
4. Put in place resources to undertake the activities to meet their needs (inc. marketing and distribution)
5. Measure performance and amend offering over time as required

Question 16

How is channel management used to deliver value?

Answer 16

It is concerned with how the products or services reach an end customer.

Technology enables organisations to personalise their interactions with customers (involving tailoring the interface customers use - app, website, etc.)

Technology has increased customer power as they expect to be able to combine experience of browsing in physical shop with purchasing goods on mobile devices.

Failure to embrace advanced channels can risk reputation damage.

Question 17

What is capturing value?

Answer 17

An org captures value (aka residual value) when it sells products and services to customers. The surplus arises when the revenues generated are larger than costs, which is then shared with stakeholders whose efforts were involved in the process of value creation.

Question 18

What are the three issues to consider when capturing value?

Answer 18

1. Cost model: concerned with costs involved in defining, creating and delivering value. Including cost of resources used to capture the value, level of resources used, efficiency or the processes. Organisations need to carefully control costs to ensure there is sufficient value for them to extract.
2. Revenue model: concerned with pricing and collection policy. Organisations must set appropriate prices to ensure sufficient value can be captured after costs have been deducted. This may be affected by regulation. Collection policy relates to how sales are converted to cash (e.g., accounts receivable guidelines).
3. Distribution of surplus: how value will be shared with others. This includes shareholders (distributing dividends); government (tax), board of directors (performance-related pay), organisation itself (reinvestment).