Week 2 Flashcards
What is a business model?
The heuristic logic that connects technical potential with the realization of economic value.
The business model maps which two domains together?
o Technical domain: Technical inputs such as: • Feasibility • Performance o Economic domain Economic outputs • Value • Profit • Price o In between Business model: Value proposition • Value offered to the customer Market segments Value chain Revenue, costs and profit Value network
What do customers want?
They want benefits, not features
Why is a business model needed for a given technology
Technology:
• By itself no single objective value
• Economic value stays latent until it is in the market through a business model
What are the business model functions?
• 1. Creates value
o Requires a series of activities to deliver the product to the customer, value is added throughout these various activities
• 2. Captures a portion of that value
o Requires that the firm establishes an unique resource/assets/opposition within the series of activities in which it enjoys a competitive advantage
• Business model
o Is a set of assumptions about how a firm will create and capture (appropriate) value for all its stakeholders – connecting technology to economic profits
User value is:
the value perceived by customers
opportunity costs
as required for resources
Use value - opportunity costs =
value created
Value created exists of?
- seller
- competitors
- customers
- suppliers
- others
Shares of created value captured
In the value created part, what is the customer shares, firms share, and suppliers share
Customer
- willing to pay
- price
Firm:
- price
- costs
Supplier:
- costs
- opportunity costs
What is the innovation process perspective?
o First part = value creation phase
o Second part = value appropriation phase
• Does value creation always lead to value creation?
o Not always the case
o Use a business mapping (ex. business mode canvas)
Business model innovation:
• New ways to create and capture value
• Why important?
o Related to performance of entrepreneurial firms o Important for new firms because Competitive position Changes of survival o Increases operating margins
Where can BMI start? and what is it called if it start everywhere?
• Can start anywhere in the BMC, if start everywhere at once it is called: multiple epicentre business model innovation
BMI involves what?
• BMI involves the discovery and adoption of fundamentally different models of value proposition, value creation and / or value capturing
to what degree should you do business model innovation?
• Types of changes
o Radical new business models
o Incremental changes to existing business models
• Degree of business model innovation and new firm survival:
o U shaped graph: both incremental and radical = long term survival, in between (moderate) is short term
BMI and its effect on performance:
o 1. Positive effect of novelty-centred business model design on performance
Confirmed
o 2. A positive effect of efficiency-centred business model design on performance
Mixed support from analysis (zott and Amit 2007) more research is needed
o 3a. More novelty-centred and efficiency-centred business model design, the higher the performance of the firm, because 1. And 2. Seen above.
No support, more research is needed
o 3b. More novelty-centred and efficiency-centred business model design, the lower the performance of the firm due to splitting the resources
No support, more research is needed
Chesbrough (2002) What are the functions of a business model:
o articulate the value proposition, i.e. the value created for users by the offering based on the technology;
o identify a market segment, i.e. the users to whom the technology is useful and for what purpose, and specify the revenue generation mechanism(s) for the firm;
o define the structure of the value chain within the firm required to create and distribute the offering, and determine the complementary assets needed to support the firm’s position in this chain;
o estimate the cost structure and profit potential of producing the offering, given the value proposition and value chain structure chosen;
o describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementors and competitors;
o formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals.
The 6 functions of a business model collectively serve additional functions, namely to……… (chesbrough, 2022)
justify the financial capital needed to realize the model and to define a path to scale up the business.
Hwat is the key for a start-up according to Burns 2014?
identify and focus limited resources on just three or four clearly defined,
important and sizeable market segments. The marketing mix, marketing and communications strategy
can then be tailored to the needs of customers in these different segments.
To be viable, a market segment must be:
Distinctive with significantly different needs from other segments. Without this the segment
boundaries are likely to be too blurred.
2. Sufficiently large, or willing to pay a high enough price, to make the segment commercially
attractive. It may be that a gap in the market exists because it is not commercially viable.
3. Accessible. The gap in the market might not exist in reality because the segment cannot be
reached through communication or distribution channels.
4. Defendable from competitors. If the segment is not defendable, for example because it is a
commodity market, prices and profits will quickly reduce as competition increases.
What are the Three core value propositions that offer fundamental ways of achieving sustainable competitive
advantage:
Low price/low cost: this is where customers value low price more than anything. Economies
are scales are important to lower prices, e.g., commodity products.
High differentiation: this is where customers value the other elements of the marketing mix
more than price and are therefore willing to pay a premium.
Customer focus: this is where the fifth ‘P’ (people or service) is important and ensures that
customers are provided with a product/service that is more closely tailored to their specific
requirements.
What are the properties of lowprice low cost?
Maintain cost leadership through economies of scale Continually drive down costs Achieve high sales volumes Improve efficiency Standardize
What are the properties of high differentiation?
Understand the basis for the differential advantage Build on differential advantage Build barriers to entry Build the brand Continuous innovation Encourage creativity and innovation.
What are the properties of Customer Focus
Maintain close relationships with customers Keep in touch with and understand changes in customer needs Maintain customer loyalty Maximize sales to existing loyal customers (economies of scope) Build the brand
What is niche marketing strategy? It can also be called beachhead approach?
Companies that offer both high differentiation and customer focus are said to have a niche marketing strategy. Market focus involves understanding in depth the needs of relatively few customers and therefore there is more scope for differentiation.
It involves targeting smaller markets and therefore there are more opportunities for smaller businesses.
This is the strategy that research tells us is most likely to succeed for a start-up since they can charge higher prices and are more likely to sustain their differential advantage because the smaller market segment does not attract competitors, at least initially.
What is the underlying principle in pricing?
the price charged for a product or service ought to reflect the value-to-customer of the package of benefits.
What is cost+ or full-cost pricing?
This takes the total cost of producing a product or
delivering a service and divides it by the predicted number of units to be sold to arrive at the average
cost, to which a target mark-up is then added. Some costs, often called overheads, are fixed, and do
not change with volume (e.g., depreciation of equipment, rent and some salaries). Another benchmark
is the variable cost of the product or service – the cost of producing one additional unit.
