BUSINESS MODEL GENERATION AND CHANGE MANAGEMENT IN PUBLIC AND PRIVAVE

SECTOR SUMMARY - PSM 813

Business Model

Definitions of Business Model

 The term business model refers to a company's plan for making a profit. It identifies the
products or services the business plans to sell, its identified target market, and any anticipated
expenses.
 Generally, business model refers to a company's core strategy for profitably doing business.
 Additionally, business model describes the rationale of how an organization creates,
delivers and captures value.

The two levers of a business model

 Pricing
 Costs.

The two primary levers of a company's business model are pricing and costs. A company can
raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many
analysts consider gross profit to be more important in evaluating a business plan. When
evaluating a company as a possible investment, find out exactly how it makes its money (not
just what it sells but how it sells it). That's the company's business model.

Understanding Business Models

A business model is a high-level plan for profitably operating a business in a specific market
place. A primary component of the business model is the value proposition. This is a description
of the goods or services that a company offers and why they are desirable to customers or
clients, ideally stated in a way that differentiates the product or service from its competitors.

Evaluating Successful Business Models

One way analysts and investors evaluate the success of a business model is by looking at the
company's gross profit. Gross profit is a company's total revenue minus the cost of goods sold
(COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds
light on the efficiency and effectiveness of its business model. Gross profit alone can be
misleading, however. Analysts also want to see cash flow or net income. That is gross profit
minus operating expenses and is an indication of just how much real profit the business is
generating.

The fundamental building blocks cover the four main areas of a business which includes:
 Customers
 Offer
  Infrastructure
 Financial viability
TYPES OF BUSINESS MODELS

There are as many types of business models as there are types of business.

 Traditional business models: For instance, direct sales, franchising, advertising-based, and
brick-and-mortar.
 Hybrid business models: e.g. Businesses that combine internet retail with brick-and-mortar
stores or with sporting organizations like the NBA.

Other common types of business models note that the examples given may fall into Traditional
or Hybrid category:

i. Retailer

One of the more common business models most people interact with regularly is the retailer
model. A retailer is the last entity along a supply chain. They often buy finished goods from
manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

ii. Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by
leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods
or highly replicated, mass produced products. A manufacturer can also sell goods to
distributors, retailers, or directly to customers.

Example: Ford Motor Company

iii. Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and
providing services. A fee-for-service business model may charge by an hourly rate or a fixed
cost for a specific agreement. Fee-for-service companies are often specialized, offering insight
that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

iv. Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into
long-time, loyal patrons. This is done by offering a product that requires ongoing payment,
usually in return for a fixed duration of benefit

Example: Spotify
 v. Freemium

Freemium business models attract customers by introducing them to basic, limited-scope

products. Then, with the client using their service, the company attempts to convert them to a
more premium, advance product that requires payment.

Example: LinkedIn/LinkedIn Premium, Telegram/Telegram Premium

vi. Bundling

If a company is concerned about the cost of attracting a single customer, it may attempt to
bundle products to sell multiple goods to a single client. Bundling capitalizes on existing
customers by attempting to sell them different products. This can be incentivized by offering
pricing discounts for buying multiple products.

Example: AT&T

vii. Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business
to be conducted, the marketplace receives compensation.

Example: eBay

viii. Affiliate

Affiliate business models are based on marketing and the broad reach of a specific entity or
person's platform. Companies pay an entity to promote a good, and that entity often receives
compensation in exchange for their promotion.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

ix. Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a
durable product below cost to then generate high-margin sales of a disposable component of
that product.

Example: HP (printers and ink)

x. Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model
tries to sell a high-margin product upfront. Then, to use the product, low or free companion
products are provided. This model aims to promote that upfront sale, as further use of the
product is not highly profitable.

Example: Apple (iPhones + applications)

 xi. Franchise

The franchise business model leverages existing business plans to expand and reproduce a
company at a different location. Often food, hardware, or fitness companies.

Example: Domino's Pizza

xii. Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business
model where the amount charged depends on how much of the product or service was used.

Example: Utility companies

xiii. Brokerage

A brokerage business model connects buyers and sellers without directly selling a good
themselves. Brokerage companies often receive a percentage of the amount paid when a deal
is finalized. Most common in real estate.

Example: ReMax

Steps/How to Create a Business Model

1. Identify your audience: Most business model plans will start with either defining the
problem or identifying your audience and target market.
2. Define the problem: you must know what problem you are trying to solve.
3. Understand your offerings: consider what you are able to offer.
4. Document your needs: consider the hurdles your company will face. This includes product-
specific challenges as well as operational difficulties.
5. Find key partners: Most businesses will leverage other partners in driving company success.
6. Set monetization solutions: A business model isn't complete until it identifies how it will
make money. This includes selecting the strategy or strategies above in determining your
business model type.
7. Test your model: When your full plan is in place, perform test surveys or soft launches.

BUSINESS MODEL CANVAS

The Business Model Canvas is a strategic management and entrepreneurial tool. It allows you
to describe, design, challenge, invent, and pivot your business model.

The Business Model Canvas should come before your business plan. Although some refer to the
Business Model Canvas as a one-page business plan, it should not replace your business plan.

The Business Model Canvas consists of nine essential parts: Customer Segments, Value
Proposition, Revenue Streams, Channels, Customer Relationships, Key Activities, Key Resources,
Key Partners, and Cost Structure.
 1. Customer Segments – Who is your customer?

Identify who would be your key customers and group them by their pain points, demographics,
buyer behavior, or other relevant characteristics.

2. Value Propositions – What makes you better than others?

Some of the elements that contribute to customer value creation are newness, performance,
Customization, design, price, brand/status, cost reduction, risk reduction, convenience etc

3. Channels – How will you communicate your value proposition?

 Channels have five distinct phases
i. Awareness – how do we raise awareness about our company’s products and services
ii. Evaluation – how do we help customers evaluate our organization’s value proposition
iii. Purchase – how do we allow customers to purchase specific products and services
iv. Delivery –how do we deliver value proposition to customers
v. After sales – how do we provide post purchase customer support

4. Revenue Streams – How will you make money?

Represents the cash a company generates from each customer segment.

A business model can involve two different types of Revenue Streams

1. Transaction Revenues resulting from one time customer payments.

2. Recurring revenues resulting from ongoing payments to either deliver a value proposition to
customers or provide post purchase customer support

There are several ways to generate Revenue Streams:

 Asset sale, Usage Fee, Subscription Fees, Lending, Renting, Leasing, Licensing, Brokerage
Fees, Advertising

Each revenue stream may have different pricing mechanisms.

 Fixed Menu Pricing

 Dynamic Pricing

5. Customer Relationships: How will you interact with your customers?

Describes the types of relationships a company establishes with specific customer segments

6. Key Activities: What are the activities that would enable you to deliver your value
proposition?

Describes the most important things a company must do to make its business model work.
  Key activities are required to create and offer a value proposition, reach markets, maintain
customer relationships and earn revenues.
 Key activities can be categorized as
i. Production
ii. Problem solving
iii. Platform/Network

7. Key Resources: Who/what are your key resources?

Describes the most important assets required to make a business model work

 Key resources allow an enterprise to create and offer a value proposition and earn
revenues.
 Key resources can be physical, financial, intellectual or human.

8. Key Partners: Who are your Suppliers/Partners?

Describes the network of suppliers and partners that make the business model work.
Partnerships are becoming the cornerstone of many business models. Companies create
alliances to optimize their business models, reduce risk or acquire resources

Key partnerships can be categorized into four:

i. Strategic alliances between non competitors.

ii. Coopetition – strategic partnership between competitors.
iii. Joint ventures to develop new business.
iv. Buyer supplier relationships to assure reliable supplies.

The motivations for creating partnerships are:

i. Optimization and economy of scale.

ii. Reduction of risk and uncertainty.
iii. Acquisition of particular resources and activities

9. Cost Structure

It describes all the costs incurred to operate a business model. Creating and delivering value,
maintaining customer relationships and generating revenue incur costs, these can be calculated
after defining the key resources, key activities and key partnerships.

There are two broad classes of business model cost structures

i. Cost driven: focus on minimizing costs wherever possible – and aims at creating and
maintaining the leanest possible cost structure using low price value propositions, maximum
automation and extensive outsourcing. E.g. low cost airlines.
ii. Value driven: some companies focus on value creation and less concerned with cost.
Premium value propositions and high degree of personalized service are its characteristics. E.g.
luxury hotels

CHARACTERISTICS OF COST STRUCTURES

 Fixed Costs: costs that remain the same despite the volume of goods and services
produced.
 Variable Costs: costs that vary with the volume of goods or services produced.
 Economies of scale: cost advantages that a business enjoys as its output expands.
 Economies of scope: cost advantages that a business enjoys due to a larger scope of
operations. E.g. in large companies, distribution channels may support multiple products.

IMPORTANCE OF BUSINESS MODEL CANVAS

The Business Model Canvas enables you to:

 Visualize and communicate a simple story of your existing business model.

 Use the canvas to design new business models, whether you are a start-up or an existing
business Manage a portfolio of business models.
 You can use the canvas to easily juggle between "Explore" and "Exploit" business models.

BUSINESS CASE STUDY

Definition of Business Case Study

A business case study is a summary of a real-life business scenario where steps are taken to
solve a problem effectively.

Benefits of Case Study to Brand

 Put your product or service value into action

The case study walks the reader through the conflict the customer experienced, what they
tried, and how they ultimately used your product or service to solve it.

 Highlight the benefits and features of product or service

Nearly every product or service has several specific benefits and features.

MAIN TYPES OF CASE STUDIES FOR BUSINESS

A business case study is not just a generalized term, a one size fits all marketing ploy. It is a
highly specialized type of content that can breathe new life into your brand and become a vital
part of your business strategy.

There are four main types of case studies:

1. Critical Instance Case Study: This type of study answers cause-and-effect questions. It
examines a situation in a very detailed manner with a key characteristic of avoiding
generalization and universal assertions.
2. Cumulative Case Study: This type of study aggregates information from several sources that
occurred at different times.
3. Exploratory Case Study: Also known as a pilot case study, It is primarily used to aid in
determining types of measurement and identifying questions before launching the main
research.
4. Illustrative Case Study: This type of study is mostly focused on being descriptive and It
outlines the problem, usually one or two situations to illustrate the challenge, then move on to
the solution.

Within each of these types, one or more areas of business may be explored, including:

 Growth Plan or Strategy

 Industry Landscape & Competitor Dynamics
 Market Entry or Expansion
 Merger, Acquisition, or Joint Venture
 New Product
 Pricing Optimization
 Profitability Optimization

SWOT ANALYSIS

S.W.O.T. is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats. A
SWOT analysis is an organized list of your business’s greatest strengths, weaknesses,
opportunities, and threats.
 Strengths and weaknesses are internal to the company (think: reputation, patents,
location).
 Opportunities and threats are external (think: suppliers, competitors, prices)

SWOT Analysis is a simple but powerful tool for sizing up an organization’s resource.

COMPONENTS OF SWOT ANALYSIS

SWOT Analysis is a process that involves four areas into two dimensions. It has four
components: ‘Strengths, weaknesses, opportunities, threats. Strengths and weaknesses are
internal factors and attributes of the organization, opportunities and threats are external
factors and attributes of the environment.

Helpful Harmful
Internal
Origin
External STRENGTHS WEAKNESSES
Origin

OPPORTUNITIES THREATS

Table of SWOT Analysis, with its four elements in a 2x2 matrix

 Organizational Strengths (internal, positive factors): Strength is the characteristic that

adds value to something and makes it more special than others.
An organization can be described as strong, equal or weak compared to their competitors
based on five criteria:
 Market situation
 Financial structure
 Production and technical capacity
 Research and development potential
 Human capacity and management effectiveness.
 Organizational Weaknesses (internal, negative factors): Weakness refers to not having the
form and competency necessary for something. Weakness means that something is more
disadvantageous when compared to something else.
 A weakness is something an organization lacks or does poorly in comparison to others or a
condition that puts it at a disadvantage.
 Weakness is a limitation or deficiency in resource, skills, and capabilities that seriously
impedes an organization’s effective performance. Facilities, financial resources, management
capabilities, marketing skills, and brand image can be sources of weaknesses.
 Environmental Opportunities (external, positive factors): Opportunity means a situation or
condition suitable for an activity. Opportunity is an advantage and the driving force for an
activity to take place. For this reason, it has a positive and favourable characteristic.
 Environmental Threats (external, negative factors): Threat is a situation or condition that
jeopardizes the actualization of an activity. It refers to a disadvantageous situation.

External opportunities and external threats: refer to economic, social, cultural, demographic,
environmental, political, legal, governmental, technological, and competitive trends and events
that could significantly benefit or harm an organization in the future.

ADVANTAGES OF SWOT ANALYSIS

1. SWOT Analysis is a road map that guides one from the general to the specific.
2. SWOT Analysis is an interactional analysis technique that makes macro evaluations possible.
3. SWOT Analysis can help organizational managements to uncover opportunities to take
advantage.
 4. SWOT Analysis forms a thinking model for organizational managements as an approach and
analysis technique.
5. SWOT Analysis fits other theories and strategic decision tools. e.g Porter’s Five Forces
Model, Delphi Panel, Norton Balanced Score Card etc.
6. SWOT Analysis promotes group discussion about strategic issues and strategy development.
7. SWOT Analysis helps organizational managements to start a discussion for the future and
goals of the organization by moving beyond daily problems and the current situation.
8. SWOT Analysis can be applied at different analytical levels, individual level, organizational
level, national level, international level.

DISADVANTAGES AND LIMITATIONS OF SWOT ANALYSIS

1. Systematic and comprehensive assessment of external and internal factors determines

current competitive position and growth potential of an organization.
2. Listing strengths on paper is prone to bias and is very different from testing the organization
and experiencing the strengths at work.
3. SWOT Analysis has a general perspective as an approach and present general solutions.
Dynamic and structural changes at the level of system, sub-system, and super system affect the
validity of entries in a SWOT Matrix.
4. There are various studies showing that SWOT Analysis is poorly formulated. It requires
experience and training for a systematic construction and use.
5. SWOT Analysis is an analysis technique that has a problem in terms of quality and quantity.
6. SWOT Analysis has high cost, but fewer benefits.
7. Categorization of variables into one of the four SWOT quadrants is challenging.
8. SWOT Analysis begins with current strengths, weaknesses, opportunities and threats.
Otherwise, generating strategies will be based on the current or past, and not the future.
9. SWOT Analysis lacks comparison with competitors.
10. The information contained in a SWOT Analysis, under the influence of corporate culture,
may be unreliable, all bound up with aspirations, biases.

LIMITATIONS OF SWOT ANALYSIS

i. Strengths may not lead to an advantage.

ii. SWOT Analysis focuses on environment which is too narrow.
iii. SWOT Analysis gives a one-shot view of a moving target.
iv. SWOT Analysis overemphasizes a single dimension of strategy.
v. SWOT Analysis is rarely deployed at lower than the organization level.
vi. SWOT Analysis is very popular and useful in business management. It has much to offer, but
only as a starting point.

CUSTOMER PROFILE
A customer profile is a document that contains key information about your ideal customer.
Each profile should contain customer pain points, interests, buying patterns, demographic data,
motivations, interaction history, etc.

Types of customer profiles

There are two business types of customer profiles:

1. Business-to-business (B2B)
2. Business-to-customer (B2C).
 B2B customer profiles map the typical business that buys your goods or services, including
the company’s size, industry, location, revenue, and target audience.
 B2C customer profiles focus on individual customers and feature demographic data like age,
gender, and lifestyle preferences.

Customer Profiling: Customer profiling is the process companies use to create customer
profiles.

Benefits of customer profiling

 Improve efficiency by reducing silos.

 Drive loyalty through personalized and proactive experiences.
 Increase cross-team collaboration.
 Boost sales.
 Gather insights to make data-informed decisions

TYPES OF CUSTOMER PROFILING

1. Demographic

Demographic profiling defines your customers by who they are. This type of segmentation
groups customers by personal characteristics like: Age, Gender, Marital status, Ethnicity,
Income, Job title and Education.

2. Psychographic

Psychographic profiling defines why customers buy your products or services. This type of
customer profiling segments customers by: Personality traits, Attitudes, Opinions, Values and
beliefs, Lifestyle, Religions and Political affiliation.

3. Behavioral
Behavioral profiling defines how your customers interact with your brand. This type of
segmentation groups customers by behavioral tendencies like: Buying patterns, Spending
habits, Brand interactions, how they use your products or services and Types of feedback.
4. Geographic
Geographic profiling defines your customers by their physical location and where they shop.
This type of profiling separates customers by personal characteristics, such as: Physical location,
Language, Culture, Workplace. The factors of geographic data like climate, cultural influences,
delivery options, rural vs. urban environmental needs and preferences impact customer
influences and shopping habits.

METHODS OF CUSTOMER PROFILING

Customer profiling will group customers with similar traits, characteristics, behaviors,
motivations, or decision-making styles.

You can approach customer profiling in three ways: psychographic, typology, and
characteristic.

1. Psychographic method

The psychographic method uses the consumer’s qualities, traits, and lifestyles to define market
segments. It covers: Demographics, Lifestyle etc.

2. Typology method

The typology method focuses on what drives the consumer to interact with you. It defines the
customer by their motivation type: Need-based, Deal-based, Impulse-based and Loyalty-based.

3. Brand characteristics method

The characteristics method focuses on the traits that influence purchases. Some common traits
for this approach consist of: Convenience, Personalization and Belonging.