www.bradford.ac.uk/management

Creating the Business ModelCreating the Business Model

Session OutlineSession Outline

•Review

•Defining the Problem/Opportunity

•Assessing the Opportunity

•Extracting Value from the Opportunity

Creating and exploring the opportunityCreating and exploring the opportunity

How does the opportunity

create new value?

How is it different?

Exploring the

opportunity

Who are the customers,

suppliers, partners?

What are their

expectations?

Is it an idea or

opportunity?

What is the

opportunity?

why? who for? how to

realise it? where?

when? scale?

Demand?

Innovation?

Feasibility?

Attraction?

Drawing a problem/opportunity mapDrawing a problem/opportunity map

OPPORTUNITY

Problem

Causes

Effects

Gains

Who

Costs

Where, when ,how

Rae (2007)

Time wasted by missed appointmentsTime wasted by missed appointments

Every year, many hours are wasted by people to Every year, many hours are wasted by people to turn for appointments with professionals whose turn for appointments with professionals whose

time is at a premium and costed by the hour. This time is at a premium and costed by the hour. This especially affects doctors in the UK National Health especially affects doctors in the UK National Health Service, where it is estimated to cost £162million a Service, where it is estimated to cost £162million a year, but it is also experienced in other profession year, but it is also experienced in other profession

such as law, accounting, and consultancy.such as law, accounting, and consultancy.

Problem map of ‘timesaver’ problem of people failing Problem map of ‘timesaver’ problem of people failing to keep appointments, e.g. in NHSto keep appointments, e.g. in NHS

Time saver

Problem

Causes

Effects

Gains

Who

Costs

Where, when ,how

People fail to keep prebooked appointments

People dont think it matters

Unable to advise cancellation

Their needs change

May be late-running

Little or no cost to them

Missed appointments

Time wasted

Have to be re-arranged

Client needs not met

Over-booking aims to reduce impact

Time based on £80/hour min

5% appointments missed£160/week, £8000/year minper person

Cause: client

Affected: professional

Intermediary: receptionist or secretary

Less downtime

More productive use of timePredictable workload

Meet more client needs

No fixed pattern

Costs NHS £162m./year

Extra waiting time

Decision maker:practice manager

Rae (2007)

1. Introducing or raising charges for missed appointments

2. Confirming appointments by email/text3. Downgrading or dropping clients who missed

more than two appointments4. Informing clients about the negative effects of

missed appointments

Time Saver - OptionsTime Saver - Options

Time saver

Solution

How it will work

Resources

Why it will work

Who

Disadvantages

Gains

Automated diary system to

make & monitor appointments

Confirms appointment to client by text, email or auto phone call

Requires response by client

Offers rearrangement or cancel options

Can be internet or intranet enabled

Makes client responsible

Reminds clientGives options

Saves 5% time minimum

Enables appointments to be reallocated

Manages workload more productively

Frees up spaces for 'urgent' clients

Can be self administered by professional or administrator

For GP, professional practice managers

Uses existing diary management& email/text technology repackaged as new product

Clients cannot be contacted

Clients dont respond

Opportunity map for the ‘timesaver’ applicationOpportunity map for the ‘timesaver’ application

Rae (2007)

Assessing OpportunitiesAssessing Opportunities

• Investment: None High

• Risk: Certain Unpredictable

• Return: None High

• Impact of None Great change:

• Time: Now Future

Rae (2007)

Investment – Financial, Non Financial, Intangible (Knowledge, Information, Expertise) IP, Reputation, Branding, Social Capital.

Risk – Knowledge, Economy, Technology, Financials, Customers, Competition, Supply Chain, Management.

Return – Amount, Timescale, Form, Exit Strategy.

Change – disruptive technologies

Timescale – Duration, Leadtime, Return

Opportunity assessment – Pentagon modelOpportunity assessment – Pentagon model

INVESTMENT

RISK

RETURN

TIME

CHANGE

2020

2020

20

Opportunity assessment – Pentagon modelOpportunity assessment – Pentagon model

Opportunity selectionOpportunity selection

• Selection criteria between high- and low-value opportunities• Used in strategic decision-making on opportunities

Strategy

Market

Investment

OPPORTUNITY

SELECTION

Innovation

People

Learning

Rae (2007)

Opportunity evaluation: Summary of key factorsOpportunity evaluation: Summary of key factors

• Why there is a perceived opportunity; what and where it is• The market opportunity for the business; its size, value and

duration• Key market segments and customer groups, their

preferences and how to reach them• The industry structure, driving forces and competition• The dynamic effects of change on the industry• Who is likely to support or invest in the business• The options, resources and key factors for the business

project

Rae (2007)

What is a Business Model?What is a Business Model?

• Model– A model is a plan or diagram that is used to make or

describe something.

• Business Model– A firm’s business model is its plan or diagram for how it

competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it generates.

– The term “business model” is used to include all the activities that define how a firm competes in the marketplace.

• A description of how your company will intends to create value in the market place, It includes the that unique combination of products, services, image, and distribution that your company carries forward. It also includes the underlying organisation of people, and the operational infrastructure that they use to accomplish their work.

Kaplan (2007) Patterns of Entrepreneurship

• A business model is the way that a company applies knowledge to capture value.

IBM definition to convey the concept of business model innovation to its executives.

Defining the Business ModelDefining the Business Model

People

Growing the venture to achieve a sustainable business

Forming the organisation and launch

The business case

Business proposition

Initial ideas

Feasibility study and justification of the plan

Business modelOwner MotivationsOwnership etc Identify income and cost streams,

Operations and market connection

modify

The Start Up StagesThe Start Up Stages

Lowe (2006)

How Business Models EmergeHow Business Models Emerge

The Value Chain

Dell v ‘Traditional’ Business ModelDell v ‘Traditional’ Business Model

Barringer (2006)

Forecasts demand

Obtains subcomponents from suppliers

Makes basic component

Assembles complete PC

Ships PCs to retailer

PCs sit on retailer’s shelf until sold

Stores PCs in warehouse

In hands of consumer

Customer order via phone or internet

Instantly contact manufacturers, view order information & ship parts

Dell assembles computer from parts as they arrive and maintains CRM

In hands of consumer

Customer is shipped PC via courier

Traditional Manufacturer

(e.g) HP or IBM

Dell

Business Models Examples

Bait and hook Low margin basic product with high margin refill, eg razor and blades, mobile phone and air time, computer printer and cartridges

‘No frills’ airlines Yield management processes to maximise revenue from a flight, using flexible pricing, rather than relying on a fixed seat price at South West Air, easyjet and Ryanair

Online retailing Easy purchasing on line with customised recommendations at Amazon

On line auctions Organiser takes percentage from advertiser and completed deal, eg eBay and Betfair

Lowe (2006)

Examples of Business Model BreakpointsExamples of Business Model Breakpoints

www.en.wikipedia.org/wiki/Business_model

• Who are your target customers?• What value will you create for them?• Why will they buy from you?• How is this superior to customers?• How will the business generate cash flow through

sales?• How will the business generate profits?• What financial investment does the business

require?• Can you draw a simple diagram to show the

business model?

Creating a Business ModelCreating a Business Model

Customer Group

ProjectedGrowth

SalesYr 2 =Yr 3 =

Variable Costs (Per customer)

Total =

Customer Benefits

SalesIncome

Total =

Fixed CostsFinance Costs

Premises, Facilities, Insurance, Salaries, Other Fixed Costs.

Total =

Total Costs:Gross Profit:

Net Profit before tax:

Gross Profit Margin:

Net Profit Margin:

Breakeven Sales:

Business Model TemplateBusiness Model Template

Evaluating Business ModelsEvaluating Business Models

• Are the assumptions and information on which the model is based realistic and reliable? E.g. Customer acquisition and sales growth)

•Are fixed costs kept as low as possible?

•At what point is break-even reached?

•Are the gross and net profit levels realistic and attractive?

ActivityActivity

1. Examine the business model provided, which is for a IT services business to be set up by two people.

2. What problems or weaknesses can you identify in the business model?

3. What suggestions would you make to improve it?

A simple business model

PROJECTED GROWTH

Gain 300 customers/year in

years 2-3

Lose 25% past customers/year

Increase charges 5%/year

Sales

Year 2 = £425000

Year 3 = £634000

CUSTOMER BENEFITS

200 x improved communications

systems

100 x start e-business

100 x managed CRM system

100 x time saved within businesses

Gross profit margin: 83%

Net profit margin: 32%

Breakeven sales: £110844

CUSTOMER GROUP

Micro-small businesses buy

integrated

web/e-business/comms/CRM service

They pay £50 month flat fee + traffic

charges on 1 year contract

BUSMODE LTD

FIXED COSTS

Repayment on £100,000 financing of IT

system = £28,000

Premises, facilities, insurance = £24,000

Salaries (2 people) = £40,000

Total fixed costs = £92,000

SALES INCOME

200 customers in year 1

£50 month each = £120,000

+ £25 month average traffic = £60,000

Total income= £180,000

VARIABLE COSTS

Marketing costs £100 to attract each

customer = £20,000

Variable costs £50 per customer = £10,000

Total variable costs = £30,000

Total costs: £122,000

Gross profit: £150,000

Net profit before tax: £58,000

Rae (2007)

Importance of a Business ModelImportance of a Business Model

Having a clearly articulated business model is important because it does the following:

• Serves as an ongoing extension of feasibility analysis. A business

model continually asks the question, “Does this business make sense?”

• Focuses attention on how all the elements of a business fit together and

constitute a working whole.

• Describes why the network of participants needed to make a business

idea viable are willing to work together.

• Articulates a company’s core logic to all stakeholders, including the

firm’s employees.

Potential Fatal Flaws in Business ModelsPotential Fatal Flaws in Business Models

• Fatal Flaws– Two fatal flaws can render a business model

untenable from the beginning:• A complete misread of the customer.• Utterly unsound economics.

Pets.com sported an unsound business model,

and failed.

Take Away’sTake Away’s

Defining the Opportunity

Assessing the Opportunity

Extracting Value from the Opportunity

Problem - Opportunity Map

Pentagon

Business Model

Useful WebsitesUseful Websites

www.en.wikipedia.org/wiki/Business_model

Definitions plus examples.

www.searchenginelowdown.com/2006/10/colin-angles-14-failed-robot-business.html

iRobot story