Designing a new business (1): the businessmodel

Prof. Antonio Renzi

Entrepreneurship and venture evaluation

Agenda

1. Entrepreneurial opportunities and business planning

2. An introduction to business model

3. The business model according to “canvas” approach

Opportunities selection

General evaluation of chosenopportunity

Embryonic business idea

Development of the business idea

Business Model

Business Plan

DiscoveryandSelection

Entrepreneurial opportunities and business planning

Embryonic business idea

Development of the business idea

Business Model

Business Plan

DesignAnd Evaluation

Implementation and revisions

Feedback

Development of the business idea

Evaluation of possible ways to protect the specific business idea:for instance, eventually creating entry barriers.

Categories of potential customers

Evaluation and identification of potential customers.

Categories of potential suppliers.

Evaluation and identification of potential suppliers.

Identification of critical resources

Entrepreneurial opportunities and business planning

Development of the business idea

Evaluation of possible ways to protect the specific business idea:for instance, eventually creating entry barriers.

Categories of potential customers

Evaluation and identification of potential customers.

Categories of potential suppliers.

Evaluation and identification of potential suppliers.

Identification of critical resources

Characteristic traits of the business idea

Product system

Entrepreneurial opportunities and business planning

Organizational Structure

Market Segment

Entrepreneurs’ capabilities are greater than opportunities discovery. Theentrepreneur converts a business idea into an actual project, structured in phasesas:

• design and evaluation of the new business;

• organization and set up of resources needed for the project implementation.

Entrepreneurial opportunities and business planning

The pre-requisites needed to convert an idea into an actualbusiness project

• Availability of tangible; human, and financial reosurces (actual orpotential ones)

•Strategic and managerial capabilities of the entrepreneur.

From opportunities catching to business planning

• Availability of tangible; human, and financial reosurces (actual orpotential ones)

•Strategic and managerial capabilities of the entrepreneur.

An introduction to business model

The project’s first step is the elaboration of the “business model”.

There are several and heterogeneous definitions of what is a “businessmodel”However, there are some general recurring concepts, which are thefollowing:

• The business model is a logical scheme that connects the dots amongideas; technologies, and economic results;

• The business model expresses the value proposition;

• The business model is a sort of structural template.

The project’s first step is the elaboration of the “business model”.

There are several and heterogeneous definitions of what is a “businessmodel”However, there are some general recurring concepts, which are thefollowing:

• The business model is a logical scheme that connects the dots amongideas; technologies, and economic results;

• The business model expresses the value proposition;

• The business model is a sort of structural template.

An introduction to business model

The origin of the business modelThe “business model” concept began during the ’90s and it was used withreference to innovative start up firms, whose main assets were mostlyintangible.

Internet start up firm

Based on networkpotentialities

Characterized by the massivepresence of intangible assets

Their innovative capabilitywere mostly based on:

Customer relationship; salesprocess; trade process

Business model

The business model was thenew language built to

express a new businessparadigm

Its purpose was to find agreater integration among

different projects elements,than previous adopted tools

for planning

Internet start up firm

Based on networkpotentialities

Characterized by the massivepresence of intangible assets

Their innovative capabilitywere mostly based on:

Customer relationship; salesprocess; trade process

Business model

The business model was thenew language built to

express a new businessparadigm

Its purpose was to find agreater integration among

different projects elements,than previous adopted tools

for planning

An introduction to business model

The multi-dimensional nature of the business model

• Value/Customer oriented (external dimension)

• Activity/Role oriented (internal dimension)

• Structural/strategic dimension

• Economic Dimension

The multi-dimensional nature of the business model

• Value/Customer oriented (external dimension)

• Activity/Role oriented (internal dimension)

• Structural/strategic dimension

• Economic Dimension

Basic business model type

Market TargetBusiness model

Competition

An introduction to business model

Supply Structure

Economic and operating dimension of the project

Financial dimension of the project

NewBusiness

model Noveltyfactors

Market targetSupply system

Structure

The business model arises from thedecision to imitate or to differentiate

from competitors

An introduction to business model

AntecedentBusinessmodels

Convergence factors

Noveltyfactors

Market targetSupply system

Structure

The business model according to Canvas approach

All of the business elements are depicted in a single representation

Source: Osterwalder, Pigneur (2010)

Breakdown of canvas

The canvas facilitates both the unification and the breakdown process.

Breakdown process: it allows to extract the four dimensions and the nineelements of the business.

The business model according to Canvas approach

Right side of Canvas

The business model according to Canvas approach

Value/Customer oriented(external perspective)

Left side of canvas

The business model according to Canvas approach

Activity/Role oriented (internal perspective)

Up side of canvas

The business model according to Canvas approach

Structural and strategic dimension

Down side of canvas

Economic dimension

The business model according to Canvas approach

Economic dimension

What kind of value do we offer to our customers?What kind of problems are we helping to fix?Which are the bundles of product and services we are offering to our customers?What is the need we are satisfying?

Value proposition

The business model according to Canvas approach

PerformanceCustomizationDesignBrand/ Status symbolPriceCost savingRisk reductionAccessibilityComfort/usefulness

1) Describing the capacityof your product to solvecustomers’ problems.

How to describe a value proposition

The business model according to Canvas approach

2) Describing customers’benefits

3) Describing yourdifferentiation degree fromcompetitors

4) Describingdifferentiation drivers

3) Describing yourdifferentiation degree fromcompetitors

4) Describingdifferentiation drivers

The value proposition explains how the firm’s generating customervalue

Value proposition

Advantagesperceived by the

customer

High Customer valuecreation

Customer valuedestruction

The business model according to Canvas approach

Advantagesperceived by the

customer

Costs perceived by thecustomer

Low High

Low

Customer valuedestruction

The value creation can be further investigated analyzing :- Purchase decision (Canvas);- Customer behavior;- Quantitative evaluation of customer value creation;- Quantitative evaluation of the relationship capital.

The value proposition according to a differentiation logic(strategic or operating)

Resource saving toproduce the same

competitors’ product

Price below the averageof the market

Value propositionO

pera

ting

diffe

rent

iatio

n

The business model according to Canvas approach

Innovation concerningthe product bundle

The quality is perceived ashigher than competitors’ one

Creation of a newmarket

Satisfaction ofa new need

Value propositionSt

rate

gic

Diff

eren

tiatio

nO

pera

ting

diffe

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iatio

n

Value proposition: the switching costs problem

Often, the adoption of a new product by customers requires furtherinvestments, as those one made for compatibility among products.

For instance :• A new software could require further investments to update alreadyexisting software;• A new plant could require additional investments for human resourcestraining• There could be penalties due to previous suppliers in case of switching.

Moreover, the innovative product could increase the supply risk, whetherif it’s a real risk or just a difference in risk perception.

The business model according to Canvas approach

Often, the adoption of a new product by customers requires furtherinvestments, as those one made for compatibility among products.

For instance :• A new software could require further investments to update alreadyexisting software;• A new plant could require additional investments for human resourcestraining• There could be penalties due to previous suppliers in case of switching.

Moreover, the innovative product could increase the supply risk, whetherif it’s a real risk or just a difference in risk perception.

Value proposition: network opportunities

The network effect could produce positive externalities, increasingcustomer’s perceived advantages.

The network can have both an emotional and a functional nature

The business model according to Canvas approach

For whom do we want to create value?Which are our main customers?

Mass-marketNicheSegmentMulti-sided platforms

Customers

The business model according to Canvas approach

Mass-marketNicheSegmentMulti-sided platforms

Which kind of relationship do we need to build and keep with each of our target?What kind of customer relationship did we build in the past?How they are integrated with our business model?How much they cost?

Customer relationship

The business model according to Canvas approach

Personal assistanceDedicated personal assistanceSelf-serviceAutomatic systemsCommunitiesCo-creation

1.AwarenessHow can we increase our product/service awareness?2.EvaluationHow can we help our customer to detect the value weoffer?3.PurchaseHow the customers can purchase ourproducts/services?4.DeliveryIn what way is the value delivered to our customers?5.Post-salesHow do we offer post-sales assistence?

Trade Channel

What is the channeldesidered by customers?What channel are weusing?How much they areintegrated?How our channels areintegrated?Which one is bestperforming?Which one is the mostefficient?Are we keeping them upto date, considering ourcustomer habits?

The business model according to Canvas approach

1.AwarenessHow can we increase our product/service awareness?2.EvaluationHow can we help our customer to detect the value weoffer?3.PurchaseHow the customers can purchase ourproducts/services?4.DeliveryIn what way is the value delivered to our customers?5.Post-salesHow do we offer post-sales assistence?

What is the channeldesidered by customers?What channel are weusing?How much they areintegrated?How our channels areintegrated?Which one is bestperforming?Which one is the mostefficient?Are we keeping them upto date, considering ourcustomer habits?

RevenuesFor what value customers want to really pay?For what they actually pay?In which way they pay?How they prefer to pay?How much each revenue contributes to the overall revenues?

The business model according to Canvas approach

Revenues typeGoods salePay as you goSubscriptionRent/ LeasingBrokerageAdvertising/promotion

Fixed pricePrice listDepending on productcharacteristicsDepending on targetDepending on quantities

Variable priceBargainingMarket real time

Core activities

What are the main activities for the creating value?

The business model according to Canvas approach

- model of production- vertical integration- activities in favor of the customer- administrative model

Core partners

Which are our main partners?Which are our main suppliers?What are the core resources we are acquiring from them?Which are the core activities they carry out?

The business model according to Canvas approach

Partnership motivation:- Optimization and savings- Risk and uncertainty reduction- Acquiring core resources or activities

Which are the resources needed to:- Create value?- Trade channels?- Customer relationships?- Revenues?

Core resources

The business model according to Canvas approach

Types of resourcesTangiblesIntangibles (brands, patents, copyrights, data)HumanFinancial

Costs

The view of the competitive advantage can be:-Cost oriented (lean costs structure, low cost supplied value, massiveautomation, massive outsourcing)?- Value oriented

The business model according to Canvas approach

The view of the competitive advantage can be:-Cost oriented (lean costs structure, low cost supplied value, massiveautomation, massive outsourcing)?- Value oriented

Fixed costs (wages, rents,utilities)Variable costsEconomies of scaleEconomies of scope

The reasons of business model

Key Points

The business idea elements

External relationships and revenues (Right side of Canvas)

External relationships, internal structure and costs(Left side ofCanvas)

Value proposition concept

33

External relationships, internal structure and costs(Left side ofCanvas)

Project structure

1. Title and Business idea (one slide)

2. Entrepreneurial opportunity (one slide)

3. Innovation approach (one slide)

4. Slack puzzle (one or two slide)

5. Business model (Canvas – 30/40 slides)

1. Title and Business idea (one slide)

2. Entrepreneurial opportunity (one slide)

3. Innovation approach (one slide)

4. Slack puzzle (one or two slide)

5. Business model (Canvas – 30/40 slides)

Project structure

5. Business model (Canvas – 30/40 slides)

5.1. General picture

5. Business model (Canvas – 30/40 slides)

5.1. General picture

5.2. Description of the value proposition

5.3. Description of each canvas box5.4. Check on possible inconsistencies

5.5. Conclusions

Examples

Example of a business idea

Title: “Pollicino” (Emanuele Sorrentino, Matteo Signori, SerenaSpinelli, Pier Giorgio Renzetti - Academic year: 2014/15).

Business idea: a bracelet for children useful to find lost orkidnapped children (GPS Technology)

Discovery process

Value proposition: Meet a need for security; Usability; Reducingthe kidnappings phenomenon

Example of a business idea

Title: “Pollicino” (Emanuele Sorrentino, Matteo Signori, SerenaSpinelli, Pier Giorgio Renzetti - Academic year: 2014/15).

Business idea: a bracelet for children useful to find lost orkidnapped children (GPS Technology)

Discovery process

Value proposition: Meet a need for security; Usability; Reducingthe kidnappings phenomenon

Final grade =

(project work grade + applicative work in class)/2

Deadlines:October 20, working groups;November 20, work delivery (PowerPoint);November 27, presentation of projects;December 11, applicative work (financial analysis)January 11 (or other exam dates) , formal registration of the

grade.

Who want improves his grade can do the oral test

Final grade =

(project work grade + applicative work in class)/2

Deadlines:October 20, working groups;November 20, work delivery (PowerPoint);November 27, presentation of projects;December 11, applicative work (financial analysis)January 11 (or other exam dates) , formal registration of the

grade.

Who want improves his grade can do the oral test

Designing a new business (2): The five dimensionsof the project feasibility

Prof. Antonio Renzi

Entrepreneurship and ventures finance

Agenda

1. The feasibility components

2. Entrepreneurial feasibility

3. External feasibility

4. Technological feasibility

5. Operative feasibility

6. Economic and financial feasibility

1. The feasibility components

2. Entrepreneurial feasibility

3. External feasibility

4. Technological feasibility

5. Operative feasibility

6. Economic and financial feasibility

The feasibility components

• Entrepreneurial feasibility: Adequacy of the entrepreneur (or the team ofentrepreneurs) in relation to the new business that he (they) is (are) proposing.

• External feasibility: Market potentialities of the new business.

• Technological feasibility: Adequacy of available technologies.

• Operative feasibility: Quality of internal processes.

• Economic and financial feasibility: Capacity for obtaining a sufficient level offinancial resources; Potential capacity for generating economic and financialresults over time; Risk level

• Entrepreneurial feasibility: Adequacy of the entrepreneur (or the team ofentrepreneurs) in relation to the new business that he (they) is (are) proposing.

• External feasibility: Market potentialities of the new business.

• Technological feasibility: Adequacy of available technologies.

• Operative feasibility: Quality of internal processes.

• Economic and financial feasibility: Capacity for obtaining a sufficient level offinancial resources; Potential capacity for generating economic and financialresults over time; Risk level

The feasibility components

Entrepreneurialfeasibility

Externalfeasibility

Technologicalfeasibility

Marketpotentialities

Onerwrship structureEntrepreneurial skills

TechnologicalInvestments

Marketinginvestments

Exploitation

Exploitation

Exploitation

More in general

Technologicalfeasibility

TechnologicalInvestments

Financial resources

Operativefeasibility

Organizationalprocesses

Expected revenues Expected costs

Economic and financialfeasibility

Exploitation

More in general

Entrepreneurial feasibility

Entrepreneurial capacities

1. Respectability2. Problem solving capacity: Finding

solutions3. Operational capabilities and

technical knowledge4. Personal behavior and

relationship capacity5. Balance skills6. Financial capacity: capacity to

invest on the project7. Propensity to risk

Business characteristics

1. Business idea2. Product/service characteristics3. Production process4. Technological profile5. Organizational structure6. Internal resources7. Financial need8. Project Risk

Entrepreneurial capacities

1. Respectability2. Problem solving capacity: Finding

solutions3. Operational capabilities and

technical knowledge4. Personal behavior and

relationship capacity5. Balance skills6. Financial capacity: capacity to

invest on the project7. Propensity to risk

Business characteristics

1. Business idea2. Product/service characteristics3. Production process4. Technological profile5. Organizational structure6. Internal resources7. Financial need8. Project Risk

Typical examples of inconsistency between entrepreneurialcapacities and business characteristics

• Knowledge lack of entrepreneurial team in relation to the technological profile ofthe business.• Leadership lack.• Absence of managerial skills• Skill concentration in one or few areas• Few external relationships• Incapacity to explain the projects contents• Lack of initial capital• Riskiness of the project higher than the propensity to risk (initial unawareness).• Low propensity to accept external controls and/or corporate governance rules.

Entrepreneurial feasibility

Typical examples of inconsistency between entrepreneurialcapacities and business characteristics

• Knowledge lack of entrepreneurial team in relation to the technological profile ofthe business.• Leadership lack.• Absence of managerial skills• Skill concentration in one or few areas• Few external relationships• Incapacity to explain the projects contents• Lack of initial capital• Riskiness of the project higher than the propensity to risk (initial unawareness).• Low propensity to accept external controls and/or corporate governance rules.

Inconsistency between entrepreneurial capacities and businesscharacteristics

In some cases it’s possible to remove inconsistency elements thanks the thecollaboration with external actors:

• Actors who have interest to acquire business shares;• Actors who are able to give consulting services

The cost of those solutions can push the entrepreneur to give up the project

Entrepreneurial feasibility

Inconsistency between entrepreneurial capacities and businesscharacteristics

In some cases it’s possible to remove inconsistency elements thanks the thecollaboration with external actors:

• Actors who have interest to acquire business shares;• Actors who are able to give consulting services

The cost of those solutions can push the entrepreneur to give up the project

External feasibility

Externalfeasibility:

- Demand analysis- Marketing strategies- Expected revenues

Externalfeasibility:

- Demand analysis- Marketing strategies- Expected revenues

Primary demand and secondary demand

External feasibility

m'max

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m

qDD

qD''D'

D’ = current primary demand ; D’’ = expected secondary demand;qm= best hypothesis of expected market share.D’ = current primary demand ; D’’ = expected secondary demand;qm= best hypothesis of expected market share.

Primary demand and secondary demand

Main exogenous variables

Macro-environment

Structural characteristics ofthe sector

Lifecycle of the sector

Main endogenous variables

Competitive strategies

Marketing

Price elasticity of demand

External feasibility

Main exogenous variables

Macro-environment

Structural characteristics ofthe sector

Lifecycle of the sector

Main endogenous variables

Competitive strategies

Marketing

Price elasticity of demand

Demand estimationCustomer analysis

Product analysis

Advertising analysis

Price analysis

Elasticity analysis

Estimation of primary demand and secondary demand

External feasibility

Customer analysis

Product analysis

Advertising analysis

Price analysis

Elasticity analysis

Estimation of primary demand and secondary demand