IS3240 DIGITAL PLATFORM STRATEGY AND ARCHITECTURE [2320]

LECTURE 3
BUSINESS MODELS

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 U UPDATES
1. Team schedules
2. Case B is online
3. Case A questions

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 Update #1: Teams & Schedules
MLEPCLAYNOS TURTLES THINKTANK TIRAMISU RACCOONS RAGING Ts RIVERCATZ
Alfred Alex Chloe Bryan Ming Yong Emma Richeton

Aryan Evangeline Farhan Varsha Ryan Jin Yuen Minh Phong

Dian So a Jia Yi Haoyao Wei Kian Spring Wei Kuang

Snigdha

Denzel Matthias Ji Won Zhiwei Wei Ning Rover

Xin Yi

Nicko Timothy Kahjyun Clement Zhiqian

3 5 7 8 10 12
1

MEGAMINDS T GIRLS TINKERERS

ROAST CHICKEN RATATOUILLE
Jay-Lynn Boon Wah
Chenxuan Bina Chan Dylan
Kordelia Glendon
Davy Brendan Elgin
Le Xuan Mila Irene
Tshuen Hau Jia En
Ophelia Yilin
Andre Michael
Sijia

4 6 11
2 9

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 Update #1: Teams & Schedules

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 Update #2: Case B

Case B (Zara: The Evolving Fast Fashion Industry) is now online.

|| https://www.iveypublishing.ca/s/ivey-coursepack/a1ROF0000006yXl2AI

|| Questions for individuals / Guidance for presenting teams will be released this weekend.

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 Update #3: Case A

Questions
|| How detailed should our
presentation be?
| It depends. You need to balance
“Why”, “How” and time.

|| What is the criteria on which we’ll

be assessed?
| Category 1: Content (35)
| Category 2: Presentation (15)

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 Update #3: Case A

So what happens next week?

|| If you’re presenting, I’ll let you know what time to arrive at class.
| Please submit your slide deck in Canvas at least 1 hour before your tutorial. I’ll open submissions
today.

|| If you’re not presenting, please arrive on time at the start of the session.
| Please submit your answers in Canvas before tutorial. I’ll open submissions today.

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 Let’s review last week’s class
What is an organisation’s strategy?

A deliberate search for a plan of action that will develop a business’s

competitive advantage and compound it. It’s concerned with:
|| Where are we now? (An analysis of our current situation)
|| Where do we want to be? (An analysis and determination of our mission, vision, goals)
|| How do we get there? (Keeping in mind our analyses, and our competitors

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 The process of strategy formulation

External
Analysis

Strategy
Mission & Vision
Formulation
One aspect of the current
Internal
Analysis situation: your business model

Evaluating our current situation

ie. where are we now?

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 Today’s 1. Continuing from last week: Before we can
describe specifically what a platform

Objectives strategy / platform business does, how can

we describe what a business does in
general?

2. What about the other aspects of strategic

formulation?

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 1 BUSINESS MODELS

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 What is a business model?

A business model is a description of how your business runs/works.

|| It is not your strategy (how you compete against others), but when you compare
business models with others’ models, you start the process strategic thinking.

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 Common business models
They try to help explain how businesses work

There were 4 major models in e-commerce

|| B2C - business to consumer

|| B2B - business to business

|| C2C - consumer to consumer

|| C2B - consumer to business

There are models based on pricing, or other factors

|| Subscription, Freemium, Razor / Printer, Direct, Agency, UGC, Drop shipping, Franchise, Social enterprise, Family owned, Data licensing, Pyramid
schemes

But these terms are just attempts to generalise, describe and categorise them. Usually by highlighting just one key thing about
the model.
|| But business models are very ‘personal’, unique, different to the businesses. And they do not stay the same. A lot of the change is driven by the
changing customers, by competition, by technology changes and other environmental pressures.

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 The business model canvas
A way of describing a business
IKEA

affordability, customers can buy their furniture at cheaper price

Value Propositions
Key Activities VP Customer Relationships
KA CR

Key Partners
KP Customer Segments
CS
Key Resources
KR
Channels
logistic distrubtion network
CH
all these here earn money

Doing key activities, partners, resources need pay money

Cost Structure Revenue Stream

CS RS
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 4 Pillars in the Canvas

Pillar 1: Product
|| Main building block is value proposition

Pillar 2: Customer
|| Main building blocks are segments, channels and relationships

Pillar 3: Infrastructure
|| Main building blocks are key resources, key activities, key partners

Pillar 4: Financial
|| Main building blocks are cost structure and revenue model

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 Product
Pillar 1

Building Block: Value Proposition

|| An organization seeks to solve customer problems and satisfy customer needs with
value propositions. What are the products and services an organisation is offering,
and to which customer segments, that create the strongest value proposition?

|| Customers have needs that must be satisfied. An organisation seeks to solve

customers’ problems and satisfy customers’ needs with products & services. These
create a value proposition to the customer. In exchange, organisations are
compensated for this value.

|| Choose the right:

| products/services (i.e. what needs can I satisfy with my features?)
| groups of customers (i.e. what customer segments can I serve?)
| compensation (i.e. what price can I offer?)

|| Providing a unique value proposition or a novel value proposition can be very

desirable, but difficult.

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 Customer
Pillar 2

Building Blocks: Customer Segments, Channels,

Customer Relationships
|| An organisation serves one or several customer segments. An
organisation must decide which segments to serve and which
to ignore

|| Value propositions are delivered to customers through

communication, distribution, and sales channels.

|| Customer relationships are established and maintained with

each customer segment.

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 Infrastructure
Pillar 3

Building Block: Key Resources, Key Activities, Key

Partners
|| Key activities are the most important things a company must
do to make its business model work.

|| Key resources are the assets required to offer and deliver the
elements by performing a number of key activities.

|| Key partners are the critical suppliers and partners to perform

key activities. Some activities are outsourced and some
resources are acquired outside the enterprise.

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 Financial
Pillar 4

Building Block: Cost Structure, Revenue Model

|| Revenue streams result from value propositions
successfully offered to customers.

|| The business model elements result in the cost

structure.

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 Developing your strategy requires knowing these

Evaluating them together

|| What’s our current business model? (What are
External we doing now?)
Analysis
|| What’s our mission/vision? (Where are we trying
Strategy to go?)
Mission & Vision
Formulation
|| What’s happening around us? (external analysis)
Internal
Analysis || What’s happening inside us? (internal analysis)

Evaluating our current situation Then modifying

ie. where are we now?
|| Given all these considerations, what should our
business model look like to get us to our
desired destination?

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 Technology, data and designing our business models
Leverage on technology and data when developing your strategy
if im doing something that i can do but you cant do, makes me unique

Technology and data create the possibility to

|| Deliver additional value more efficiently, but generally the same value proposition. By using
technology in each pillar, you can create new, more efficient possibilities that deliver a lot
more value to customers (eg. Using social media as a channel for customer relationships).
| This isn’t particularly strategic, it doesn’t change your competitive position much, but is an
incremental improvement.

|| Deliver new value by making new types of business models possible. Technology allows us
to create new arrangements of how we deliver value (eg reverse auctions, gig/sharing
economy, platforms, …), which creates new markets/customers, new products, new industries.
| This can be a lot more strategic, requires more time and risk.

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 Business models do evolve

Taobao in 2003 was a C2C business.

Want to nd and acquire
goods

But prices were high,

quality was low and trust
was lacking

Want to sell used and new

goods

But don’t have access to

customers, and can’t
process payments

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 Taobao in 2008 - From C2C to small
B2C to big B2C

Want to sell products,

make a living, ful l a
passion

Want to reach a mass

audience, develop brand
loyalty, grow sales.

But customer acquisition

cost is high, and it takes
time to build physical
presence
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 Business models are designed

For start-ups, they design their business models. For established companies, business models are
already in place.
|| Notice the interdependence of the components. You can’t just do anything and everything - activities, partners,
resources are needed! You shouldn’t just do anything - value proposition and customer segments need to be identified.

|| A competitive business model must evolve in response to changes. Could take several paths forward. What’s the best
way forward? It depends on internal and external environment changes / analysis.

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 2 OTHER FACTORS IN STRATEGY
FORMULATION

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 How should your business model change?
Considering an external analysis

External analysis aims to understand the factors and pressures affecting your environment and
competition. These frameworks provide insights - that help identify opportunities and threats in an
organisation’s external environment.
But you need to ask ‘so what’?

Industry
Five Forces
> < Macro
Environmental
Factors

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^
Industry
Life Cycle
26
 Macro Environmental Factors

8 key categories in the macro-environment that can impact a firm’s strategy:

|| Economic - availability of credit, propensity to spend, interest rates, productivity levels, tax rates, fiscal policies, …

|| Social - life expectancy, trust in government, attitude toward work, buying habits, racial equality, …

|| Technological - prevalence of computers/mobile/internet access, workforce availability, …

|| Ecological - consumer behaviours/attitudes, environmental laws, …

|| Media - power to influence, availability of media, …

|| Political - government regulation/deregulation, lobbying, relationships with other countries, …

|| Legal - tax laws, IP laws, employment laws, environmental laws, antitrust regulation, unions, …

|| Ethical - corruption, transparency, equality, international pressures, …

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 Industry 5 Forces - How attractive / easy is an industry?

Lastly, the bargaining power of both suppliers and

customers is low due to Blue Nile’s drop shipping
model which allows them to choose suppliers that
provide cost-effective, quality materials. Customers
can then purchase high-quality products at lower prices

Can i set the price or they?

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 Industry 5 Forces

How erce the competition is Power of buyers & suppliers to

Ease with which new players can move past
between organisations in the in uence the behaviour of
barriers to entry to enter the competition, or
industry competitors
the ease with which buyers can substitute
what an industry produces with alternatives

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 Key Variables for Rivalry

Seller Concentration: The number and size distribution of firms competing within a market. Commonly
measured with concentration ratios indicating the market share of leading firms. (eg. 3 firm concentration ratio of
80%)

Diversity of Competitors: How similar the competitors are, in terms of objectives, strategies, costs.

Product Differentiation: How similar offerings are among rivals, how much of a commodity has the product
become. everyone fighting for the same product or? is it all similar? if little product differentiaion, very small space to fight

Excess Capacity & Exit Barriers: Availability of excess resources as a result of over-investment, declining demand
or economic factors. How durable and specialised are resources? Do they make exiting costly?

Cost Conditions and Structure: Are fixed costs high relative to variable costs? How low can prices go? Can
economies of scale be enjoy?

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 Key Variables for the Bargaining Power of Buyers & Suppliers

Buyers
|| Buyers Price Sensitivity: Extent to which buyers are sensitive to prices charged by firms. Usually depends on the
importance of an item as a percentage of total cost, how differentiated products are, the intensity of competition,
product criticality.

|| Relative Bargaining Power: Balance of power between parties in transactions, usually depends on the size and
concentration of buyers relative to suppliers, buyer information, ability to integrate vertically.

Suppliers - similar to buyers.

|| The ease of switching to different input suppliers and the relative bargaining power of each party determines the
power of suppliers.

|| Suppliers of raw materials and components are often smaller than the large manufacturers they sell to. Hence they
usually lack bargaining power.

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 Key Variables for the Threat of Substitutes and New Entrants

Substitutes
|| Availability and propensity to substitute: Absence means consumers are comparatively insensitive to price. Existence means consumer will switch to
substitutes in response to price changes.

|| Relative prices and performance of substitutes

New Entrants
|| Capital requirements

|| Economies of scale

|| Absolute cost advantages: Having absolute cost advantage, often from owning low-cost raw materials, create barriers to entry.

|| Product differentiation

|| Access to distribution channels

|| Government or legal barriers

|| Retaliation expectations

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 BARGAINING POWER OF BUYERS Bargaining Power
Price Sensitivity Buyers’ switching cost
Product differentiation Buyers’ information
Cost of product relative to total cost Buyers’ ability to integrate backward
Competition between buyers Size and concentration of buyers relative to producers

THREAT OF NEW ENTRANTS

INDUSTRY RIVALRY
Capital requirements
THREAT OF SUBSTITUTES Concentration
Economies of scale Economy of scale
Buyer propensity to substitute Diversity of competition
Absolute cost advantages
Relative prices and performance of Product differentiation a proportionate saving in
Product differentiation costs gained by an
substitutes Excess capacity increased level of
Access to distribution channels production.
Exit barriers
Government and legal barriers "mergers may lead to
Cost conditions economies of scale"
Retaliation

BARGAINING POWER OF SUPPLIERS

The factors determining the power of suppliers relative to existing
producers - similar to buyers

33

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 Industry Life Cycle

Useful to identify opportunities or threats, whether in an uncertain introductory

period, high growth phase, increasing maturity or falling sales

4 phases:
Introduction >> Growth >> Maturity >> Decline
|| Suggests that industry starts with slow increase in sales with start up losses, followed by
rapid growth and significant profits. Competition grows. In mature phase, overall growth
plateaus, competition intensifies. Products and services become standardised. Overall
profits begin to decline.

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 Resources & Capabilities
An internal analysis

Resources are productive assets owned by firms. Resources themselves do not

provide any competitive advantages.
Tangible resources Culture
Financial — cash, securities, borrowing capacity Human resources

Physical — plant, equipment, land, mineral Skills / know-how

reserves
Capacity for communication &
collaboration
Intangible resources Motivation
Technology — patents, copyrights, trade secrets

Reputation — brand, relationships

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 Resources & Capabilities

Capabilities are what a firm can do, usually as the result of using resources.
|| Capabilities are the essence of superior performance and competitive advantages.

|| A firm’s capacity to deploy resources for a desired end result.

|| Distinctive competence — those things an organisation does particularly well, relative to its competitors

|| Core competencies — those competencies that (1) make a disproportionate contribution to ultimate consumer value, or to
efficiency with which that value is delivered, (2) provide a basis for entering new markets

The mix, type, amount and nature of a firm’s resources should be considered first in devising strategies that can
lead to competitive advantages. Firms should develop and exploit unique resources and capabilities, and
continually maintain and strengthen those resources.

They can then pursue a strategy that isn’t being implemented by other firms. When those other firms cannot
duplicate a strategy, then the firm has a competitive advantage that is sustainable.
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 Resources & Capabilities

Core competencies
|| Companies get competitive advantages by focusing on their core competencies. These competencies lead
to core products (not sold to end users, but rather are used to build a larger number of end products). These
core products are then used in multiple businesses units to create end user products. By combining
competencies in different ways and matching them to market opportunities, new businesses and products
can be created.

Identifying core competencies: A core competence should

|| provide access to a wide variety of markets

|| contribute significantly to end product benefits

|| be difficult for competitors to imitate

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 Resources & Capabilities

Competencies stem from the ability of an organisation to integrate and coordinate

various resources. Simply having these resources isn’t enough to give a company a
competency.
|| But some of these activities can be acquired, and not learnt, through alliances, mergers or
licensing

Core competencies can also be lost

|| Cost-cutting – eg. decentralisation, outsourcing – make it difficult for core competencies to be built

|| Failure to recognise your core competencies may lead to decisions that will lose them

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 Resources & Capabilities

Is a resource or capability valuable to customers? Is the firm ability to exploit an opportunity or neutralise a threat
with this resource?

|| NO — competitive disadvantage (not valuable)

|| YES — Is it rare? Is it controlled by you (or few others)?

|| NO — competitive parity

|| YES — Is it costly, difficult or impossible to imitate, duplicate, obtain or develop?

|| NO — non-sustainable/temporary competitive advantage

|| YES — Is the firm organized, ready and able to exploit / support it?

|| NO — non-sustainable/temporary disadvantage (not valuable)

|| YES — sustainable competitive advantage

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 Creating Options

Situation (external & internal) analysis acts as a way to assess the current state, or
diagnose the problem, but (often) doesn’t point to a solution.
|| If a strategy is the solution, then what is the problem? We need to identify the strategic
problem / issues / uncertainties. These are not operational issues, but are more closely
relate to competition, disruptions, organisation, business model.

To understand the strategic issues, we must have a clear understanding of

where we are now, and the mission (where we want to be), and if anything will
stop us / get us there (internal/external analysis).

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 E END OF CLASS

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