Category: GoForth Institute Small Business Training

In our last post, we discussed the Key Partnerships portion of a Business Model Canvas. The Business Model Canvas allows you to describe and think through the business model of your small business, your competitors, or any other company. This concept has been applied and tested around the world and used in large organizations, as well as hundreds of thousands of small businesses.

Today, let’s talk about Cost Structure.

What is Cost Structure in the Business Model Canvas?

The Cost Structure Building Block of the Business Model Canvas describes all costs incurred to operate a business model. This building block describes the most important costs incurred while operating under a particular business model. Creating and delivering value, maintaining Customer Relationships, and generating revenue all incur costs. Such costs can be calculated relatively easily after defining Key Resources, Key Activities, and Key Partnerships (see links at the end of this post for more information).

Some business models, though, are more cost-driven than others. So-called “no frills” airlines, for instance, have built business models entirely around low Cost Structures.

Ask yourself these questions:

• What are the most important costs inherent in our business model?
• Which Key Resources are most expensive?
• Which Key Activities are most expensive?

Different classes of Cost Structures

Naturally enough, costs should be minimized in every business model. But low Cost Structures are more important to some business models than to others. Therefore it can be useful to distinguish between two broad classes of business model Cost Structures: cost-driven and value-driven (many business models fall in between these two extremes):

Cost-driven

Cost-driven business models focus on minimizing costs wherever possible. This approach aims at creating and maintaining the leanest possible Cost Structure, using low price Value Propositions, maximum automation, and extensive outsourcing. No frills airlines, such as Southwest, easyJet, and Ryanair typify cost-driven business models.

Value-driven

Some companies are less concerned with the cost implications of a particular business model design, and instead focus on value creation. Premium Value Propositions and a high degree of personalized service usually characterize value-driven business models. Luxury hotels, with their lavish facilities and exclusive services, fall into this category.

Characteristics of Cost Structures

Cost Structures can have the following characteristics:

Fixed costs

Costs that remain the same despite the volume of goods or services produced. Examples include salaries, rents, and physical manufacturing facilities. Some businesses, such as manufacturing companies, are characterized by a high proportion of fixed costs.

Variable costs

Costs that vary proportionally with the volume of goods or services produced. Some businesses, like music festivals, are characterized by a high proportion of variable costs.

Economies of scale

Cost advantages that a business enjoys as its output expands. Larger companies, for instance, benefit from lower bulk purchase rates. This and other factors cause average cost per unit to fall as output rises.

Economies of scope

Cost advantages that a business enjoys due to a larger scope of operations. In a large enterprise, for example, the same marketing activities or Distribution Channels may support multiple products.

Read our complete Business Model Canvas series here!

 

In our last post, we discussed the Key Activities portion of a Business Model Canvas. The Business Model Canvas allows you to describe and think through the business model of your small business, your competitors, or any other company. This concept has been applied and tested around the world and used in large organizations, as well as hundreds of thousands of small businesses.

Today, let’s talk about Key Partnerships.

What are Key Partnerships in the Business Model Canvas?

The Key Partnerships Building Block of the Business Model Canvas describes the network of suppliers and partners that make the business model work.

Companies forge partnerships for many reasons, and partnerships are a cornerstone of many business models. Companies create alliances to optimize their business models, reduce risk, or acquire resources.

Different types of Key Partnerships

We can distinguish between four different types of partnerships:

1. Strategic alliances between non-competitors
2. Coopetition: strategic partnerships between competitors
3. Joint ventures to develop new businesses
4. Buyer-supplier relationships to assure reliable supplies

Ask yourself these questions:

• Who are our key partners?
• Who are our key suppliers?
• Which Key Resources are we acquiring from partners?
• Which Key Activities do partners perform?

Why form Key Partnerships with other businesses?

It can be useful to distinguish between three motivations for creating partnerships:

Optimization and economy of scale

The most basic form of partnership or buyer-supplier relationship is designed to optimize the allocation of resources and activities. It is illogical for a company to own all resources or perform every activity by itself. Optimization and economy of scale partnerships are usually formed to reduce costs, and often involve outsourcing or sharing infrastructure.

Reduction of risk and uncertainty

Partnerships can help reduce risk in a competitive environment characterized by uncertainty. It is not unusual for competitors to form a strategic alliance in one area while competing in another. Blu-ray, for example, is an optical disc format jointly developed by a group of the world’s leading consumer electronics, personal computer, and media manufacturers. The group cooperated to bring Blu-ray technology to market, yet individual members compete in selling their own Blu-ray products.

Acquisition of particular resources and activities

Few companies own all the resources or perform all the activities described by their business models. Rather, they extend their own capabilities by relying on other businesses to furnish particular resources or perform certain activities. Partnerships like these can be motivated by needs to acquire knowledge, licenses, or access to customers. A mobile phone manufacturer, for example, may license an operating system for its handsets rather than developing one in-house. An insurer may choose to rely on independent brokers to sell its policies rather than develop its own sales force.

Read our complete Business Model Canvas series here!

In our last post, we discussed the Key Resources portion of a Business Model Canvas. The Business Model Canvas allows you to describe and think through the business model of your small business, your competitors, or any other company. This concept has been applied and tested around the world and used in large organizations, as well as hundreds of thousands of small businesses.

Today, let’s talk about Key Activities.

What are Key Activities in the Business Model Canvas?

The Key Activities Building Block of the Business Model Canvas describes the most important things a company must do to make its business model work.

Every business model calls for a number of Key Activities. These are the most important actions a company must take to operate successfully. Like Key Resources, they are required to create and offer a Value Proposition, reach markets, maintain Customer Relationships, and earn revenues. And like Key Resources, Key Activities differ depending on business model type. For software maker Microsoft, Key Activities include software development. For PC manufacturer Dell, Key Activities include supply chain management. For consultancy McKinsey, Key Activities include problem solving.

Ask yourself these questions:

• What Key Activities do our Value Propositions require?
• Our Distribution Channels?
• Customer Relationships?
• Revenue streams?

Types of Key Activities in a small business

Key Activities can be categorized as follows:

Production

These activities relate to designing, making, and delivering a product in substantial quantities and/or of superior quality. Production activity dominates the business models of manufacturing firms.

Problem solving

Key Activities of this type relate to coming up with new solutions to individual customer problems. The operations of consultancies, hospitals, and other service organizations are typically dominated by problem solving activities. Their business models call for activities such as knowledge management and continuous training.

Platform/network

Business models designed with a platform as a Key Resource are dominated by platform or network-related Key Activities. Networks, matchmaking platforms, software, and even brands can function as a platform. eBay’s business model requires that the company continually develop and maintain its platform: the website at eBay.com. Visa’s business model requires activities related to its Visa® credit card transaction platform for merchants, customers, and banks. Microsoft’s business model requires managing the interface between other vendors’ software and its Windows® operating system platform. Key Activities in this category relate to platform management, service provisioning, and platform promotion.

Read our complete Business Model Canvas series here!

In our last post, we discussed the Revenue Streams portion of a Business Model Canvas. The Business Model Canvas allows you to describe and think through the business model of your small business, your competitors, or any other company. This concept has been applied and tested around the world and used in large organizations, as well as hundreds of thousands of small businesses.

Today, let’s talk about Key Resources.

What are Key Resources in the Business Model Canvas?

The Key Resources Building Block of the Business Model Canvas describes the most important assets required to make a business model work.

Every business model requires Key Resources. They allow an enterprise to create and offer a Value Proposition, reach markets, maintain relationships with Customer Segments, and earn revenues. Different Key Resources are needed depending on the type of business model. A microchip manufacturer requires capital-intensive production facilities, whereas a microchip designer focuses more on human resources.

Key resources can be physical, financial, intellectual, or human. Key resources can be owned or leased by the company or acquired from key partners.

Ask yourself these questions:

• What Key Resources do our Value Propositions require?
• Our Distribution Channels?
• Customer Relationships?
• Revenue Streams?

The different types of Key Resources

Key Resources can be categorized as follows:

Physical

This category includes physical assets such as manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales systems, and distribution networks. Large retailers rely heavily on physical resources, which are often capital-intensive. Some have an enormous network of stores and related logistics infrastructure. Others have an extensive IT, warehouse, and logistics infrastructure.

Intellectual

Intellectual resources such as brands, proprietary knowledge, patents and copyrights, partnerships, and customer databases are increasingly important components of a strong business model. Intellectual resources are difficult to develop but when successfully created, they offer substantial value. Consumer goods companies like Nike and Sony rely heavily on
brand as a Key Resource. Microsoft and SAP depend on software and related intellectual property developed over many years. Qualcomm, a designer and supplier of chipsets for broadband mobile devices, built its business model around patented microchip designs that earn the company substantial licensing fees.

Human

Every enterprise requires human resources, but people are particularly prominent in certain business models. For example, human resources are crucial in knowledge-intensive and creative industries. A pharmaceutical company, for example, relies heavily on human resources. Its business model is predicated on an army of experienced scientists and a large and skilled sales force.

Financial

Some business models call for financial resources and/or financial guarantees, such as cash, lines of credit, or a stock option pool for hiring key employees. Ericsson, the telecom manufacturer, provides an example of financial resource leverage within a business model. Ericsson may opt to borrow funds from banks and capital markets, then use a portion of the proceeds to provide vendor financing to equipment customers, thus ensuring that orders are placed with Ericsson rather than competitors.

Read our complete Business Model Canvas series here!