STRATEGIC FINANCE AND MARKETING

Business Model - A business model is the logic of how a company intends to make money.

9 Building Blocks of Business Model Canvass (Alexander Osterwalder & Yves Pigneur)

1. Value Proposition… describes the bundle of products and services that create value for a specific
customer
2. Customer Segments… the different groups of people or organizations an enterprise aims to reach
and serve
3. Customer Relationship… describes the type of relationship a company establishes with a specific
customer 
4. Channels… how a company communicates with and reaches its customer to deliver a value proposition
5. Revenue Stream… represents the cash a company generates from each customer
6. Key Resources… describes the most important assets required to make a business model work
7. Key Activities… describes the most important thing a company must do to make its business model work
8. Key Partners… describes the network of suppliers and partners that make the business model work.
9. Cost Structure… describes all costs incurred to operate a business model

“Marketing is so basic that it cannot be considered a separate function. It is the whole business seen from
the point of view of its final result, that is, from the customer’s point of view… business success is not
determined by the producer but by the customer!”

Marketing is a social* and managerial process* by which individuals and groups obtain* what they need
and want through creating*, offering*, and exchanging* products of value* in the market*

The CORE concepts of Marketing

1. Needs, Wants and Demands

2. Products (Goods, Services or Idea)
3. Value, cost And Satisfaction
4. Exchange & Transaction
5. Relationship And Network Markets
6. Marketers & Prospects

“While great devices are invented in the laboratory, great products are invented in the Marketing
Department!” - William H. Davidow on Products

DEFINE – PRODUCT? … is anything that can be offered to a market to satisfy a want or a need
DEFINE – SERVICE? … is any act or performance that one party can offer to another that is essentially
intangible and does not result in the ownership of anything. Its production may or may not be tied to a
physical product.

“The real issue is value, not price!” - Robert T. Lindgren on Price

TOOLS OF PROMOTION
1. ADVERTISING
2. SALES PROMOTION
3. PUBLIC RELATIONS
4. PERSONAL SELLING
5. DIRECT MARKETING
 TYPE OF DEFINITION RENTAL CAR
MARKET EXAMPLE

POTENTIAL MARKET All customers who may be Any driver who needs
interested in a particular temporary transportation
offering

AVAILABLE MARKET Subset: Customers who are Any driver who can afford the
interested, possess adequate rental fees and is in the area
income, and have access to the served by rental-car services
offering

QUALIFIED AVAILABLE Subset: Customers who are Drivers in the available market
MARKET qualified to buy based on age who have licenses and meet
or other criteria minimum age restrictions

TARGET (SERVED) MARKET Subset: Customers that the Drivers in the qualified
company intends to target for a available market who need to
particular offer cover “airport to final
destinations” in the area

PENETRATED MARKET Subset: Customers who are Drivers in the target market
already buying the type of good who have previously used
or service sold by the company rental car services

“Every customer is different, and every customer has a different value for your firm; to succeed at
marketing, you must understand and exploit these differences by matching offerings to customer needs,
and by focusing resources on your most valuable customers…”

Customers comprise the heart of any business model. Without (profitable) customers, no company can
survive for long.

Customer groups represent separate segments if:

•Their needs require and justify a distinct offer.
•They are reached through different Distribution Channels.
•They require different types of relationships.
•They have substantially different profitabilities.
•They are willing to pay for different aspect of the offer.

1. Mass Markets do not distinguish between customer segments.

2. Niche Market cater to specific, specialized customer segment.
3. DIVERSIFIED. An organization with a diversified customer business model serves two unrelated.
Market Segment with slightly different needs and problems
4. Multi-sided platforms. Some organizations serve two or more interdependent Customer
Segments Customer Segments with very different needs and problems

NEWNESS
This is when a value proposition satisfy an entirely new set of needs that customers previously didn’t
perceive because there was no similar offering.

Ethical products? Sustainable products?

PERFORMANCE

Improving product or service performance has traditionally been a common way to create value.

In your opinion, how does this value proposition played in the  PC Industry?

CUSTOMIZATION

Tailoring products and services to the specific needs of individual customers or Customer Segments

creates value.

In recent years, the concepts of mass customization and customer co-creation have gained importance.

GETTING THE JOB DONE

Value can be created simply by helping a customer get certain jobs done.

Rolls-Royce understands this very well: its airlines customers rely entirely on Rolls-Royce to
manufacture and service jet engines. This arrangement allows customers to focus on running their
airlines. In return, the airlines pay Rolls-Royce a fee for every hour an engine runs.

DESIGN

A product may stand out because of superior design.

In the fashion and consumer electronics, design can be a particularly important part of Value
Proposition.

COST REDUCTION

Helping customers reduce costs is an important way to create value.

This relieves the buyers from the expense and trouble of having to buy, install and manage it
themselves.

RISK REDUCTION

Customers value reducing the risks they incur when purchasing products or services, e.g. 1-year service
guarantee.
A service level guarantee partially reduces the risk undertaken by a purchaser of an outsourced IT
services.

ACCESSIBILITY

Making products and services available to customers who previously lacked accessed to them is
another way to create value.

Time share? Mutual funds?

CONVENIENCE/ USABILITY

Making things more convenient or easier to use can create substantial value.

iPod and iTunes

Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the
mind of the target market.

Guide to create a positioning statement:

To (target group or need) our (brand) is (concept) that (point-of-difference)

“To young, active soft-drink consumers who have little time for sleep, Mountain Dew is the soft drink
that gives you more energy than any other brand because it has the highest level of caffeine. With
Mountain Dew, you can stay alert and keep going even when you have not been able to get a good
night’s sleep.”

A value network is a system of partnership and alliances that a firm creates to source, augment, and

deliver its offerings.

Marketing channels are sets of interdependent organizations involved in the process of making a

product or service available for use or consumption.

EXCLUSIVE DISTRIBUTION is used when the producer wants to maintain control over the service level

and outputs offered by resellers. (Examples: cars and women’s apparel brands)
SELECTIVE DISTRIBUTION is used when the producer wants to gain adequate market coverage with

more control and less cost than intensive distribution. (Examples: Bench & Penshoppe)

INTENSIVE DISTRIBUTION consists of manufacturer placing the goods or services in as many outlets as

possible. This is driven by the consumer who requires a great deal of location convenience. (Examples:

tobacco, snack foods or gum)

CHANNEL FUNCTIONS is decided during the marketing planning process. It must be able to perform a
variety of functions to make the right assortment of products, in the right sizes, available to consumers
or business customers at the right time and in the right place, with the right touch of service.

Supply chain management (SCM) starts before physical distribution. It involves procuring the right
inputs (raw materials, components, and capital equipment); converting them efficiently into finished
product; and dispatching them to the final destinations

LOGISTICS is managing the movement of goods, services, and related information from the point of
origin to the point of sale or consumption
 Who will transport and store supplies, parts, and finished products – and how and when
 How inventory levels will be managed, and by whom
 Who will collect, analyze, and share data on customer orders, billing, and payment – and how
and when

What type of relationship does each of our Customer Segments expect us to establish and maintain with

them?

PERSONAL ASSISTANCE

This relationship is based on human interaction. The customer can communicate with a real customer

representative to get help during the sales process or after the purchase is complete.

This may happen on-site at the point of sale, through call centers, by e-mail or through other means.
 DEDICATED PERSONAL ASSISTANCE

This relationship is based on dedicating a customer representative specifically to the client. It represents

the deepest and most intimate type of relationship and normally develops over a long period of time.

In private banking services, for example, dedicated bankers serve high net worth individuals.

SELF-SERVICE

In this type of relationship, a company maintains no direct relationship with customers. It provides all the

necessary means for customers to help themselves.

AUTOMATED SERVICES

This type of relationship mixes a more sophisticated form of customer self-service with automated

processes.

Automated services can recognize customers and their characteristics and offer information related to

orders or transactions (e.g. Amazon.com)

COMMUNITIES

Increasingly, companies are utilizing user communities to become more involved with customers and to

facilitate connections between community members.

Many companies maintain online communities that allow users to exchange knowledge and solve each

other’s problems. Communities can help companies better understand their customers (e.g.

GlaxoSmithKline on weight loss drugs)

CO-CREATION
 More companies are going beyond the traditional customer-vendor relationship to co-create value with

customers.

Amazon.com invites customers to write reviews and thus create value for other book lovers.

Youtube.com solicit customers to create content for public consumption.

Revenue Stream represents the cash a company generates from each Segment.
There are two different types of Revenue Stream

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.

ASSET SALE

The most widely understood Revenue Stream derives from selling ownership rights to a physical product.

USAGE FEE

This Revenue Stream is generated by the use of a particular service. The more the service is used, the more the

customer pays (e.g. Hotel charges customers for the number of nights room/s are used.)

SUBSCRIPTION FEES

This Revenue Stream is generated by selling continuous access to a service. (e.g. Fitness First)

LENDING/ RENTING/ LEASING

This Revenue Stream is created by temporarily granting someone the exclusive right to use a particular asset for a

fixed period in return for a fee. (e.g. Zipcar.com)

LICENSING

This Revenue Stream is generated by giving customers permission to use protected intellectual property in

exchange for licensing fees.

BROKERAGE FEES

This Revenue Stream derives from intermediation services performed on behalf of two or more parties.

(e.g. Brokers and real estate agents earn a commission each time they successfully match a buyer and

seller.)

ADVERTISING

This Revenue Stream results from fees for advertising a particular product, service or brand.

KEY RESOURCES

This describes the most important assets required to make a business model work.  

Every business model requires Key Resources. These resources allow an enterprise to create and offer a

Value Proposition, reach markets, maintain relationships with Customer Segments and earn revenues.

Key Resources differ depending on the type of business model. A microchip manufacturer requires

capital-intensive production facilities, whereas a microchip designer focuses more on human resources.

PHYSICAL

This category includes physical assets such as manufacturing facilities, buildings, vehicles, machines systems, POS

and distribution networks.

Wal-Mart has enormous global network of stores and logistical infrastructure. Amazon.com has 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 may offer substantial value.

Consumer companies like Nike and Sony rely heavily on brand as a Key Resource. Qualcomm, a designer and

supplier of chipsets for broadband mobile  devices, built its business model around patented microchip design that

earn the company substantial licensing fees. 

HUMAN

Human resources are crucial in knowledge-intensive and creative industries.

Novartis 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 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 them rather than the competitors.

KEY ACTIVITIES

These are the most important actions a company must take to operate successfully. These are required

to create and offer a Value Proposition, reach markets, maintain customers and earn revenues.
For Microsoft, this is, but not limited to software development. For Dell, this is supply chain management.

For McKinsey, problem solving.

PRODUCTION

These activities relate to designing, making and delivering a product in substantial quantities and superior

quality. Production activity dominates business models of manufacturing firms.

PROBLEM SOLVING

This type relate to coming up with new solutions to customer problems.

The operations  of consultancies, hospitals and other service organization are dominated by problem

solving activities.

These call for knowledge  management and continuous training

PLATFORM/ NETWORK

Networks and matchmaking platforms, software and even brands can function as a platform.

Visa business model requires activities related to its credit card transaction platform for merchants,

customers and banks.

Key Activities in this category relate to platform management, service provisioning and platform

promotion.

Companies forge partnerships for many reasons, and partnerships are becoming a cornerstone of many business

models. Companies create alliances to optimize their business models, reduce risk or acquire resources.

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.

1st Motivation
OPTIMIZATION AND ECONOMY 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.

2nd Motivation
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. 

3rd Motivation
ACQUISITION OF PARTICULAR RESOURCES AND ACTIVITIES
Few companies own all resources or perform all the activities described by their business. Rather, they extend their
own capability by relying on other firms to furnish particular resources or perform certain activities. Such
partnerships 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. 

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. Some business, though, are more cost-driven than others. So called ‘no-frills’ airlines, for

instance, have business models entirely around low cost structures.

Some companies are LESS concerned with the cost implications of a particular business model design, and instead
focus on value create on. 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
 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 and Cebu Pacific for us, easyJet, and Ryanair typify cost-
driven business models.

VARIABLE & FIX COSTS

FIX COSTS are expenses that do not fluctuate with output volume within a relevant time period but
become progressively smaller per unit of output as volume increase.
The two (2) types are programmed costs (costs that happened in attempting to generate sales volume)
and committed costs (costs required to maintain the organization like rent and administrative
expenses)
VARIABLE COSTS are expenses that are uniform per unit of output within a relevant time period yet
total variable costs fluctuate in direct proportion to the output volume of units produced. In other
words, as volume increases, total variable costs increase.
The two (2) types are those tied to product (cost of goods sold) and those not tied to product costs
(e.g. commissions, discounts and delivery expenses)

RELEVANT & SUNK COSTS

RELEVANT COSTS are expenditures that (1) are expected to occur in the future as a result of some
marketing actions and (2) differ among marketing alternatives being considered. To expound, if we
decided to add a new product to our offering, we have to consider the cost to manufacture and to
market

SUNK COSTS are the direct opposite of relevant costs. Sunk costs are past expenditures for a given
activity and are typically irrelevant in whole or in part to future decisions. In marketing context, sunk
costs include past research and development expenditures and last year’s advertising expense.

RELEVANT ACCOUNTING & FINANCE CONCEPTS

•Variable and Fix Cost
•Relevant and Sunk Cost
•Margins
•Contribution Analysis
•Liquidity
•Operating Leverage
•Discounted Cash Flow
•Customer Lifetime Value Analysis

“Profit is a reward for the appreciation given by the customer…” - MATSUSHITA KONOSUK