| People will always stress that having a well | | | | strategy?According to the Collins English |
| researched business plan is key before you start | | | | Dictionary, strategy is "a particular long-term plan |
| your business. Although creating a business plan is | | | | for success". For our purposes, we will consider |
| often an important step in the evolution of a | | | | the essence of strategy as a formula for coping |
| business, particularly if you need financing or you | | | | with the competition. Competitive strategy is |
| are not experienced at running a business, it is not | | | | about being different and the goal for a corporate |
| necessarily the essential first step. There are two | | | | strategy is to find a position in the industry where |
| key elements that should be completed prior to | | | | the company is unique and can defend itself |
| the business plan:The business modelThe | | | | against market forces. To do this the company |
| strategyWhat is a Business Model?While the word | | | | must choose a set of activities that can deliver a |
| model often stirs up images of mathematical | | | | unique mix of value.Market Forces and |
| formulas, a business model is in fact a story of | | | | StrategyThe determination of a strategy is |
| how a business works. In general terms, a | | | | rooted in determining how a company stacks up |
| business model is the method of doing business | | | | against basic market forces, how it can defend |
| by which a company can generate revenue. Both | | | | itself against these forces and how it can influence |
| start-up ventures and established companies take | | | | these forces. Fortunately, Michael E. Porter in his |
| new products and services to the market through | | | | article How Competitive Forces Shape Strategy |
| a venture shaped by a specific business model. In | | | | defined these market forces for us. Known as |
| their paper, The Role of the Business Model in | | | | Porter's 5 forces they consist of:The industry - |
| Capturing Value from Innovation, Henry | | | | this is the jockeying for position among current |
| Chesbrough and Richard S. Rosenbloom outlined | | | | competitors, this can consists of price |
| the six basic elements of a business | | | | competition, new product introduction or |
| model:Articulate the value proposition - the value | | | | advertising slugfests.The threat of new entrants - |
| created to users by using the productIdentify the | | | | the seriousness of the threat of entry depends |
| market segment - to whom and for what | | | | on the barriers to entry and reaction from |
| purpose is the product useful; specify how | | | | existing companies. There are 6 major barriers to |
| revenue is generated by the firm.Define the value | | | | entry: 1) economies of scale 2) product |
| chain - the sequence of activities and information | | | | differentiation 3) capital requirements 4) cost |
| required to allow a company to design, produce, | | | | disadvantages independent of size 5) access to |
| market, deliver and support its product or | | | | distribution channels 6) government policy. A new |
| service.Estimate the cost structure and profit | | | | company will generally have second thoughts |
| potential - using the value chain and value | | | | about entering an industry if the incumbent has |
| proposition identified.Describe the position of the | | | | substantial resources to fight back, the incumbent |
| firm with the value network - link suppliers, | | | | seems likely to cut prices or industry growth is |
| customers, complementors and | | | | slow.The threat of substitute products/services - |
| competitors.Formulate the competitive strategy - | | | | substitutes can place a ceiling on prices that are |
| how will you gain and hold your competitive | | | | charged and limit the potential of an industry.The |
| advantage over competitors or potential new | | | | bargaining power of suppliers - suppliers can |
| entrants.Joan Magretta in her article Why Business | | | | squeeze profitability by increasing prices or |
| Models Matter took the concept of the business | | | | lowering the quality of the goods.The bargaining |
| model a little further. Magretta suggests every | | | | power of buyers (customers) - customers can |
| business model needs to pass two critical tests, | | | | force down prices, demand better quality, more |
| the narrative test and the numbers test. The | | | | service or play competitors off on each |
| narrative test must tell a good story and explain | | | | other.Once you assess how the market forces |
| how the business works, who is the customer, | | | | are affecting competition in your industry and |
| what do they value and how a company can | | | | their underlying causes, you can identify the |
| deliver value to the customer. The numbers test | | | | underlying strength and weaknesses of your |
| means your profit and loss assumptions must add | | | | company, determine where it stands against each |
| up. At the most basic level, if your model doesn't | | | | force and then determine a plan of action. Plans |
| work, then your model has failed one of the two | | | | of action may include:Positioning the company - |
| tests.To begin the modeling process you need to | | | | match your strengths and weaknesses to the |
| articulate a value proposition on the product or | | | | company's industry, build defenses against |
| service being provided. The model must then | | | | competitive forces or find a position in the |
| describe the target market. The customer will | | | | industry where forces are the weakest. You need |
| then value the product on its ability to reduce | | | | to know your company's capabilities and the |
| costs, solve a problem or create new solutions. A | | | | causes of the competitive forcesInfluencing the |
| market focus is needed to identify what product | | | | balance - take the offensive, for example |
| attributes need to be targeted and how to | | | | innovative marketing can raise brand identification |
| resolve product trade-offs such as quality versus | | | | or differentiate the product.Exploiting industry |
| cost. You also need to identify how much to | | | | change - an evolution of an industry can bring |
| charge and how the customer will pay.Think of | | | | changes in competition. For example, in an |
| business modeling as the managerial equivalent of | | | | industry life-cycle growth rates change and/or |
| the scientific method - you start with a | | | | product differentiation declines; anticipate shifts in |
| hypothesis, which you then test in action and | | | | the factors underlying these forces and respond |
| revise when necessary. The business model also | | | | to them.The framework for analyzing the industry |
| plays a part of a planning tool by focusing | | | | and developing a strategy provides the road map |
| managements on how all the elements and | | | | for answering the question "what is the potential |
| activities of the business work together as a | | | | of this business?"Reconciling the Business Model |
| whole. At the end of the day, the business model | | | | and StrategyI will use a short example to illustrate |
| should be condensed onto one page consisting of: | | | | the difference between a business model and |
| a diagram outlining how the business generates | | | | strategy. Although you may think that Wal-Mart |
| revenue, how cash flows through the business | | | | pioneered a new business model on its road to |
| and how the product flows through the business | | | | success, the reality is that the model was really |
| and; a narrative describing the product/ service | | | | no different than the one Kmart was using at the |
| components, financial projections or other | | | | time. But it was what Sam Walton chose to do |
| important elements not captured in the | | | | differently than Kmart, such as focusing on small |
| diagram.Business Models and StrategyIt is | | | | towns as opposed to large cities and everyday |
| important to note that completing a business | | | | low prices, that was the real reason for his |
| model does not constitute strategic planning. | | | | success. Although Sam Walton's model was the |
| Strategic planning factors in the one thing a | | | | same as Kmart's, his unique strategy made him a |
| business model doesn't; competition.What is | | | | success. |