Pindelski_Competitive_Strategies

Value Proposition

Products and services provided by a company form a value proposition. In a slightly simplified manner, this can be explained as a reason why customers choose certain supplier, and not any other one. The value for a customer is the level at which the needs will be met. So the value proposition is a unique pool of benefits for a customer. Sometimes the value proposal may be innovative and unprecedented. Often, however, this is a portfolio of products or services already existing on the market, but enriched by a certain characteristic, slightly modified, etc. Value proposition can be expressed quantitatively (price, size, weight, duration of the service) or qualitatively (appearance, customer experience with a product or service, a unique service). By specifying a unique value offered to customers and their segments, a legitimate question is: what needs are satisfied with a product or service, or what type of issues it helps buyers to solve. In the case of innovation and its value, it may just be the fact, that the product is new, such as new car models. Qualitative criteria may be based on a specific product design, to which, for example, the Alfa Romeo car manufacturer refers. It may also be that of the image of an ecological or socially responsible company. The proposal can be expressed quantitatively by punctuality, size of passenger seats, increased deposit interest rates, low prices, or lightweight mobile devices. In the B2B segment, the value offer often includes a promise to reduce costs, improve operations, reduce the time of completion, etc., offered by, i.e., companies that supply CRM systems (Customer Relationship Management). This can also be risk reduction offered by insurance companies or bidders of extended warranties. Its value can also be in the form of great availability of a service at a place where it is needed, such as Veturilo, Warsaw's urban system of renting bicycles.

Value proposition can be divided into a number of factors, which generate value for customers, eg.:

•Price (one of the most important factors),

•Freshness (novelty) of a product,

•Product personalization,

•Efficiency and product reliability,

•Product brand,

•Unique product design (execution),

•Cost and risk reduction (resulting from the purchase of a given product),

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•Product availability and convenience of its operation,41

Distribution Channels

Channels are routes, which a company takes in order to reach towards segments of its existing or potential customers, in order to introduce them to their offer. Communication, distribution and sales are points of contact of a company and its offer with customers, definitely playing a major role in the entire business model. They have the following functions:

•Provide information on products and services of a company - a bidder.

•Help customers to get to know the proposed value.

•Allow the purchase of new products and services.

•Support after making a purchase.

•Allow the collection of information about the market and customer.

In determining the business model diagram, five stages of development and use of channels need to be taken into consideration. The first stage is to provide clients with information about products and services. In the second stage, review of proposed values should be available. The third stage is when the purchase happens. In the fourth stage, a product or a service is delivered. The fifth stage is for post-purchase client support.

Customer Relationships

Companies operating on the market must pay constant attention to the level of their customer relationships. Relationships are built in order to achieve three main objectives: to attract new customers; maintaining the old ones; to increase the sales of products and services. There are two main types of relationships, between which a businessman may choose the right one for himself.

Personal Relationship - in this type of a relationship the main emphasis is on building a real, long-term relationship with a customer. The client gets full and direct support from the company, support in the form of call-centres or live chats. The business model, in which the biggest emphasis is on the positive relationship with customers, the consumer has his own account manager, dedicated only to him. This is the most complete, the deepest and the most expensive form of client contact, and simultaneously, the one that takes the most time to establish.

41 A. Osterwalder, Y. Pigneur, ibidem, p.26-29

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Automated relationship - self-service model, in which the relationship with a customer is not the most important one. The service provider creates an opportunity for a customer to use tools that allow troubleshooting, without the need to contact the company. Availability and easy use of such tools may result in the fact that these relationships may almost resemble personal relationships. We need to keep in mind that mainly the market and the customers generate a demand for a services automation, and a company wanting to meet the expectations, should offer such possibilities.

Far more important in the customer relationship seems to be creating communities, through which companies can establish close relations with users. Relationships are also formed among users themselves. A company then is gaining access to communities that are interested in the fate of the company, and therefore able to help in product development and/or improvement. 42

Revenue Streams

Funds generated by a company related to the operation channel sales, are one of the most essential components of a business model. With regards to the revenue stream, the most important thing here is to determine the price which customers will be able to pay for a product or a service offered, since the right price selection ensures high impact revenue for the company.

Revenue Streams may operate in other pricing mechanisms:

•Rigid prices,

•Appropriate negotiations rates,

•Auctions,

•Amount of purchased goods.

Revenue Streams are generated in a number of ways, whose choice depends on the specifics of a given industry; desired impact speed; impact robustness; among the main revenue streams of a company are:

•sales of assets,

•user fees,

•subscriber fee,

•rental/leasing,

•licence fees,

42 A. Osterwalder, Y. Pigneur, ibidem, p.32-33

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•intermediary commissions,

•advertising.43

Key Resources

In order to ensure its proper functioning, a company requires appropriate resources. Access to resources can help your business build value for your customers, penetrate new markets and generate revenue. According to its general division, we can distinguish:

Physical Resources - all physical assets, and therefore mainly buildings, vehicles, and machinery owned by a business.

Financial Resources - cash and/or credit lines. Having these resources is necessary for the proper conduct of a business model.

Human Resources - respectively skilled employees whose work generates profit for the company. Their knowledge, skills and characteristics play a significant role in shaping innovation.

Intellectual Resources - brand, patents, copyrights, trademarks, customer database, customer relationships. Examples of businesses, which mainly rely on intellectual resources, are technological industry companies. 44

Key actions

The term, key actions, includes all the steps taken by a company in order to achieve its smooth functioning. Usually, there are a few key actions taken by most businesses necessary to create value, maintain customer relationships and to generate revenue.

Such key actions can be divided into three groups:

•Production operation activities, which are focused on design, manufacturing and product delivery.

•Problem solving activities, allowing for the understanding of difficulties, finding a solution, and then implementing it.

•Tasks responsible for smooth operations of a platform or a network, which allow consistent and stable business operations. 45

Key Partners

43A. Osterwalder, Y. Pigneur, ibidem, p.34-37

44A. Osterwalder, Y. Pigneur, ibidem, p.38-39

45A. Osterwalder, Y. Pigneur, ibidem,, p.40-41

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This is an extremely important component of a business model, because it describe the network of co-workers and suppliers. An appropriate management of relationships with key partners keeps the business running smoothly. Companies decide to cooperate with one another because of various reasons, however, if relationships are carefully selected, they become the foundation of a business model based on process optimization, cost reduction and greater resource access.

The main goal of this partnership is to increase resource allocation and to achieve economies of scale. A company that decides to cooperate can extend the range of its own capabilities by moving some of the responsibilities for obtaining resources onto other companies. Such cooperation may include, for example, purchasing licenses from other partners or using ready-made structures and existing contacts, rather than building relevant departments within the company from scratch. Having access to all resources and their self-management is not rational from a business point of view. This behaviour generates costs and involves tremendous responsibility. Cooperation allows cost reduction, and is usually carried out in the form of outsourcing or shared infrastructure, which spreads out the responsibilities and risks. The cooperation of two businesses in a certain area, and their simultaneous, hard and fierce competition in another area, is no longer seen as something abnormal.46

Cost Structure

Cost structure contains all expenses incurred by a company as a result of using a specific business model. Generated costs arise from creating value for customers, maintaining partner relationships and revenue production. Cost calculation happens after having defined key activities, resources and partners. There are two types of structures in the framework of a given business model:

•Structure based on costs, which is to reduce company costs in every possible area. Ensuring the right quality drops to second place, and the competitive advantage of such companies is based on offering services cheaper than the competition.

•Value focused structure. In this structure, the level of costs is not as an important aspect as is the generation of the right value for customers. In this case, the offer is generally very attractive, and the level of services - very individualized.

46 A. Osterwalder, Y. Pigneur, ibidem, p.42-43

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The cost structure of a company is affected by fixed costs, variable costs, economies of scale and economies of scope.47

Fig.20 Business Model Canvas

Source: Osterwalder A., Pigneur Y., Business Model Generation. A Handbook for Visionaries, Game Changers, and Challengers, Published by John Wiley & Sons, Inc., Hoboken, New Jersey, 2010

All of these components form a business model canvas, which is a kind of a template for creating business models. While you are working on a template you can use sticky notes with ideas written on them, later placed in specific positions of the template. A business model described in this way is quite simple to both, create and define. It can be used for many industries and any organization. The advantage here is also the placement of the value proposition as a main, central element. It requires focusing the efforts on creating a unique value proposition for a customer.

9.3 Types of business models (Strategies of Business Model Development)

Components of a business model have a direct impact on the four, main areas of business

operations:

•offer for clients;

•clients, who generate corporate profits;

•infrastructure, which allows for efficient production and customer service;

•profitability, which determines the degree of cost-effectiveness of business activities undertaken by a company.

47 A. Osterwalder, Y. Pigneur, ibidem, p.44-45

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Each of the above components is the basis for business strategy, which is reflected within an organization’s systems, structures and processes and ultimately becoming the organization's foundation of capabilities to generate profit.

Two key parameters should be analyzed before choosing the right strategy of business model development:

1.Easy imitation of the technology solution. This parameter allows you to specify the level of technological lead over its competitors, as the more difficult it is to copy a product, the greater becomes a company's market advantage.

2.Availability and validity of complementary assets. This parameter is used to specify assets, which enable you to take full advantage of potential solutions (e.g.,

brand, manufacturing potential, available distribution channels)48.

Relationships occurring between these two parameters are used to construct an array, which is the basis for evaluating strategy, which should be adopted by a company in a given situation. A company, when making a decision on which business model to use, should make sure that it will be able to adopt the appropriate strategy required in a given business situation.

Complementary assets

Source: Own elaboration based on: A. Afuah, Ch. L. Tucci, Biznes internetowy - strategie i modele, Oficyna Ekonomiczna, Krakow 2003, p. 128-129

48A. Afuah, Ch. L. Tucci, Biznes internetowy - strategie i modele, Oficyna Ekonomiczna, Krakow 2003, p. 127

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The analysis of an array for strategies of a business model development indicates 4 main types of strategy. Each type must be matched to the relevant situation.

The first strategy type is an escape into the future, necessary in an environment of constant changes, in which each new solution can be easily imitated, and complementary assets necessary in using this solution are readily available. As a part of this strategy the company should make continual improvements, even at the expense of cannibalization (literally the copying of solutions already applied in other products/services) of an existing product portfolio, so as to leave the competition always a step behind - what they will be able to copy, should already be outdated. Selecting a different strategy is very difficult, because the market is full of entities possessing similar offers.

Another type is the combining forces strategy, involving either the strategic alliance, the appointment of the joint venture or the merger or acquisition of another company. The use of this strategy is indicated in situations where complementary assets, not held by a company, are importantly difficult to acquire in the market, as having them gives a company a significant advantage. The price of this solution is, however, the necessity to share profits with a new partner.

The third strategy type adopted by companies is to Block competition. This strategy is based on the elevation of barriers by a company in order to protect its market before the entry of competitors. This type of strategy is applied in situations where the opportunity of imitating an already used solution is limited, such as used patent or company's knowhow. It is a strategy effective only as long as it is possible to keep barriers preventing the entry of new competitors onto the market. Technological progress is the main threat to this strategy. This may allow the competition to work around the solutions used by a business.

Fourth, and the last type of strategy for business model development, is the internal asset development. This development is made by an organic expansion of a company's abilities, which is cost-effective only if it happens within the complementary assets, so far unavailable to the company. Its main advantage is that it allows for the full use of the opportunities of having a technological advantage. This solution also has its disadvantages, including high costs, risk of failure and a long time required for process completion.

A business model is a tool that enables you to understand, analyze, and build your business from the bottom up. It is important to remember that it is not of a universal nature, that just one group of business models suitable for any business, in any situation,

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simply does not exist. A business model should always be chosen according to a situation, which is to take place, because together with the change in the economic performance of the business, the needs of the model change as well.

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Questions and discussions:

1.What is a business model ? How it differs form a strategy ?

2.Can a company not follow any business model and why ?

3.List the business model components and describe them in short.

4.Describe and present the business model of your company, school or university.

Case study 20

The Stealth

Stealth was created in 1990. It currently produces high quality protective cases for mobile phones. For more than ten years of activity in the market, the company tried to get to know its clients taste and develop their own quality standards. The production of cases for various devices had already started in 1990, as one of the first productions in Poland. The products were manufactured using the vacuum-molding method. One year later, the company decided to use the injection manufacturing method that has been in use until today. In the year 2000, it started producing cases for the more and more popular smartphones. Previously, the company was a successful manufacturer of cases for traditional phones. From the start of its activity, the company has been focusing on quality, and therefore gaining clients like the largest phone distributors and mobile networks around.

The manufacturing process is fully automated and based on cutting-edge technologies, high-quality machines and materials. The Stealth Company has been the holder of the community industrial design patent rights RCD 3232, assigned to the smartphone case and therefore, have the right for the commercial use of this design throughout the entire European Union, since 2005. A full description of the design, among other things, can be found on the website of the Office for Harmonization in the Internal Market (OHIM) and was published on its bulletin in May of 2005.

In 2010, thanks to the purchase of a top-quality sealing machine, the company adapted its products for automatic packaging. In subsequent years, i.e. in 2011 and 2012, it has expanded its offer to Supersafe and Slimsafe cases. At the end of 2013, the company launched an innovative, first in Poland, robotized technological line for the production of cases. Currently, none of the Polish competitive solutions manufacturers produces such cases, and the substitutes available on the market, are imported from China. With

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