ValueLinks Module 5 Business models

1. ValueLinks Module 5 Business models

2. ValueLinks 2.0 Setting boundaries Chain analysis and strategy VC upgrading solutions Monitoring 1 2 5 11 Value chain analysis Managing data & monitoring Scope of value chain development Business models 6 Business linkages 3 Value chain strategies 7 Services 4 Programs and projects 8 VC Financing 9 Quality and standards Solutions for improving the value chain 10 Policy instruments

3. Business models Contents 1 Business models for VC development 2 Improving small-scale farm and SME business models 3 Promoting and supporting entrepreneurship

4. The business model concept • Business models and the value chain • Every enterprise has a business model, either implicitly or explicitly. • The value chain as a whole can be decomposed into business models of specific types of operators who follow a similar business model. • Value chain development implies improving business models as enterprises- innovate technology- make new or better products- seek developing new markets 1

5. The business model concept Definition…a specific combination of product/markets, internal operations & technology, supply and marketing links that an enterprise uses to succeed and grow (“the rational of how an individual firm creates, captures and delivers value”) Elements of a business model • Product • Costumers/markets • Scale of production (capacity, volume) • Type of enterprise (size, localisation, organisation, formal/informal) • Technology • Backward linkages to suppliers • Marketing channels 1

6. Tools to analyse business models The “business model canvas” (simplified) Partners / suppliers Value-creating activities and resources Product („value proposition“) Distribution channel Costumers Costumer relations 1 Cost structure Revenue stream Profit or Loss

7. Business model canvas The complete “business model canvas” form Key Activities Key Partners Value Propositions CustomerRelationships CustomerSegments Key partners? Key suppliers? Which key resources are we acquiring from partners? Which key activities do partners perform? What key activities dovalue propositions, relationships,distribution channels, revenue streams require? Types of relationships with each customer? Are they integrated with the business model? How costly are they? For whom are we creating value? Who are the most important costumers? What value do we deliver?Which of our customer´s problems are we helping to solve? What bundles of products and services are offered? Which costumer needs are we satisfying? 1 Key Resources Channels Through which channels are costumers reached? Are channels integrated?Which ones - work best? - are most cost-efficient? What key resources dovalue propositions, relationships,distribution channels, revenue streams require? Cost Structure Revenue Streams What are the most important costs inherent in the business model? Which key resources are most expensive?Which key activities are most expensive? For what value are costumers willing to pay? For what do they currently pay?How much does each revenue stream contribute to overall revenues?

8. Business models Contents 1 Business models for VC development 2 Improving small-scale farm and SME business models 3 Promoting and supporting entrepreneurship

9. Millingcassava and making attieke, Burkina

10. Value chain and business models Cassava production Atiéké making Intermediary trade Milling Trade Importers of cassava paste Artisanal producers Traders Retailers Domestic market Small growers Artisanal producers Manual grinding Mechanized producers 2 collectors Attieke makers Importers Individual business models

11. Business model canvas Business model analysis of artisanal producer Key Activities Key Partners Value Propositions CustomerRelationships CustomerSegments Regular, repeated sales Acquire paste Make / package attieke Packaged attieke Domestic markets Both urban and rural Suppliers of paste Key Resources Channels 2 Sales to traders Sales to retailers small building small equipment (pans, pots, …) Cost Structure Revenue Streams Very low fixed cost High variable cost, due to high price of paste Revenue from sales of attieke

12. Financial analysis of business models Elements of financial analysis For each of the business models retained, a financial analysis is required to make projections of the attainable income of enterprises and to calculate the investment and financing needs: • Unit cost of production (current and at improved scale and technology) • Estimated profit, income • Investment requirements to move from current to the improved status • Cash flow, ability to pay back loans • Risk 2

13. Business model evolution Manual versus mechanized cassava milling for attieke 2

14. Financial analysis Manual versus mechanized cassava milling for attieke 2

15. Business model comparison Observations on the differences 2

16. Business model canvas Business model analysis of mechanized producer Key Activities Key Partners Value Propositions CustomerRelationships CustomerSegments Regular, repeated sales Acquire cassva mill cassava Make attieke Package attieke Packaged attieke Milling service for artisanal producers Domestic markets Both urban and rural Suppliers of cassava Suppliers of milling equipment Technical service providers Key Resources Channels 2 Sales to traders Sales to retailers mechanical mill3 small buildings small equipment (pans, pots, …) Cost Structure Revenue Streams Fixed cost from depreciation Variable cost Revenue from sales of attieke And from milling services to artisanal producers

17. Assessing small-scale business models Critical parameters of biz models to check – in general • Financing of long-term and short-term capital needs (“key financial partners”)- attractiveness of the investment- access to financial institutes • Capacity utilization - volume of production needed to get beyond the break-even point- Securing the supply of additional volume of raw material and inputs(“key partners”) • Qualified workers- numbers of qualified workers available on the labour market • Sales channels- marketing of additional volumns of attieke (“costumer relationships”, “channels”) 2

18. Assessing small-scale business models Significance for VC development & social benefits Can the business model be replicated? Does it provide services or products that can become a basis for developing other business models? • Position of the business model in the value chain - upstream and downstream business linkages • Number of enterprises that can adopt the business model • Potential subsequent innovations (business partners, service providers) 2 • Assessment of the likely social benefits • Income of poor self-employed entrepreneurs • Jobs created • Economic opportunities created for (other) small-scale entrepreneurs • Availability of cheap food

19. Business models Contents 1 Business models for VC development 2 Improving small-scale farm and SME business models 3 Promoting and supporting entrepreneurship

20. Becoming a better entrepreneur • Strategies developing improved business models • “Firm-level upgrading”: Upgrading an existing business model making it more profitable for enterprises and improving its economic viability • Supporting start-ups: Creation of new types of (SME) business models • Generating and promoting new business ideas • Preparation of business plans 3

21. Promoting/supporting entrepreneurship • Generic instruments for business skills training • ILO: “Start and Improve your business” (SIYB) • “Competency based economies & formation of enterprise” - CEFE • UNCTAD: Empretec program • Sector-specific “agripreneurship” training • FBS - Farmer business school (value chain specific) • Promotion of business start-ups • Business incubation / SME counselling / Assistance services • Financial incentives • Business plan competitions • Grants, venture capital and fiscal incentives • Public co-investment 3

22. Summary: Main lessons to remember • “Module 5 is the first in the series of modules 5-10 that present the choice of VC solutions to be implemented in VCD programs. • Business model solutions are the key to VC development because improved profitability of operators is a precondition for the VCD strategy to be effective. • For one, developing the VC implies improving the business models of the VC operators. Improved business models are key solutions in any VCD strategy. • Second, business model analysis is used to assess the economic viability of VC solutions addressing environmental and social issues. • Two main instruments are available – the business model canvas, a qualitative tools, and the quantitative financial analysis of business models. The instruments complement each other. • An improved business model does not only increase profits, it also provides answers to critical factors such as raw material supply and sales channels, clarifies the capital needs and determines the repayment ability. Here is a connection to module 8 – VC finance.