Business Models and Competitive Strategy Stewart Thornhill, Ph.D .

1. Business Models and Competitive Strategy Stewart Thornhill, Ph.D.

2. Business Models “A business model describes the rationale of how an organization creates, delivers, and captures value (economic, social, or other forms of value). The process of business model construction is part of business strategy.”

3. What Strategy Is (and Isn’t) • Strategic Analysis • Industry Analysis • PEST Trends • Competitor Analysis • Resources & Capabilities NY Times:America’s newspaper of record • Mission • Purpose • Values • Organization • Structure • Process • Rewards • Symbols • People • Policies • Activities Strategy Central, integrated, externally oriented concept of how to achieve objectives • Objectives • Specific targets GE:#1 or #2 in our chosen industries Adapted from Hambrick & Fredrickson, AME 19(4) 2005

4. What Strategy Is • Strategic Analysis • Industry Analysis • PEST Trends • Competitor Analysis • Resources & Capabilities • Mission • Purpose • Values Strategy 1. Markets 2. Growth 3. Value Creation 4. Economics 5. Ecosystem • Organization • Structure • Process • Rewards • Symbols • People • Policies • Activities • Objectives • Specific targets Adapted from Hambrick & Fredrickson, AME 19(4) 2005

5. Strategy and Business Models Activities Choices Market Customers Distributors Competitors • Value • Basis of differentiation • Ecosystem • Network • Value Chain • Regulators • Social Media • Economics • Price • Cost • Risk Growth Scope Mode Pace

6. Strategy and Business Models Activities Choices Market Customers Distributors Competitors • Value • Basis of differentiation • Ecosystem • Network • Value Chain • Regulators • Social Media • Economics • Price • Cost • Risk Growth Scope Mode Pace

7. Value – Price – Cost (V - P) + (P - C) = V - C Willingness to Pay (WtP) VALUE Consumer Surplus PRICE Profit Margin Labour (L) Material (M) Capital (K) COST Price does not create value

8. Competitive Dynamics Buyers and Suppliers use bargaining power to drive costs up and prices down Willingness to Pay (WtP) VALUE Consumer Surplus PRICE Profit Margin Labour (L) Material (M) Capital (K) COST Rivals and Entrants determine the range of bargaining Substitutes can change the entire value equation

9. PersonalComputerBusinessModels telephone internet telephone internet MS Intel drives key-b monitor etc. a/s service C U S T O M E R S order sales (corp.) ship assmbly to order parts invty PC assmbly order/ ship parts invty ware- house retailer whole- saler V-A reseller

10. PersonalComputerBusinessModels MS Intel drives key-b monitor etc. 1.5 days 2 days C U S T O M E R S a/s service order ship assmbly to order parts invty PC assmbly order/ ship parts invty ware- house retailer whole- saler V-A reseller 30 days 15 days

11. Strategy and Competitive Advantage Value Frontier (state of best practice) Improvement in Operational Effectiveness Source: adapted from Porter, M.E.; 1996

12. Strategy and Competitive Advantage Value Frontier (state of best practice) Source: adapted from Porter, M.E.; 1996

13. Strategy and Competitive Advantage Value Frontier (state of best practice) Source: adapted from Porter, M.E.; 1996

14. Strategy and Competitive Advantage Value Frontier (state of best practice) Source: adapted from Porter, M.E.; 1996

15. Strategy and Competitive Advantage Value Frontier (state of best practice) Source: adapted from Porter, M.E.; 1996

16. Sustainable Growth Formula Retention Ratio r = g* = N.I. ROE x E

17. Sustainable Growth Formula Retention Ratio r A S g* = N.I. x x x E A S Financial Leverage Profit Margin Asset Intensity

18. Sustainable Growth Formula r A S g* = N.I. x x x E A S 100% 2 2 40% = 10% x x x

19. Canadian Manufacturing Data

20. Competing in the “New Normal” 2008 can best be described as a global de-leveraging Less debt is now available and this situation is unlikely to change in the foreseeable future Interest rates remain low, but businesses cannot count on long-term low-rate regime Less debt and lower risk appetites mean debt will be harder to acquire and more expensive for all but the best borrowers Increased bank regulation and reporting requirements will add costs to banks that they, in turn, will pass on to their customers Canadian exchange new normal: 40% currency appreciation in 2 years

22. Big Channel Deal Milestones and Risk Profiles Complete Business Plan Complete Prototype (technology works) First Paying Customer Order Risk Seed Funding Secondary Funding Time

24. LumiSmart Value Calculation

25. LumiSmart Value-Price-Cost Analysis 2800 Value to Customers 1500 Potential Profit Margin 750 Unit Cost 400

27. Brokerage Advertising Unit Sales Royalties Subscription

30. Strategic Leadership FORMULATES WINNING STRATEGIES EVALUATES THEM SYSTEMATICALLY EXECUTES THEM BRILLIANTLY IMPROVESPERSONAL, TEAM & ORGANIZATIONAL CAPABILITIES Now & Future: Political, Economic, Societal. Technological, Competitive. ANALYZES THEENVIRONMENTTHOROUGHLY Now & Future: Formulating and choosing winning strategies in an uncertain and rapidly changing business environment Perform Today Now & Future: Ensuring that we have the capabilities, capacity and culture to succeed in our strategic choices. Build for Tomorrow

31. Business Models and Competitive Advantage Competitive advantage lies in the gap between value and cost Look to new entrants to identify new business models Integration of internal processes with ecosystem partner activities can provide powerful barriers to imitation Different risk factors are associated with different business models – risk factors can be multiplicative The business models is not sufficient to ensure sustained performance – LEADERSHIP makes the difference