Innovative Business Model · Innovative Business Model Presentation Script Module 01 Developing a...

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Innovative Business Model

Presentation Script

Module 01Developing a Strong Business Model - Part 1

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Module 01: Developing a Strong Business Model – Part 1 Presentation Script

Learning Objectives for Modules 1 & 2

In first two modules, we will demonstrate how to develop a strong business model. We will

focus on bringing the practical aspects of developing a business model so that you can

create an actionable business plan that will increase your social impact. The lessons in these

models will discuss all elements that are necessary to developing a successful business

model. First, we will cover how to articulate a clear mission statement and the intended

impact of your model. In order to highlight these lessons, we will use three fictional social

enterprises that will act as examples throughout the course.

Introduction to Our Social Enterprises

Here are the three social enterprises, and their business structures, that we will use as

examples throughout the course. Let us introduce you to each one of these.

Cook Booster Stoves

Cook Booster Stoves, or CBS, provides last mile distribution of a new design of clean cook

stoves that utilize biofuel bubu cane feedstock (the country’s most prominent crop). The

stoves are distributed through community organizations. They are currently manufactured in

China, but the company is exploring the possibility and financial viability of manufacturing

them locally. In the last three years, Cook Booster Stoves has distributed 8,000 stoves in 12

districts of the western state of Thulan, in Bangiastan

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Water Pumps R’ Us Foundation

Our second enterprise is the Water Pumps R’ Us Foundation which drills wells in rural

communities and urban slums in 60 districts of Kenoalia. Recently, the company introduced

a new earned income model that maintains damaged pumps throughout the targeted

districts.

While they maintain a nonprofit structure, they are working toward creating community

buy-in structure to maintain local pumps.

To date, the Water Pumps R’ Us Foundation has installed 20,000 water pumps and provided

150 maintenance services per year across the 60 districts.

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Productos del Corazón

Our third example is Productos del Corazón that trains women to manufacture traditional

Mexadorian handicrafts.

After completing the four month training, participating women are given the opportunity to

join a specialized cooperative that sells its products in the domestic and international

markets through the company’s e-commerce site: www.productosdelCorazón.com.

Productos del Corazón’s model utilizes local NGOs by hosting each training at their facilities

and uses their staff as trainers.

Over the last two years, Productos del Corazón has trained 150 women, created 30

cooperatives and has sold 15,000 products via their e-commerce site.

Mission & Impact Model Come First

Now that we have been introduced to our three social enterprises, we are ready to begin.

The first component of a strong and successful business model is a clearly defined mission

statement and impact model. Here we will demonstrate how to improve your mission

statement and impact model and discuss the most effective ways to present them to

potential investors and clients. Furthermore, we will discuss how the impact model, mission

statement, and business model are linked.

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What is a Mission Statement?

A mission statement is a high-level description of what you want to change and for whom. It

is important to keep in mind that the mission statement is NOT a description of how you will

make change, but rather what you want to change.

A good mission statement must be short and concise. In fact, a solid mission statements can

be expressed in less than 10 words.

What Defines a Good Mission Statement?

Here are some characteristics of a good mission statement.

First, as we mentioned before, the statement must be short and concise.

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Second, you must indicate what you want to change and the target audience. This will

provide focus for the organization.

Third, a good mission statement must be presented in simple language so that it can be

easily understood by all parties within and outside your organization.

Last but not least, the mission statement should be achievable in a certain amount of time

and must be able to be described by a single metric.

Making Your Mission Measurable

Incorporating a single metric into your mission statement is fundamental in creating a solid

mission statement. This metric directly relates to the mission. It should be simple, and

clearly demonstrate the desired outcomes of your direct intervention. A simple metric will

stick in people’s minds so that it will easily be repeated by partners and investors.

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For example, the fast food giant, McDonald’s uses the metric “number of people served

daily.” This simple metric indicates that McDonald’s, which served 17 million people in 1984,

has been successful at serving more and more customers through the years. Now, let’s check

out the mission statements and metrics of our sample social enterprises.

We will take a more in depth look at metrics and indicators in Module 4 on Monitoring and

Evaluation. For now, it is important that you start thinking about it when defining your

mission statement.

Example - Mission Statement

Now we will look at some examples from our three fictional social enterprises.

Cook Booster Stoves mission is “to provide fuel efficient cooking solutions to people of

Bangiastan”.

Here, we see that Cook Booster Stoves’ mission is succinct and clearly expresses the what -

efficient cooking solutions - and for whom - the people of Bangiastan – they do. This mission

statement is easily understood by those inside and outside the organization and provides a

clear, guiding path.

The metric chosen, “10% adoption of clean cook stoves in region served by 2016” provides a

specific timeframe and single metric to measure against.

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In video quiz 1: Productos del Corazón

Now it is your turn to show you have understood what makes a successful mission

statement. Ready? Let’s use our third social enterprise, Productos del Corazón, as an

example.

Earlier, we saw that Productos del Corazón focuses on the training for women to

manufacture traditional Mexadorian handicrafts. Which of the following choices do you

think is the best good mission statement for the organization?

Business Model and Social Impact

The mission of your social enterprise feeds into your social impact. Your organization's social

impact will be derived from your organization’s key activities. Each component of the

business model that is shown on the right side of the screen must directly relate to the

impact you are trying to create.

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In this sense, key activities must directly relate to your mission, and we will see exactly how.

We will come back to the impact of your organization and its relationship with your key

activities in Module 4. There we will help you understand this relationship better and the

specific tools you can use.

Business Model and Social Impact

As social entrepreneurs, our goal is to pursue a mission and realize the greatest social impact.

A business model outlines the mechanisms which helps support the impact of your

organization. A strong business model communicates to investors and donors the ability of

your organization to achieve that impact and that you have a sustainable, innovative,

effective and impactful strategy

The following five lessons in Module 1 and 2 will outline the five essential elements of a

business model and how to best communicate each component of your business plan to the

outside world.

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Element 1: Target Customer

In this diagram we can see these five essential elements. The first element of the business

model we will discuss is your target customer.

In the purest terms, a target customer is who will buy your product. For most non-social

enterprises this is simple. For social enterprises however, it is more difficult to define your

target customer.

Your target customer may differ from your beneficiaries or those socially impacted by your

company. In that case, you have two target markets. In the following slides we will learn

more about how to best define your target markets.

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Market Sizing

When defining your target customer the first important step is to size your market.

Sizing your market is important to ensure your organization has the potential to scale and

grow your revenue. This is fundamental for you and your potential investors.

You can demonstrate to an investor or possible funder your market sizing by providing three

distinct levels of market size.

The largest level is total addressable market, or your TAM. Your TAM is every person that

would possibly want to purchase your product or service. What would your business look

like if you reached the largest scale possible?

Investors want to see the largest possible TAM because the larger the TAM, the larger the

possibility for your company to make money or have a great impact.

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Market Sizing

The second level in market sizing is the Served Available Market or SAM.

This is the market that you believe you can reach with your current business model without

time or other constraints. In other words, a Served Available Market is a portion of the Total

Addressable Market that you want to reach using your current business model. For example,

if your TAM is 10,000 people (100% of addressable market) and your business model

proposes to reach 3,000 people, your SAM is 30%.

Market Sizing

The third level of market size is your Serviceable Obtainable Market or SOM.

This is how many customers you think you can address in a given time frame.

The SOM is also your target market. It is a reasonable estimate of your ability to serve, given

the time frame, and therefore it is the level to focus all your energy on. In other words, your

SOM is a portion of the Served Available Market or SAM, that your current business model

can serve given specific resources and period of time.

Remember this as you will be asked to perform market segmentation and segment a TAM in

the individual exercises section.

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Segmenting the Market

There are many different kind of variables you can use to segment your TAM. The

categories include demographics variables, psychological variables and product/patronage

Characteristics among others.

When deciding how you will segment your market you must always remember the end goal

of your segmentation. Entrepreneurs must segment their market in order to determine the

different methodologies for marketing and distribution. Furthermore, it allows you to think

about what type of categories have different marketing or product needs.

Let’s look at how our fictional social entrepreneurs have sized and segmented their markets.

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Example - Cook Booster Stoves

Here, Cook Booster Stoves successfully demonstrates to investors it market segments.

Take a moment and look at the chart they have developed. When developing your chart,

make sure to put the top targeted market at the top. Note that, in order to successfully

define their markets, they utilized geography and socio-economic status as the main

segmenting factors.

Example - Pumps R’ Us

Here we see how Pumps R’ Us has executed their market segmentation.

Remember that for Pumps R’ Us, the customers are communities with water points, not

individuals buyers. The segments are therefore divided by type of community. Many of the

reasons for adoption and reasons for non-adoption are similar.

However, the small differences in the reasons can determine differences in the marketing

approach, distribution methodology and more for the different segments.

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In Video Quiz 2

Based on what you have learned so far about mission statements, which of the following

options do you think best exemplifies a mission statement?

Element 2: Competitive Analysis and Value Proposition

Now that you have sized and segmented your market, you are ready to learn more about

the second element of a business model; the competitive advantage and value proposition.

First we will walk you through the definition and ways to present your competitive

advantage. Then we will demonstrate how to create a value proposition.

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Competitive Analysis

Let’s explore why it is important to do define your competitive advantage.

People have choices, and investors need to know why people would choose a certain

product or service. Investors want to see that your model has a strong advantage over other

models with the same mission. With limited resources, investors look to invest in the most

efficient and impactful model. A competitive advantage is what characterizes and

communicates your organization’s efficacy and its value added. Even for nonprofit social

enterprises, it is important to think about your competitive advantage.

To define your competitive advantage, think about the following questions: What

distinguishes you from other players and/or competitors? What makes your organization

unique?

By demonstrating you understand the economic landscape (market segmentation) of your

product or service, and identifying why people choose you, investors will see that you have

done the research that supports your business. Additionally, your competitive advantage will

act as a vital part in developing your value proposition.

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Competitive Advantage

The ways in which you can define competitive advantage are countless and vary widely

based on circumstance. Some example parameters defining an organization’s comparative

advantage can be:

• Lowest cost: the organization provides services or products at a more affordable

price for a same market segment.

• Greatest value or highest function: the service or product provides unique features

or value to consumers.

• Easiest to use or educate about: the service or product is more intuitive to use and

user-friendly than other products or services on the market.

• Most widely distributed: the product or services are delivered through a wide range

of channels proving access to the service or product to a larger number of

consumers.

It is important to think about what traits your target market will focus on for adoption.

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The Classic 2x2 Matrix - Pumps R’ Us

You need to clearly communicate to investors why you are competitive in your marketplace.

We will now look at some examples of how to do this visually. A visual representation will

allow investors to quickly and easily see your competitive advantage in comparison to your

competitors.

First, let’s use the example of Pumps R’ Us.

On the x-axis, the organization has listed the ability to maintain a pump and provide good

tasting and clean water; where the left is the worst ability to do this and to the right is the

best ability to do this.

On the y-axis, they have listed the cost to maintain the pump. Understandably, one would

want to have the best tasting and safest water at the lowest cost. As we can see, Pumps R’

Us is situated in the part of the graph where it has both the lowest cost, and the best quality.

Therefore, Pumps R’ Us has the comparative advantage.

Using this graph, Pumps R’US analyzed competitors prices and quality of maintenance to

determine its comparative advantage and show it visually. This graphs does a great job in

showing the organization’s comparative advantage over other organizations with the same

mission.

Example - Cook Booster Stoves

Here is another visual example of how Cook Booster Stoves presents its competitive

advantage to investors.

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We see all product options consumers face laid out horizontally. These are: electric stoves,

charcoal burning stoves, firewood burning stoves, Liquefied Petroleum Gas (LPG) stoves, and

Bio Gas stoves.

Vertically, the columns are what sets CBS apart from its competitors: savings of fuel, health

benefits and speed of cooking. By going with a color code, CSB has made it easy for investors

to see how they compare to the competition. Green blocks mean that the approach offers

the benefit, yellow means that the approach offers a weaker benefit, and red means the

benefit is not offered at all with the approach. In this example, we see that bio gas stoves,

the CBS product, has the most green blocks and therefore has a competitive advantage over

other clean energy solutions.

These are just two examples of how to visualize your competitive advantage. Long lists of

pros and cons can make an investor’s head spin. So the easier you can make it for them to

understand the better off you are.

In your individual exercises document provided, we will ask you to state out and present a

visualization of your comparative advantage. Be ready!

Value Proposition

Once you have defined yourself against your competitors, you are ready to put together a

value proposition.

A value proposition is a brief description of your organization and why consumers will

choose your product in the face of alternatives. Unlike your mission statement that focuses

on the what and for whom, the value proposition describes how you make impact.

Clear? Not yet? Let’s clarify it.

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Value Proposition

Here we lay out a “recipe” or tool that is used in many entrepreneurial circles.

This recipe is composed of 6 ingredients that describe who you are targeting, how you are

reaching out, and why you are better. By going through this process you will be able to

clarify all aspects important to your business model. This recipe took will allow you to easily

and effectively define your value proposition.

Do not forget, unlike the competitive advantage, the value proposition is for internal use

only and should never be shared externally.

Let’s see examples of how the fictional social entrepreneurs used this formula to create their

value proposition.

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Cook Booster Stoves Value Proposition

Here is how Cook Booster Stoves is using this recipe to define its value proposition.

Read through the recipe and see the value proposition of Cook booster Stoves.

Water Pumps R’ Us Value Proposition

Here we see how Pumps R’ Us used the recipe tool to define its proposition. Take a moment

to read through it and see how you could use it.

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In video Quick 3

Now it is your turn to show that you have understood what competitive advantage is and

how to define it.

From the list, choose one or more factors that can help your organization have a competitive

advantage. Remember to select as many as you consider applicable.

Even though your product or project does not have to incorporate all of these factors, each

of this options represents a factor that will help you have a competitive advantage.

Therefore, all the options are correct.

Element 3: Sales, Marketing, Distribution

Element 3 of a business model refers to marketing, sales, and distribution.

While you might have your product or service well established, if you cannot get it into the

hands of your consumers, you will not be successful.

In the next slides, we will guide you through the creation of a model for marketing and for

distribution. First, let’s focus on distribution.

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How does your product get purchased?

Before thinking about your distribution model, it is important to think about some of the

following questions.

How does your product or service get purchased? Here you should take another look at the

target audience, defined in element 1, and you ask yourself, who are they? How do they buy

things? Is your good or service a one time purchase or is it on going? If it is ongoing, how will

you collect the payments? and Are there any transaction fees?

These questions highlight the small steps that have a big effect on your business model.

In addition, you must ask who is the beneficiary of the product or service, and who is paying

for the product. For instance, is it parents paying for the education for their children? If it is,

you have to think about what the parents can afford, rather than exactly what the children

want.

Types of Distribution

Now, we must think about the types of distribution and how you are going to actually get

your product into your customer’s hands.

Ask yourself, how does my customer naturally buy a things? If they buy from a store, you

want to make sure you are in the stores they go to. If your customer is an agriculture farmer,

placing your product in a rural agriculture store is the best approach.

Similarly, if your target audience is in the urban slums – that typically have many of small

kiosks – it is important for you to get your product into these stores, where your customer is

already shopping. Franchises and co-ops are also common ways to do last mile distribution.

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Another course of action could be to build your own sales force and sell person-to-person.

Benefits of this practice include receiving immediate feedback and having personal

interaction with your customer. Although this approach is expensive, the feedback can help

you understand how to improve your business and what your customers are looking for.

If building a sales force does not work for you, you can use agents that already have ‘feet on

the street.’ These agents utilize people who have developed relationships with customers

and already exist in many communities, allowing for a smooth pathway to entry for your

product.

Finally, if you have a sophisticated level of customer, internet and catalogs could be your

optimal choice for distribution.

Services sometimes have to be distributed differently then products. A company can provide

a service directly, create a network of agents or franchises to deliver a service, or deliver a

service within a partnership (think about computer technicians that provide services out of a

computer store).

Example - Cook Booster Stoves Distribution

Here we can see the complete distribution model for Cook Booster Stoves.

Cook Booster Stoves products are sold mostly through micro financing partners in both rural

and urban areas. The customers mostly need microfinance to purchase the cook stoves.

Therefore CBS has incorporated the microfinance institutions into their distribution model.

Additionally, Cook Booster Stoves has developed a single retail store in Bangiastan’s capital

Aliachi.

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Example - Productos del Corazón Distribution

Here is an example of the distribution model for Los Productos de Corazón.

This is a different type of distribution model because the beneficiaries are not the clients.

Their clients are not the women from Mexadonia, but international clients who but the

products and have greater access to the internet.

Therefore, the distribution model is to sell to fashion boutiques that the rich of Mexadoria

and international markets already go to. The internet site specifically targets international

customers with distribution centers located in a major North American and European

centers.

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The 4 P’s of Marketing

Similar to the distribution model, the components of marketing plan of a business plan are

specific to different customer segments. The most common way for businesses to present

the marketing component of a business plan is through what we will refer to as the 4 P’s

(Product, Price, Promotion and Placement).

Product

The first P is Product, which defines the products or services that you will deliver to your

beneficiaries.

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Price

The second P of marketing is Price. Price defines the amount (which could be zero) that you

will charge your customers for your product or service.

Note that for products or services in a social enterprise, the price may not entirely cover the

costs, or expenses. Therefore you may choose not to charge some, or any, of your

beneficiaries.

There are five main pricing structures for social enterprises that we will examine. They are

subsidized prices, cost based, market based, value based and ability to Pay.

Price

Here we will cover the five possible pricing structures.

Subsidized (or free) pricing is used when all or part of the costs of the product or service will

be born by a third party on either a total volume or per unit basis.

A Cost-based price structure is based on recovering all of the costs of each product or service,

also known as fully loaded cost basis, or on recovering on the marginal or incremental costs

of each product or service, also known as marginal cost basis. The fully loaded cost basis can

be determined by dividing the total expenses of the organization for a time period by the

number of units to be sold during that same period. The marginal cost basis is determined by

dividing the total costs of goods sold for all units sold in a time period by the number of units

sold in that same period.

A Market-based price structure is found when you set your price (below, the same, or

above) using the price of alternative products based on what you think a beneficiary will pay

for your product compared to the alternative.

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A Value-based structure is when you set your price using a percentage of the monetary

value of your product/service to the customer (For e.g., a percent increase in income due to

the use of your product).

Finally, the Ability to pay price structure is used when you set the price of the

product/service based on each category of the beneficiaries' ability to pay.

It is important to note that often, pricing is set using a combination of two or more of these

pricing methods. For example, a subsidized price based on a third party buyer paying all or

part of the cost-based pricing.

Promotion

The third P of marketing is Promotion. Promotion describes what you will do to make sure

your beneficiaries are aware of your product or service.

Basically, it is your marketing plan. Processes for marketing are endless. They range from

advertising, to selective outreach, to creating buzz etc.

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Placement

The last P is Placement. Placement is your distribution methodology discussed at length

previously.

This P helps you decide how you would deliver the product/service. Remember, typical

channels, in order of increasing costs, include: use an existing channel (coordination), use an

existing social group to create a channel (collaboration), or set up a completely new channel

(creation).

Next, we will see how two of our three social enterprises used this 4 P model to summarize

their marketing plan.

Example - Cook Booster Stoves Marketing

Here Cook Booster Stoves have summarized their 4 P’s in a chart.

Their single product is the fuel efficient cook stove. Since they are a for-profit, they used

market pricing to price their stoves.

As per their distribution channels, they will employ microfinance, and their main marketing

is done through their microfinance partners.

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Example - Los Productos de Corazón Marketing

Here is a diagram representing Los Productos del Corazón’s 4 Ps.

Given their hybrid model, they have two main products: their training programs, and the

handicrafts that are made by the cooperatives.

Here is a chart for the training product. The price is subsidized by grants and the sales from

the cooperative.

In order to enroll students in the training, they mobilize through local NGO partners and in

local areas.

Finally, the distribution channel for the training program is through local NGO partners, who

host the classes.

In video Quiz 3

It is your turn to show you have understood what the 4 Ps of marketing are by selecting on

the option that is NOT one of these Ps.

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Summary

We have now finished Module 1. By this time, you have worked on three basic components

of the business model. We will explore the remaining two components in module 2.

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