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1.0 What is competitive advantage?

An organization that is capable of outperforming its competitors over a long period has
sustainable competitive advantage. Examples of competitive edges include, higher profit margin,
greater return on assets, valuable resource such as brand reputation or unique competence in
producing jet engines.
In order to sustain a competitive advantage, it is imperative that you position your product
whereby it undoubtedly emphasizes your products' value. Remember that value is measured
through the eyes of the customer.
As a result, some organizations try to out-compete their adversaries because they can provide
their products and services cheaper; others compete on the basis of a unique product or service
that is hard for others to replicate; others still attempt to position themselves as the exclusive
supplier to a small but loyal niche in the marketplace.

There are many ways to achieve the advantage but only two basic types of it: cost or
differentiation advantage. A company that is able to achieve superiority in cost or differentiation is
able to offer consumers products at lower costs or with higher degree of differentiation and most
importantly, is able to compete with its rivals.

Porter (1996) asserted that there are three fundamental strategies that can be applied in any
organization: irrespective of their industry, products and services, environmental circumstances
and resources describing competitive advantage as the way a firm can choose and implement a
generic strategy to achieve a sustainable and competitive advantage.

If a company cant identify one or just doesnt possess it, competitors soon outperform it and
force to leave the market. The following diagram illustrates the basic competitive advantage
model.







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This concept has been extended by Coyne with the idea that without sustainability a competitive
advantage becomes uncertain. A firm can achieve a sustainable competitive advantage if the
customers perceive a consistent difference in attributes between its products or services and
those of the competitors: this difference is the direct consequence of a capability gap between the
firm and the competitors and can be expected to endure over time.

The key to sustainability is the differentiation among competitors products and for a producer to
enjoy a competitive advantage in a product/market segment, the difference between him and his
competitors must be felt in the marketplace: that is, they must be reflected in some
product/delivery attribute that is the key buying criterion for the market.




Three Strategies to Achieve a Competitive Advantage in the Stadium Industry

Cost Advantage.

Porter argued that a company could achieve superior performance by producing similar quality
products or services but at lower costs. In this case, company sells products at the same price as
competitors but reaps higher profit margins because of lower production costs. The company that
tries to achieve cost advantage is pursuing cost leadership strategy. Higher profit margins lead to
further price reductions, more investments in process innovation and ultimately greater value for
customers.
To become a cost leader by supplying products and services at the lowest possible cost to as many
customers as possible. To compete, the company with the higher price will lower its price to the
same level as the competition. Eventually, another company may ignore the standard price in the
market and offer the same product at an even lower price.

The other competitors have no choice but to lower their prices as well. They have to or they will
lose their business. Eventually, this leads to a situation in which the prices are lowered to the point
where no business in the market can make a profit off of that product.

Situations such as these present themselves in markets where products are relatively similar. For
example, people generally dont consider one brand of peas inherently superior to another. Due to
this fact, they are likely to just purchase the cheapest brand. Entering into a business such of this
doesnt seem like a lucrative proposition. Gaining market share and producing a sizable profit will
be very difficult.

The answer to this problem based on economic principals is to make your product seem different
from the competition. If the customers do perceive a difference, one product is less likely to be a
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perfect substitute for another.

Should not be confused with the idea of being inexpensive, or dare I say it, "cheap". It's about
value. In today's tough economic times, customers demand more value for their money, causing
marketers to examine creative ways to deliver additional value to their customers. While value
doesn't necessarily mean that the customer will pay less for your product, it does generally imply
that they will receive more for their money.
For example, Apples introduction of tablets or its business model combining mp3 device
and iTunes online music store.





Differentiation Advantage.

Differentiation advantage is achieved by offering unique products and services and charging
premium price for that. Differentiation strategy is used in this situation and company positions
itself more on branding, advertising, design, quality and new product development rather than
efficiency, outsourcing or process innovation. Customers are willing to pay higher price only for
unique features and the best quality.

To provide a differentiated set of products and services that is difficult for competitors to
replicate. A company that uses product differentiation tries to create the perception among
certain target customers that the companys version of this product or service is somehow
different and thus has added value that is not available from competitors.

Products can be differentiated through many different ways. This differentiation may for example
take the form of different packaging. For example, certain beer drinkers may be receptive to a
different can design with a wider mouth. It can also take the form of marketing. For example, a cell
phone company may offer the same services to all age groups. However, it may target certain
kinds of cell phones to teenagers and others to senior citizens.

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The possibilities are nearly limitless. As long as a business can come up with a creative way to
differentiate its product or service, gaining a competitive advantage is possible.

The cost leadership and differentiation strategies are not the only strategies used to gain
competitive advantage. Innovation strategy is used to develop new or better products, processes
or business models that grant competitive edge over competitors.

Your product is distinguished from that of your competitors by giving customers more value and
greater perceived benefits than they could obtain elsewhere. You have to clearly state what your
product has, or can do, as compared to your competitor's product - why your product is different
and therefore better!
Niche
A strategy that concentrates, or focuses, on a specific market segment. This focus can be
combined with other strategic marketing techniques, such as differentiation or low cost, to
achieve sustainable competitive advantage. It is very difficult to be all things to all people;
however, it is reasonable to assume that you can cater to the needs to a specific market segment.
Pre-emptive Move Strategy
Involves gaining a strategic advantage by being the first to enter the market with a new product or
service, a new use for an existing product, a new transaction process, or other innovation. If
implemented successfully, this strategy can create barriers to entry for others that attempt to
follow you into the marketplace.
Synergy (or Joint Venture)
Companies, or individuals, that combine assets and skills to achieve a strategic advantage.
Examples of the synergy strategy could include: sharing customer databases, expanding your
product mix, increased market credibility, cross-selling, reduced operating costs, and so on.
The most common routes to sustainable competitive advantage involve one or more of the
following basic strategies: differentiation, low cost, niche, preemptive move, and synergy. These
three strategic positions are described below:


Focus Strategy

To provide a set of products and services to a niche in the market with the intention of dominating
market share. Generic competitive strategies answer the most basic of questions facing a venue
manager in forming a strategic choice: What is going to be our source of competitive advantage?
In other words, every organization must take a position somewhere in the marketplace. The
challenge is to find a position that is both opportune and advantageous.

1.1 How a company can achieve it?

An organization can achieve an edge over its competitors in the following two ways:


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Through External Changes.

When PEST factors change, many opportunities can appear that, if seized upon, could provide
many benefits for an organization. A company can also gain an upper hand over its competitors
when its capable to respond to external changes faster than other organizations.

By Developing them Inside the Company.

A firm can achieve cost or differentiation advantage when it develops VRIO (valuable, rare, hard to
imitate and organized) resources, unique competences or through innovative processes and
products.

1.2 External Changes - Changes in PEST factors.

When political, economic, socio-cultural and technological factors change many opportunities
arise that can be exploited by an organization to achieve superiority over its rivals.

For example, new superior machinery, which is manufactured and sold only in South Korea,
would result in lower production costs for Korean companies and they would gain cost
advantage against competitors in a global environment.

Changes in consumer demand, such as trend for eating more healthy food, can be used to gain at
least temporary differentiation advantage if a company would opt to sell mainly healthy food
products while competitors wouldnt.
For example, Subway and KFC.

If opportunities appear due to changes in external environment why not all companies are able to
profit from that? Its simple, companies have different resources, competences and capabilities
and are differently affected by industry or macro environment changes.

1.3 Companys Ability to Respond Fast to Changes.

The advantage can also be gained when a company is the first one to exploit the external change.
Otherwise, if a company is slow to respond to changes it may never benefit from the arising
opportunities.

1.4 Internal Environment

VRIO Resources.

A company that possesses VRIO (valuable, rare, hard to imitate and organized) resources has an
edge over its competitors due to superiority of such resources. If one company has gained VRIO
resource, no other company can acquire it (at least temporarily). The following resources have
VRIO attributes:

Intellectual property (patents, copyrights, trademarks)
Brand equity
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Culture
Know-how
Reputation

Unique Competences.

Competence is an ability to perform tasks successfully and is a cluster of related skills, knowledge,
capabilities and processes. A company that has developed a competence in producing
miniaturized electronics would get at least temporary advantage as other companies would find it
very hard to replicate the processes, skills, knowledge and capabilities needed for that
competence.

Innovative Capabilities.

Most often, a company gains superiority through innovation. Innovative products, processes or
new business models provide strong competitive edge due to the first mover advantage.































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2.0 McKinsey 7s Model

McKinsey 7s model is a tool that analyzes firms organizational design by looking at 7 key
internal elements: strategy, structure, systems, shared values, style, staff and skills, in order to
identify if they are effectively aligned and allow organization to achieve its objectives.

McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert
Waterman and Julien Philips with a help from Richard Pascale and Anthony G. Athos. It sought to
present an emphasis on human resources (Soft S), rather than the traditional mass production
tangibles of capital, infrastructure and equipment, as a key to higher organizational performance.

In McKinsey model, the seven areas of organization are divided into the soft and hard areas.
Strategy, structure and systems are hard elements that are much easier to identify and manage
when compared to soft elements. On the other hand, soft areas, although harder to manage, are
the foundation of the organization and are more likely to create the sustained competitive
advantage.





Understanding the Tool

The goal of the model was to show how 7 elements of the company: Structure, Strategy, Skills,
Staff, Style, Systems, and Shared values, can be aligned together to achieve effectiveness in a
company. The key point of the model is that all the seven areas are interconnected and a change
in one area requires change in the rest of a firm for it to function effectively. The shape of the
model emphasizes interconnectedness of the elements.

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The model can be applied to many situations and is a valuable tool when organizational design is
at question. The most common uses of the framework are:

To facilitate organizational change.
To help implement new strategy.
To identify how each area may change in a future.
To facilitate the merger of organizations.

Strategy

is a plan developed by a firm to achieve sustained competitive advantage and successfully
compete in the market. What does a well-aligned strategy mean in 7s McKinsey model? In general,
a sound strategy is the one thats clearly articulated, is long-term, helps to achieve competitive
advantage and is reinforced by strong vision, mission and values.

But its hard to tell if such strategy is well-aligned with other elements when analyzed alone. So
the key in 7s model is not to look at your company to find the great strategy, structure, systems
and etc. but to look if its aligned with other elements. For example, short-term strategy is usually a
poor choice for a company but if its aligned with other 6 elements, then it may provide strong
results.

Structure

represents the way business divisions and units are organized and includes the information of who
is accountable to whom. In other words, structure is the organizational chart of the firm. It is also
one of the most visible and easy to change elements of the framework.

Systems

are the processes and procedures of the company, which reveal business daily activities and how
decisions are made. Systems are the area of the firm that determines how business is done and it
should be the main focus for managers during organizational change.

Skills

are the abilities that firms employees perform very well. They also include capabilities and
competences. During organizational change, the question often arises of what skills the company
will really need to reinforce its new strategy or new structure.

Staff Elements

element is concerned with what type and how many employees an organization will need and how
they will be recruited, trained, motivated and rewarded.

Style Elements

represents the way the company is managed by top-level managers, how they interact, what
actions do they take and their symbolic value. In other words, it is the management style of
companys leaders.
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Shared Values

are at the core of McKinsey 7s model. They are the norms and standards that guide employee
behavior and company actions and thus, are the foundation of every organization.

2.1 How to use the tool?

As we pointed out earlier, the McKinsey 7s framework is often used when organizational design
and effectiveness are at question. We provide the following steps that should help you to apply
this tool.

Step 1. Identify the areas that are not effectively aligned

During the first step, your aim is to look at the 7S elements and identify if they are effectively
aligned with each other. Normally, you should already be aware of how 7 elements are aligned in
your company, but if you dont you can use the checklist from WhittBlog to do that.

After youve answered the questions outlined there you should look for the gaps, inconsistencies
and weaknesses between the relationships of the elements. For example, you designed the
strategy that relies on quick product introduction but the matrix structure with conflicting
relationships hinders that so theres a conflict that requires the change in strategy or structure.

Step 2. Determine the optimal organization design

With the help from top management, your second step is to find out what effective organizational
design you want to achieve. By knowing the desired alignment you can set your goals and make
the action plans much easier. This step is not as straightforward as identifying how seven areas are
currently aligned in your organization for a few reasons.

First, you need to find the best optimal alignment, which is not known to you at the moment, so it
requires more than answering the questions or collecting data. Second, there are no templates or
predetermined organizational designs that you could use and youll have to do a lot of research or
benchmarking to find out how other similar organizations coped with organizational change or
what organizational designs they are using.

Step 3. Decide where and what changes should be made

This is basically your action plan, which will detail the areas you want to realign and how would
you like to do that. If you find that your firms structure and management style are not aligned
with companys values, you should decide how to reorganize the reporting relationships and
which top managers should the company let go or how to influence them to change their
management style so the company could work more effectively.





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Step 4. Make the necessary changes

The implementation is the most important stage in any process, change or analysis and only the
well-implemented changes have positive effects. Therefore, you should find the people in your
company or hire consultants that are the best suited to implement the changes.

Step 5. Continuously review the 7s

The seven elements: strategy, structure, systems, skills, staff, style and values are dynamic and
change constantly. A change in one element always has effects on the other elements and
requires implementing new organizational design. Thus, continuous review of each area is very
important.

Example: Well use a simplified example to show how the model should be applied to an
existing organization.

The model is simple, but its worth the effort to do one for your business to gather some insight
and find out if your current organization is working effectively.

Current position #1

Well start with a small startup, which offers services online. The companys main strategy is to
grow its share in the market. The company is new, so its structure is simple and made of a very
few managers and bottom level workers, who undertake specific tasks. There are a very few
formal systems, mainly because the company doesnt need many at this time.

Alignment

So far the 7 factors are aligned properly. The company is small and theres no need for complex
matrix structure and comprehensive business systems, which are very expensive to develop.


Aligned
Strategy Market penetration Yes
Structure Simple structure Yes
Systems
Few formal systems. The systems are mainly concerned with customer
support and order processing. There are no or few strategic planning,
personnel management and new business generation systems.
Yes
Skills
Few specialized skills and the rest of jobs are undertaken by the
management (the founders).
Yes
Staff
Few employees are needed for an organization. They are motivated by
successful business growth and rewarded with business shares, of which
market value is rising.
Yes
Style Democratic but often chaotic management style. Yes
Shared Values The staff is adventurous, values teamwork and trusts each other. Yes



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Current position #2

The startup has grown to become large business with 500+ employees and now maintains 50 %
market share in a domestic market. Its structure has changed and is now a well-oiled bureaucratic
machine.

The business expanded its staff, introduced new motivation, reward and control systems. Shared
values evolved and now the company values enthusiasm and excellence. Trust and teamwork has
disappeared due to so many new employees.

Alignment

The company expanded and a few problems came with it. First, the companys strategy is no
longer viable. The business has a large market share in its domestic market, so the best way for it
to grow is either to start introducing new products to the market or to expand to other
geographical markets. Therefore, its strategy is not aligned with the rest of company or its goals.
The company should have seen this but it lacks strategic planning systems and analytical skills.

Business management style is still chaotic and it is a problem of top managers lacking
management skills. The top management is mainly comprised of founders, who dont have the
appropriate skills. New skills should be introduced to the company.

Aligned
Strategy Market penetration No
Structure Bureaucratic machine Yes
Systems
Order processing and control, customer support and personnel
management systems.
No
Skills
Skills related to service offering and business support, but few managerial
and analytical skills.
No
Staff Many employees and appropriate motivation and reward systems. Yes
Style Democratic but often chaotic management style. No
Shared Values Enthusiasm and excellence No

Current position #3

The company realizes that it needs to expand to other regions, so it changes its strategy from
market penetration to market development. The company opens new offices in Asia, North and
South Americas. Company introduced new strategic planning systems hired new management,
which brought new analytical, strategic planning and most importantly managerial skills.
Organizations structure and shared values havent changed.

Alignment

Strategy, systems, skills and style have changed and are now properly aligned with the rest of the
company. Other elements like shared values, staff and organizational structure are misaligned.
First, companys structure should have changed from well-oiled bureaucratic machine to division
structure. The division structure is designed to facilitate the operations in new geographic regions.

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This hasnt been done and the company will struggle to work effectively. Second, new shared
values should evolve or be introduced in an organization, because many people from new cultures
come to the company and they all bring their own values, often, very different than the current
ones. This may hinder teamwork performance and communication between different regions.
Motivation and reward systems also have to be adapted to cultural differences.

Aligned
Strategy Market development Yes
Structure Bureaucratic machine No
Systems
Order processing and control, customer support, personnel management
and strategic planning systems.
Yes
Skills Skills aligned with companys operations. Yes
Staff
Employees form many cultures, who expect different motivation and reward
systems.
No
Style Democratic style Yes
Shared
Values
Enthusiasm and excellence No

Weve showed the simplified example of how the Mckinsey 7s model should be applied. It is
important to understand that the seven elements are much more complex in reality and youll
have to gather a lot of information on each of them to make any appropriate decision.

2.2 Three Trends that Change Business: Mobile, Social and Cloud

Businesses faces a dynamic landscape where both customer and employee demands are
changing. The world is changing, and there are three market shifts that are driving this change
mobile, social and cloud. These trends change what we connect, how we connect and how we
transact.

Obviously mobile is changing what is connected. We are moving beyond laptops and smartphones.
Its moving to billions of connected devices as we connect tablets, cars, machinery and medical
equipment. Ericcson and Cisco estimates there will be 50 billion connected devices by 2020 as we
look to add sensors in just about everything. These devices can be as sophisticated as a tablet or
as simple as a sensor that monitors humidity.

Weve discussed consumerization of IT for years. Its happening and its not all bad. Consumers are
now willing to buy their own devices and bring them into the workplace and this is the year that
CIOs embrace this trend. As a result, companies can move from 15% of the employees being
mobile to over 80%. So clearly mobile is changing what we connect in terms of devices and in
terms of corporate supported assets.

In addition to what we connect, mobile also changes how businesses connected. Not only are
devices changing, but the software landscape is changing as well. Its the first time in roughly 15
years that anyone has considered using an OS other than MSFTs as a foundation for software.

There are at least four major contenders in the battle for the next-generation OS. Im sure we
could debate the winners and loser for hours but the end result is the same. The software
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landscape will fundamentally change. Existing enterprise apps will be rebuilt to operate over
multiple operating systems.

Apps will be screen adaptable and network aware. And most importantly, new apps will be
designed with mobile first in mind. The emergence of these new post PC apps will change who our
IT vendors are. Perhaps its Microsoft, Oracle and SAP. However, this isnt guaranteed, which
means at least $450B in software market cap may shift to new vendors as we make this
transition. Advances in the mobile web mean that some companies are now considering writing
full applications that run entirely in the Web.

The second trend, social combines with mobile to change how businesses engage with its
customers and employees. Social is changing the way firms market and deliver customer service.
But social isnt something that is reserved for consumers. Social software is changing our
enterprise collaboration tools and its changing engagement within business apps such as CRM.
Game mechanics are being used in retail for B2C but also in business environments for rewards.

Finally, cloud and virtualization are changing the fundamental infrastructure of a business. Cloud
adds new computing models that changes storage and processing. CIOs are looking at network
virtualization, not just VPNs, but also the opportunity to decouple network services from the
underlying physical hardware.

IT is evaluating what lives on premise versus off-premise as many firms opt to move to a hybrid
cloud environment. Cloud services provides a test and development environment for new apps
and has opened the floodgates for new software innovation as well as new pricing and distribution
models with SaaS.

On one hand, mobile-social-cloud empower businesses by allowing employees to access corporate
data anywhere and improve communication with better social collaborative tools. On the other, IT
is overwhelmed by security, compliance and rapid change. Its no surprise virtualization strategies
and mobilizing the business topped the list of IT leader concerns for 2012. In fact, over 60% of the
firms we surveyed had these items top of mind.

We are at the beginning of the next twenty years of IT evolution. These trends will combine to
create the biggest technology shift since the Internet. Successful companies will use these
technologies to transform the business. I look forward to watching the change unfold.













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3.0 Modes of Entry into International Markets (Place) - How does an organization enter an
overseas market?

Background

A mode of entry into an international market is the channel which your organization employs to
gain entry to a new international market. This lesson considers a number of key alternatives, but
recognizes that alteratives are many and diverse. Here you will be consider modes of entry into
international markets such as the Internet, Exporting, Licensing, International Agents, International
Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and International Sales
Subsidiaries. Finally we consider the Stages of Internationalization.

It is worth noting that not all authorities on international marketing agree as to which mode of
entry sits where. For example, some see franchising as a stand alone mode, whilst others see
franchising as part of licensing. In reality, the most important point is that you consider all useful
modes of entry into international markets - over and above which pigeon-hole it fits into. If in
doubt, always clarify your tutor's preferred view.

The Internet

The Internet is a new channel for some organizations and the sole channel for a large number of
innovative new organizations. The eMarketing space consists of new Internet companies that have
emerged as the Internet has developed, as well as those pre-existing companies that now employ
eMarketing approaches as part of their overall marketing plan. For some companies the Internet is
an additional channel that enhances or replaces their traditional channel(s). For others the
Internet has provided the opportunity for a new online company. More

Exporting

There are direct and indirect approaches to exporting to other nations. Direct exporting is
straightforward. Essentially the organization makes a commitment to market overseas on its own
behalf. This gives it greater control over its brand and operations overseas, over an above indirect
exporting. On the other hand, if you were to employ a home country agency (i.e. an exporting
company from your country - which handles exporting on your behalf) to get your product into an
overseas market then you would be exporting indirectly. Examples of indirect exporting include:

Piggybacking whereby your new product uses the existing distribution and logistics of
another business.
Export Management Houses (EMHs) that act as a bolt on export department for your
company. They offer a whole range of bespoke or a la carte services to exporting
organizations.
Consortia are groups of small or medium-sized organizations that group together to market
related, or sometimes unrelated products in international markets.
Trading companies were started when some nations decided that they wished to have
overseas colonies. They date back to an imperialist past that some nations might prefer to
forget e.g. the British, French, Spanish and Portuguese colonies. Today they exist as
mainstream businesses that use traditional business relationships as part of their
competitive advantage.

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Licensing

Licensing includes franchising, Turnkey contracts and contract manufacturing.

Licensing is where your own organization charges a fee and/or royalty for the use of its
technology, brand and/or expertise.
Franchising involves the organization (franchiser) providing branding, concepts, expertise,
and infact most facets that are needed to operate in an overseas market, to the franchisee.
Management tends to be controlled by the franchiser. Examples include Dominos Pizza,
Coffee Republic and McDonald's Restaurants.
Turnkey contracts are major strategies to build large plants. They often include a the
training and development of key employees where skills are sparse - for example, Toyota's
car plant in Adapazari, Turkey. You would not own the plant once it is handed over.

International Agents and International Distributors

Agents are often an early step into international marketing. Put simply, agents are individuals or
organizations that are contracted to your business, and market on your behalf in a particular
country. They rarely take ownership of products, and more commonly take a commission on
goods sold. Agents usually represent more than one organization. Agents are a low-cost, but low-
control option.

If you intend to globalize, make sure that your contract allows you to regain direct control of
product. Of course you need to set targets since you never know the level of commitment of your
agent. Agents might also represent your competitors - so beware conflicts of interest. They tend to
be expensive to recruit, retain and train. Distributors are similar to agents, with the main
difference that distributors take ownership of the goods. Therefore they have an incentive to
market products and to make a profit from them. Otherwise pros and cons are similar to those of
international agents.

Strategic Alliances (SA)

Strategic alliances is a term that describes a whole series of different relationships between
companies that market internationally. Sometimes the relationships are between competitors.
There are many examples including:
Shared manufacturing e.g. Toyota Ayago is also marketed as a Citroen and a Peugeot.
Research and Development (R&D) arrangements.
Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom.
Marketing agreements.
Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain
independent and separate.

Joint Ventures (JV)

Joint Ventures tend to be equity-based i.e. a new company is set up with parties owning a
proportion of the new business. There are many reasons why companies set up Joint Ventures to
assist them to enter a new international market:

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Access to technology, core competences or management skills. For example, Honda's
relationship with Rover in the 1980's.
To gain entry to a foreign market. For example, any business wishing to enter China needs
to source local Chinese partners.
Access to distribution channels, manufacturing and R&D are most common forms of Joint
Venture.

3.1 Overseas Manufacture or International Sales Subsidiary

A business may decide that none of the other options are as viable as actually owning an overseas
manufacturing plant i.e. the organization invests in plant, machinery and labor in the overseas
market. This is also known as Foreign Direct Investment (FDI). This can be a new-build, or the
company might acquire a current business that has suitable plant etc. Of course you could
assemble products in the new plant, and simply export components from the home market (or
another country).

The key benefit is that your business becomes localized - you manufacture for customers in the
market in which you are trading. You also will gain local market knowledge and be able to adapt
products and services to the needs of local consumers. The downside is that you take on the risk
associated with the local domestic market. An International Sales Subsidiary would be similar,
reducing the element of risk, and have the same key benefit of course. However, it acts more like a
distributor that is owned by your own company.

3.2 Internationalization Stages

So having considered the key modes of entry into international markets, we conclude by
considering the Stages of Internationalization. Some companies will never trade overseas and so
do not go through a single stage. Others will start at a later or even final stage. Of course some will
go through each stage as summarized now:

Indirect exporting or licensing
Direct exporting via a local distributor
Your own foreign presences
Home manufacture, and foreign assembly
Foreign manufacture













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4.0 Understanding Business Model Fundamentals
This post attempts to answer the following 3 basic questions on business models: What is a
business model? Why do we need to study business models? How to describe a business model?
Business model is a term that is very loosely used in our day-to-day conversations.
Business managers often use this term, without a complete understanding of it. When they use
the term business model, they are either referring to the revenue model or the operating model.
But, business model is much more than that. Before we start discussing business models, let us
discuss what a model is and why do we build models.
A model is a simplified version of something. It is the scaled representation of a real object. The
real object can be much larger or smaller than the model representation. Models are often
discussed in the field of architecture, where we build models for buildings and other physical
structures. Models not only help in the process of planning and construction of new structures,
but also in the understanding the design of existing structures. Models are also used in the field of
engineering to showcase the design of physical products such as automobiles, aircrafts, rockets,
railways, and ships. The goal is simple: Increase our understanding of the real world objects while
eliminating the unimportant details.
While physical models resemble the real world objects they represent, there exist schematic
models and mathematical models that are more abstract than a physical model. Schematic models
provide a pictorial representation of conceptual relationships. Diagrams, Charts, and Blueprints
are examples of a schematic model. They help us avoid costly mistakes. They also help us in asking
what if questions.
A business model is a kind of schematic model that helps us gain the complete picture of an
organization business from a high-level perspective. A business model is a framework that helps us
understand how different entities of a business come together to create value for customers.
These entities may include Marketing, Sales, Engineering, Manufacturing, Production, HR, Finance,
IT, Administration, Partners, and Suppliers. A good understanding of business models can help
managers in these different entities with the following:
1. Quickly gain the big picture of the business. Understand how different pieces fit together.
2. Develop the business models vocabulary. Learn to speak the language of business models.
3. Develop a shared understanding. Conduct high-quality discussions and meetings among
inter-disciplinary teams.
4. Think beyond product/service innovation. Consider innovation in different facets of business.
5. Bring structure to the innovation thought process.
In Architecture, any physical structure consists of several building blocks that need to be
assembled to build the structure. For example, a building has stairs, elevators, electricity system,
water system etc. Similarly, a business model has several components that need to be defined to
understand a business. Several scholars have attempted to define the basic components and have
built different frameworks using those components. The following papers discuss the attempt of
those scholars:

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A Business Model describes the rationale of how an organization creates, delivers, and captures
value.
As per Dr. Osterwalder, a business model can be described through 9 basic building blocks. These
are listed as follows:
1. Customer segments: Who are the group of customers?
2. Value proposition: What is the offer for each customer segment?
3. Channels: How to reach each of the customer segments?
4. Customer Relationships: How to relate with customers over time?
5. Revenue streams: How to earn revenues?
6. Key resources: What assets are required to run the business?
7. Key activities: What are the important activities/processes?
8. Partner network: Who are the key partners and suppliers?
9. Cost structure: What are the important costs?
These 9 basic building blocks can be shown visually using a diagram called Business Model
Canvas.
A good understanding of business model canvas is essential before the understanding of business
models of different companies. This is because it visually demonstrates the inter-linkages between
different elements of a business model. The canvas is very practical and easy-to-use. The canvas
helps in generating new ideas by asking few key questions. Please visit the following link to
download the business model canvas and learn those key questions.

4.1 Business Model Canvas Examples - Understanding LinkedIn Business Model

LinkedIn is the worlds largest professional network. As of 31
st
March 2012, LinkedIn had 161
million members in over 200 countries. LinkedIn helps the professionals stay connected with each
other by creating and managing a professional identity and building a professional network.
LinkedIn has implemented a Multi-Sided Platform, which offers different solutions to different
categories of users.

LinkedIn provides the following categories of solutions to its network members for free: An ability
to manage professional identity using tools such as Profile and Profile Stats; An ability to build and
manage professional networks using tools such as LinkedIn Connections, Invitations, and
Introductions; Access to knowledge and insights using tools such as LinkedIn Groups, Network
Updates, News, Answers etc.

LinkedIn is a good example of a Freemium business model. While the core offering is free for its
network members, premium offering comes for a price. The premium offering includes tools such
as LinkedIn InMails and Profile Stats Pro. The users can upgrade from a basic account type to
Business, Business Plus, or Executive account types. The premium account types provide access to
the premium offerings.

LinkedIn platform induces the same-side network effects among its members. This helps in
growing the network through word-of-mouth or connection-request-emails. As the average
number of member connections grows, the strength of the network improves. The more the
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network becomes strong, the more attractive it becomes to the users on the other sides of the
platform. The users on the other sides of the platform include Recruiters, Marketers & Advertisers,
and Developers.

LinkedIn offers LinkedIn Corporate Solutions, LinkedIn Jobs, and Subscription products to the
Recruiters. LinkedIn Recruiter is their flagship hiring solution to find, contact, and hire candidates.
Self-service postings help recruiters to post and manage job opportunities. LinkedIn Referral
engine helps organizations leverage their employees network to find qualified candidates.

LinkedIn provides job recommendations to its members over Job You May Be Interested In
(JYMBII) section of a member home page. LinkedIn offers Talent Basic, Talent Finder, and Talent
Pro as subscription products to recruiters and hiring managers. LinkedIn offers Job Seeker family
of products Job Seeker Basic, Job Seeker, and Job Seeker Plus to its members to stand out to
recruiters and hiring managers.

LinkedIn marketing solutions enable marketers and advertisers to reach their target audience.
LinkedIn Ads is their self-service product to target advertisements to specific members based on
their profile information. Advertisers can setup and manage multiple campaigns and continuously
monitor clicks, impressions, click-through rates, and average cost-per-click.

LinkedIn Ads for Enterprise product targets larger advertisers that receive dedicated account
management and get access to additional marketing solutions such as Display Ads, Custom
Groups, Sponsorships, Whitepapers, and Recommendation Ads.

LinkedIn provides a set of open APIs and embeddable Widgets to the developer community. These
APIs and Widgets provide access to the content in the LinkedIn database and help the developers
build third-party applications leveraging LinkedIn data.

LinkedIn revenues come from 3 key revenue streams: Hiring Solutions, Marketing Solutions, and
Premium Subscriptions. For CY 2011, these 3 streams represented 50%, 30%, and 20% of total
revenues of $522 Million. LinkedIn sells Hiring and Marketing solutions through field sales
organization and through their website.

The Premium subscriptions are primarily sold online. Field Sales organization comprises of direct
sales force, agencies, and resellers. While online channel is characterized by lower average selling
prices, the offline channel is characterized by longer sales cycle, higher average selling prices, and
longer contract terms. During CY 2011, Field sales contributed 55% of the total sales, whereas
online channel contributed 45% of the total sales.

LinkedIn business model can be represented over the business model canvas as follows. Click the
image to see it on Full Screen.
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As discussed earlier, LinkedIn drives almost half of its revenues from Hiring solutions. Here,
LinkedIn competes with established online recruiting companies such as Monster+HotJobs,
Careerbuilder, and Indeed.com, talent management companies such as Taleo, and traditional
recruiting firms. Then, there are companies new to the recruiting industry such as BranchOut,
which offers a Facebook application for finding jobs and recruiting employees.

In a span of less than 2 years since its launch in July 2010, BranchOut has grown into largest
professional networking application on Facebook with over 25 million registered users and 400
million professional profiles. With over 3 million jobs, it operates the largest job board on
Facebook.

How big, you think, is the threat of BranchOut to LinkedIn? In case Facebook decides to acquire
BranchOut, then how big the threat can become? On 3 May 2012, LinkedIn announced acquisition
of Slideshare, a leading professional content sharing community, for $118 Million. How acquisition
of Slideshare is going to help LinkedIn boost its revenue growth and overcome the threat from
companies such as BranchOut?

4.2 Understanding Facebook Business Model

Facebook is the leading Social Networking Site (SNS) of the World. Facebook mission is to make
the world more open and connected. Facebook has built a Multi-sided Platform (MSP) that serves
different customer segments with different value propositions.

Facebook helps Internet users stay connected with their friends, families, and colleagues. It helps
them discover and learn more about what is going on in the world around them. It helps them
express themselves by sharing their opinions, ideas, photos, and activities.

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Facebook provides a number of products, free of charge, to its users. These include: Timeline,
News Feed, Photos and Videos, Messages (Email, Chat, Text Messaging), Groups, Lists, Events,
Places, Subscribe, Ticker, Notifications, and Facebook Pages.

Facebook had 845 Million Monthly Active Users (MAU) by the end of 2011. The following statistics
are further illustrative of Facebook size and scale: 100 Billion friendships; 250 Million photos
uploaded every day; 2.7 Billion Likes and Comments per day. More than 425 Million MAUs, nearly
half of Total MAUs, used Facebook products on Mobile. With so many users using Facebook on a
regular basis, it has become an attractive destination for advertisers and developers alike.



Facebook offers a unique combination of reach, relevance, social context, and engagement to the
advertisers. Advertisers can engage with users based upon the information shared by users such
as Age, Gender, Location, Education, Work history or specific Interests. Facebook offers
advertisers an ability to include social context in their Ads. Social context highlights a users
connections with a brand or business. Businesses can also create Facebook Pages to engage with
interested customers and simulate an ongoing dialog with them.

Facebook offers development tools and APIs that enables developers to easily integrate with
Facebook. Developers can use Facebook platform to build apps and websites that are more
personalized, social, and engaging.

Facebook offers developers Open Graph API and Social Plugins that developers can use build
different user experiences, including Apps on Facebook, Desktop Apps, Mobile Apps, and
Platform-integrated websites. At the end of 2011, more than 7 million apps and websites had
been integrated with Facebook. Facebook offers developers an online payment infrastructure that
enables developers to receive payments from the users in an easy-to-use and secure environment.

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While advertisements remain a key source of revenue for Facebook, the contribution from
payments is increasing consistently. Payment revenues increased from nearly 2% in 2009 to 15% in
2011. Ad revenues contributed 85% to the total revenues in 2011.

Facebook is investing heavily into Facebook-owned data centers. This is to support user growth,
increased user engagement, and delivery of new products. Facebook data centers currently store
more than 100 petabytes (100 quadrillion bytes) of photos and videos. This is going to increase
further in the future as users engage more on Facebook. To support these massive storage and
computing needs, Facebook custom designed and built their software, servers, and data centers
from the ground up.

To increase the user engagement even further, Facebook has partnered with companies such as
Netflix, Hulu, Spotify, Washington Post providing online movies, TV shows, music, and news. Their
apps help users share what they are watching, listening, or reading with their friends and family.

Facebook business model can be represented over the Canvas as follows. Click the image to see it
on Full Screen.



Yesterday, on 9
th
April 2012, Facebook announced a decision to buy Instagram for $1 Billion.
Instagram is a photo sharing application that allows its users to apply digital filters to the photos
and then share them on different social networking services.

The acquisition news is generating lot of buzz because Instagram had no revenues and only 13
employees. However, following statistics of Instagram are impressive: 30 million+ Registered
Users; 1 billion+ Photos Uploaded; 5 million+ Photos Per Day; 575 Likes Per Second (~50 Million
Likes per Day); 81 Comments Per Second (~7 Million Comments per Day).

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In your opinion, how Instagram complements Facebook Business Model? Facebook spent about a
quarter of cash they had at the end of 2011 on the acquisition. Was it worth it? Does the Canvas
representation of Facebook business model helps you in assessing the acquisition fit?

4.3 Understanding Google Business Model

Google is among the leading Technology companies in the World. Google is most popular for its
Search engine, which helps Internet users get useful results in response to their queries. Google
maintains vast index of websites and helps users search different types of content such as Text,
Images, Audio, Video, Blogs, News, and Maps through its products. Gmail is another very popular
product of Google, for free email services to the users. Google provides social networking services
to its users through its Google+ product.

Google provides its services to the Internet users for free. Google makes the revenues from
Advertisers who are interested in reaching out to the online users. Google helps them create text-
based Ads through Google Adwords a self-serve auction-based advertising program.

These ads appear next to the search results. Most advertisers pay Google on a Cost per Click (CPC)
basis, which means advertisers pay when users click their Ads. Google helps advertisers extend
their Ad campaigns to the Google Network members websites through its Adsense program.
Google Network members get a share of Ad revenues in return.

Google provides Display Advertising services through DoubleClick advertising technology. Display
advertising comprises of video, text, images, and other interactive ads. Display ads appear on
Youtube, Google Finance, and Google Network member websites.

Google has developed Android an open source mobile software platform that can be used by
handset manufacturers to install on their devices and by developers to create applications for
mobile devices. Google provides Chrome browser for web browsing. Google is working with
several OEMs (Original Equipment Manufacturers) to bring computers running Chrome OS.

Google serves the Enterprise market through hosted web-based applications called Google Apps.
Google Apps include Gmail, Google Docs, Google Calendar, and Google Sites. People need a
browser and an Internet connection to use the Google Apps.

Google has developed a Global Sales and Support infrastructure with specialized teams across
different industries. Google multi-product sales force sells campaigns that include Search, Display,
and Mobile advertising. Google helps most of its customers with a self-serve approach and tries to
bring automation where possible. Google has built a global support team to help advertisers and
Google Network members to get the maximum value out of its offerings. Google sales team focus
on building relationships with largest advertisers and leading Internet companies.

Google business has 4 key costs elements: R&D, Data center operations, Traffic Acquisition, and
Sales & Marketing. Google invests heavily into R&D to create new products and improve existing
products. Google is estimated to have over 1 million servers in data centers around the world that
process nearly 1 billion search requests every day. Google has invested heavily in these data
centers and managing their operations continue to be a key cost element.

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Traffic acquisition costs comprises of money paid to the Google Network websites under the
Adsense program and to the distribution partners who distribute Google Toolbar and other
products or drive traffic to the Google websites. Google Sales & Marketing costs include the cost
of managing global sales and support teams as well as advertising and promotional expenditures.

Google generates over 96% of its revenues from advertising and this has remained true for last
several years. Though Google has evolved its Search offering, got into Mobile space, trying to get
into Operating systems, and has build offerings for the Enterprises, any of them has not yet
resulted into major revenue streams.

Apple, on the other hand, earned 70% of the revenues from products (iPhone and iPad) that didnt
existed 5 years ago. Can Google do that? Can Google innovate its Business Model so that 50% of
revenues in 2017 will not come from advertising, but from Google new value propositions in next
5 years? In your opinion, what can be the new revenue streams for Google?

Google Business Model is represented over the Canvas as follows. Please click the image to see it
on full screen.



4.4 Understanding Banking Business Model

A Bank has broadly two types of customers: One who deposits their money with the bank and one
who borrow money from the bank. The banks are a kind of an intermediary between the depositor
and the borrower. The business model of a bank is very simple: Offer lower interest rate to the
depositor and higher interest rate to the borrower. Make the money from the interest rate
differential.

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People whether salaried or businessman prefer to keep their money with the bank. It is a better
option than keeping it at home because this helps them earn interest income. They trust the bank
with their money and believe that it will always be available when they need it. The same people
in a different situation would want to borrow money from the bank. The banks offer them the
money, but at a higher interest rate.

The depositors and borrowers can be segmented into Retail and Corporate customers. Retail
customers are individual consumers, whereas corporate customers can be segmented to small
companies, mid-size enterprises, and large corporates.

Banks offer different value propositions to different customer segments. To retail customers,
banks offer Home loans, Education loans, Auto loans, and Personal loans. Corporate customers in
different industries have different loan requirements. For example, Power sector companies need
money to fund power projects. Airline companies need money to purchase airplanes. Construction
companies need money for building projects. Before offering them money in form of loans, one
critical exercise that banks do is the risk assessment. This is to ensure that they will get back the
money, along with the interest, they are lending.

Banks use multiple channels to reach out to their customers. They open branches at convenient
locations where their customers can physically meet them. They encourage self-service through
ATMs at convenient locations. Banks operate call centers to resolve any issues or queries and to
service different kinds of requests. Banks are increasingly leveraging Internet and Mobile channels
to offer more convenience to their customers.

In order to reduce their channel costs, banks increasingly look forward to automation. However,
they appoint relationship managers to enhance their relationships with their wealthy customers.

The operations of a bank are highly IT intensive. To fulfill their IT needs, banks partner with
technology vendors. The technology vendors provide IT solutions in areas of customer experience
management, multi-channel integration, business process improvement, loans origination and
processing, Risk Management, Business Intelligence, Predictive Analytics etc.

Banking industry is highly regulated by the government. It is very important for regulatory
agencies to maintain control over the banks because they are the lifelines of an economy. The
control is also needed to protect the depositors against any fraud. One example of a regulatory
requirement is the Reserve requirement. It sets the minimum reserves that each bank must hold.

Banks have two key revenue streams. First is the interest income from lenders. Second is the fee
that they charge for different kinds of operations. Banks also make money through Credit cards
business. We learnt that in the VISA business model case study. Channel costs are the key
component of the cost structure of a bank. The interest paid by the bank to the depositors is also
one of the important cost structure components.

There exist several different types of banks such as commercial banks, community banks, private
banks, state-owned banks, credit unions etc. Some operate within a countrys boundaries,
whereas some operate globally. Some focus just on banking, whereas some get into insurance and
investment banking businesses as well. Whatever be the case, the basics remain the same.

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The basic business model of a bank can be represented over the Canvas as follows. Does the
Canvas help you quickly understand how does a bank works? In your opinion, what are the
differentiation strategies that banks can use to differentiate their business models?




4.5 Understanding VISA Business Model

VISA business model is very different from a traditional business model. It is not very intuitive
enough. Though most of us use VISA credit cards for our payments, very few of us would know
how VISA works. In fact, many of us would not even know that VISA is a public-traded company
and is listed in the New York stock exchange.

VISA is a Technology company providing global payment solutions to the banks. Its payment
product platforms are used by the banks to develop credit and debit card programs for their
customers. VISA does not issue credit cards or extends credit to the consumers. Instead, it
operates an Open-loop payments Network to manage the exchange of information between
different financial institutions.

To understand how VISA works, which customer segments it serves, what it offers to its customer
segments, and how does it makes money from them, we need to get familiar with few terms. VISA
classifies the banks as either Issuers or Acquirers. Issuers issue cards to the cardholders, whereas
the Acquirers manage the relationship with the merchants. The diagram below explains what
happens behind-the-scenes when a cardholder presents a card for payment to a merchant.

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When a cardholder presents a card for payment to a merchant, the payment request is forwarded
to the acquirer. The acquirer contacts the issuer through the VISA network. The issuer shares the
information on whether sufficient balance is available to carry out the transaction.

The information is then routed to the merchant. In case sufficient balance is available, the
payment is accepted. Else, it is rejected. The issuer bills the cardholder on a monthly basis. The
cardholder pays those bills then.

This is a very simplified explanation of what happens behind-the-scenes. The actual process
involves separate loops for Authorization and Clearing & Settlement. VISA also offers several
value-added services such as risk management, debit issuer processing, loyalty services, dispute
management and value-added information services.

What the above diagram does not tell is how VISA and banks make money in the process. They
make money from the transaction fees charged to merchants. To understand how it works,
imagine a $100 payment from a cardholder to merchant. In case the merchant fee is 2.4%, the
merchant would get $97.60 from the transaction.

$2.40 would get unevenly split between issuer and acquirer, depending upon the interchange fee.
In case of an interchange rate of 1.8%, the issuer will keep $1.80 and acquirer will keep $0.60.
Issuer gets to keep more of the merchant fee because of a higher risk of payment default from the
cardholder. VISA makes money on payment volumes, transaction processing, and value-added
services.

VISA creates value for all its stakeholders during the process. Cardholders benefit because of
convenience, security, and rewards associated with card payments. Merchants benefit from
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improved sales by offering payment method options to the customers. Banks get new revenue
streams through card fees, late payment interests, and transaction fee cuts.

VISA captures value through the following revenue streams: Service revenues from banks for their
participation in card programs; Data processing revenues for authorization, clearing, settlement,
and transaction processing services; International revenues from transactions where the
cardholder issuer country is different from the merchants country.

In order to create the value, VISA has built a global processing infrastructure consisting of multiple
synchronized processing centers. These centers are inter-linked and are engineered for
redundancy. Managing these payment networks is a core part of VISA operations to ensure a safe,
efficient, and consistent service to the banks, cardholders, and merchants.

VISA is a great example of a Multi-sided Platform business model pattern. The platform induces
cross-side network effects. More the cardholders use VISA, more the merchants will accept it
and vice-versa. Since merchants are on the money side of the platform, VISA focuses its
marketing efforts on the cardholders who are the subsidy side of the platform. VISA sponsored
FIFA world cup in 2010 and will be Olympic sponsor through 2020. This marketing focus helps VISA
in building a strong brand and attracting more consumers.

All the aforementioned discussion is captured on the business model canvas below. Does the
Canvas help you quickly understand the big picture of VISA business? Who do you think can
threaten the strong business model of VISA?



4.6 Understanding Twitter Business Model

Twitter is one of the most popular Social Networking Site (SNS) and Micro-blogging platform in
the world. It enables its users to share text messages with a length constraint of 140 characters.
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These messages (aka tweets) are publically visible, by default. Any user can subscribe to tweets
from other users by following them. Users can tweet through Twitter website or Twitter clients
and apps for desktops, tablets, or smartphones. The following video (from Twitter early days)
explains how it works:

While Twitter started as a service to enable an individual share short updates to a small group, it is
now being used for a variety of purposes by different set of users. Some users use it as
broadcasting medium to broadcast their own thoughts or the content they want to share. Some
users simply sign-in to listen to experts or celebrities or brands, whom they like and admire. Some
use it to discover what other people are saying about their topics of interests; while some use it to
follow content publishers to stay informed on the latest.

Businesses are also using Twitter in several ways. Content and Media companies are using Twitter
to drive traffic to their websites. It is being used by e-commerce and local businesses for deal
promotions. Some businesses are using it as a customer service channel; while some are using it
increase their brand awareness and monitor their brand perception. Some non-profits are using
Twitter as a fund-raising channel as well.

Twitter started as a service in 2006. It gained immense popularity in 2009-10. As on 8 Sep 2011, as
per Twitter official blog, Twitter had 100 Million active users. More than half of them logged in
each day. As on 26 Jan 2012, as per Twitter official blog, 1 Billion tweets were send every four
days, which means 250 Million tweets were shared every day.

With so many users connected to the platform and using it on a regular basis, it is becoming an
attractive destination for the advertisers. Unlike other SNS websites, Twitter hasnt yet started
offering the option of Display Ads to the advertisers. Instead, it has provided them with the
following innovative ways to reach the users:

1. Promoted Accounts Businesses can scale up their follower-base through Promoted
Accounts product. The promoted account appears in search results and within the Who to
Follow section (powered by Twitters account recommendation engine). Promoted
Accounts are offered through Cost-Per-Follow (CPF) auction, where a business is charged
when a user converts into a follower.

2. Promoted Tweets Businesses can promote key messages through Search Results to the
non-followers of their account. Promoted Tweets can also be targeted at followers of a
business or at the users having similar profile to that of a follower. Promoted Tweets are
offered through Cost-Per-Engagement (CPE) auction, where engagement is defined as
click, favorite, retweet, or reply of a promoted tweet.

3. Promoted Trends Businesses can leverage Promoted Trends product to scale
conversations and build mass awareness. Trends reflect hottest topics of discussion during
a moment. They appear next to a users timeline. Promoted Trends appear at the top in the
Trends section.

Twitter is an example of a multi-sided platform. Twitter has built an App ecosystem. Twitter
offers APIs that help developers build third party apps. Twitter for Websites (TfW) allows easy
integration of twitter into websites with Tweet and Follow buttons. Search API allows a user to
query Twitter content and find tweets meeting a search criterion. REST API allows access to core
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Twitter objects such as timelines, status updates, and user information. Streaming API provides
real-time access to Twitter firehose. It helps developers with data-intensive needs. As per Twitter
official blog on 11 July 2011,

Application developers play a fundamental role in helping people get the best out of Twitter. As
an ecosystem, weve just crossed one million registered applications, built by more than 750,000
developers around the world. This is up from 150,000 apps just a year ago. A new app is
registered every 1.5 seconds, fueling a spike in ecosystem growth in the areas of analytics,
curation and publisher tools.

Twitter business goal is simple: Increase the number of users using the service. This will help
attract more advertisers. While third-party apps help increase website traffic and content usage,
Twitter has entered into different kinds of partnerships to increase awareness and drive more
users to the service. Here are 4 kinds of Partnerships that Twitter has entered into:

1. Search Vendors Twitter licenses full feed of public tweets to search engine vendors such
as Microsoft (Bing Social), Google (Google Realtime), and Yahoo. This helps in enabling
real-time search and discovery.

2. Device Vendors Twitter partnered with Apple to enable deep integration of Twitter in
iOS5 mobile operating system for iPad, iPhone, and iPod touch. This means users can tweet
directly from Apple apps such as Camera, Photos, and Safari, along with third-party apps
such as Flipboard, Livingsocial, and Instagram.

3. Media Twitter has entered into partnerships with companies such as Mass Relevance and
Crimson Hexagon to help media companies and brands deliver compelling Twitter
integration to their users more easily. This can help media companies capture real-time
reactions to the important news. Though these partnerships are not major source of
revenue, they help in expanding user base. Additional visibility drives further growth for
Twitter.

4. Mobile operators Twitter has partnered with Telecom operators across the globe to
enable users to send and receive tweets from mobile phones using SMS.

All the aforementioned discussion is captured on the Business Model Canvas below. Though we
have attempted to capture all important aspects of Twitter Business Model, we might have failed
to capture some. What do you think we have missed? Does the Canvas help you quickly
understand the big picture of Twitter business?

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5.0 Modes of Entry into International Markets (Place) - How does an organization enter an
overseas market?

Background

A mode of entry into an international market is the channel which your organization employs to
gain entry to a new international market. Here you will be consider modes of entry into
international markets such as the Internet, Exporting, Licensing, International Agents,
International Distributors, Strategic Alliances, Joint Ventures, Overseas Manufacture and
International Sales Subsidiaries.

Finally we consider the Stages of Internationalization. It is worth noting that not all authorities on
international marketing agree as to which mode of entry sits where. For example, some see
franchising as a stand alone mode, whilst others see franchising as part of licensing. In reality, the
most important point is that you consider all useful modes of entry into international markets -
over and above which pigeon-hole it fits into. 9

5.1 The Internet

The Internet is a new channel for some organizations and the sole channel for a large number of
innovative new organizations. The eMarketing space consists of new Internet companies that have
emerged as the Internet has developed, as well as those pre-existing companies that now employ
eMarketing approaches as part of their overall marketing plan. For some companies the Internet is
an additional channel that enhances or replaces their traditional channel(s). For others the
Internet has provided the opportunity for a new online company. More

5.2 Exporting

There are direct and indirect approaches to exporting to other nations. Direct exporting is
straightforward. Essentially the organization makes a commitment to market overseas on its own
behalf. This gives it greater control over its brand and operations overseas, over and above
indirect exporting. On the other hand, if you were to employ a home country agency (i.e. an
exporting company from your country - which handles exporting on your behalf) to get your
product into an overseas market then you would be exporting indirectly. Examples of indirect
exporting include:

Piggybacking whereby your new product uses the existing distribution and logistics of
another business.
Export Management Houses (EMHs) that act as a bolt on export department for your
company. They offer a whole range of bespoke or a la carte services to exporting
organizations.
Consortia are groups of small or medium-sized organizations that group together to market
related, or sometimes unrelated products in international markets.
Trading companies were started when some nations decided that they wished to have
overseas colonies. They date back to an imperialist past that some nations might prefer to
forget e.g. the British, French, Spanish and Portuguese colonies. Today they exist as
mainstream businesses that use traditional business relationships as part of their
competitive advantage.

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5.3 Licensing

Licensing includes franchising, Turnkey contracts and contract manufacturing.

Licensing is where your own organization charges a fee and/or royalty for the use of its
technology, brand and/or expertise.
Franchising involves the organization (franchiser) providing branding, concepts, expertise,
and infact most facets that are needed to operate in an overseas market, to the franchisee.
Management tends to be controlled by the franchiser. Examples include Dominos Pizza,
Coffee Republic and McDonald's Restaurants.
Turnkey contracts are major strategies to build large plants. They often include a the
training and development of key employees where skills are sparse - for example, Toyota's
car plant in Adapazari, Turkey. You would not own the plant once it is handed over.

5.4 International Agents and International Distributors

Agents are often an early step into international marketing. Put simply, agents are individuals or
organizations that are contracted to your business, and market on your behalf in a particular
country.

They rarely take ownership of products, and more commonly take a commission on goods sold.
Agents usually represent more than one organization. Agents are a low-cost, but low-control
option. If you intend to globalize, make sure that your contract allows you to regain direct control
of product. Of course you need to set targets since you never know the level of commitment of
your agent.

Agents might also represent your competitors - so beware conflicts of interest. They tend to be
expensive to recruit, retain and train. Distributors are similar to agents, with the main difference
that distributors take ownership of the goods. Therefore they have an incentive to market
products and to make a profit from them. Otherwise pros and cons are similar to those of
international agents.

5.5 Strategic Alliances (SA)

Strategic alliances is a term that describes a whole series of different relationships between
companies that market internationally. Sometimes the relationships are between competitors.
There are many examples including:

Shared manufacturing e.g. Toyota Aygo is also marketed as a Citroen and a Peugeot.
Research and Development (R&D) arrangements.
Distribution alliances e.g. iPhone was initially marketed by O2 in the United Kingdom.
Marketing agreements.

Essentially, Strategic Alliances are non-equity based agreements i.e. companies remain
independent and separate.




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5.6 Joint Ventures (JV)

Joint Ventures tend to be equity-based i.e. a new company is set up with parties owning a
proportion of the new business. There are many reasons why companies set up Joint Ventures to
assist them to enter a new international market:

Access to technology, core competences or management skills. For example, Honda's
relationship with Rover in the 1980's.
To gain entry to a foreign market. For example, any business wishing to enter China needs
to source local Chinese partners.
Access to distribution channels, manufacturing and R&D are most common forms of Joint
Venture.

5.7 Overseas Manufacture or International Sales Subsidiary

A business may decide that none of the other options are as viable as actually owning an overseas
manufacturing plant i.e. the organization invests in plant, machinery and labor in the overseas
market. This is also known as Foreign Direct Investment (FDI). This can be a new-build, or the
company might acquire a current business that has suitable plant etc. Of course you could
assemble products in the new plant, and simply export components from the home market (or
another country).

The key benefit is that your business becomes localized - you manufacture for customers in the
market in which you are trading. You also will gain local market knowledge and be able to adapt
products and services to the needs of local consumers. The downside is that you take on the risk
associated with the local domestic market. An International Sales Subsidiary would be similar,
reducing the element of risk, and have the same key benefit of course. However, it acts more like a
distributor that is owned by your own company.

Internationalization Stages

So having considered the key modes of entry into international markets, we conclude by
considering the Stages of Internationalization. Some companies will never trade overseas and so
do not go through a single stage. Others will start at a later or even final stage. Of course some will
go through each stage as summarized now:

Indirect exporting or licensing
Direct exporting via a local distributor
Your own foreign presences
Home manufacture, and foreign assembly
Foreign manufacture







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6.0 Porter's Five Forces Model: analysing industry structure

Overview of the Five Forces Model

Porter identified five factors that act together to determine the nature of competition within an
industry. These are the:

Threat of new entrants to a market
Bargaining power of suppliers
Bargaining power of customers (buyers)
Threat of substitute products
Degree of competitive rivalry

He identified that high or low industry profits (e.g. soft drinks v airlines) are associated with the
following characteristics: Lets look at each one of the five forces in a little more detail to explain
how they work. Threat of new entrants to an industry,

If new entrants move into an industry they will gain market share & rivalry will intensify
The position of existing firms is stronger if there are barriers to entering the market
If barriers to entry are low then the threat of new entrants will be high, and vice versa

Barriers to entry are, therefore, very important in determining the threat of new entrants. An
industry can have one or more barriers. The following are common examples of successful
barriers:
Barrier Notes
Investment cost High cost will deter entryHigh capital requirements might mean
that only large businesses can compete
Economies of scale available
to existing firms
Lower unit costs make it difficult for smaller newcomers to break
into the market and compete effectively
Regulatory and legal
restrictions
Each restriction can act as a barrier to entryE.g. patents provide
the patent holder with protection, at least in the short run
Product differentiation
(including branding)
Existing products with strong USPs and/or brand increase
customer loyalty and make it difficult for newcomers to gain
market share
Access to suppliers and
distribution channels
A lack of access will make it difficult for newcomers to enter the
market
Retaliation by established
products
E.g. the threat of price war will act to discourage new entrantsBut
note that competition law outlaws actions like predatory pricing
What makes an industry easy or difficult to enter? The following table helps summarise the issues
you should consider:
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Easy to Enter Difficult to Enter
Common technologyAccess to distribution
channelsLow capital requirementsNo need to
have high capacity and outputAbsence of strong
brands and customer loyalty
Patented or proprietary know-howWell-
established brandsRestricted distribution
channelsHigh capital requirementsNeed to
achieve economies of scale for acceptable unit
costs

6.1 Bargaining Power of Suppliers
If a firms suppliers have bargaining power they will:
Exercise that power
Sell their products at a higher price
Squeeze industry profits
If the supplier forces up the price paid for inputs, profits will be reduced. It follows that the more
powerful the customer (buyer), the lower the price that can be achieved by buying from them.
Suppliers find themselves in a powerful position when:
There are only a few large suppliers
The resource they supply is scarce
The cost of switching to an alternative supplier is high
The product is easy to distinguish and loyal customers are reluctant to switch
The supplier can threaten to integrate vertically
The customer is small and unimportant
There are no or few substitute resources available
Just how much power the supplier has is determined by factors such as:
Factor Note
Uniqueness of the input
supplied
If the resource is essential to the buying firm and no close
substitutes are available, suppliers are in a powerful position
Number and size of firms
supplying the resources
A few large suppliers can exert more power over market prices
that many smaller suppliers each with a small market share
Competition for the input from
other industries
If there is great competition, the supplier will be in a stronger
position
Cost of switching to alternative
sources
A business may be locked in to using inputs from particular
suppliers e.g. if certain components or raw materials are
designed into their production processes. To change the
supplier may mean changing a significant part of production
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6.2 Bargaining Power of Customers
Powerful customers are able to exert pressure to drive down prices, or increase the required
quality for the same price, and therefore reduce profits in an industry.
A great example in the UK currently is the dominant grocery supermarkets which are able
exert great power over supply firms. You can see a great video about this issue here.
Several factors determine the bargaining power of customers, including:
Factor Note
Number of customers The smaller the number of customers, the greater their power
Their size of their orders The larger the volume, the greater the bargaining power of
customers
Number of firms supplying the
product
The smaller the number of alternative suppliers, the less
opportunity customers have for shopping around
The threat of integrating
backwards
If customers pose a threat of integrating backwards they will
enjoy increased power
The cost of switching Customers that are tied into using a suppliers products (e.g. key
components) are less likely to switch because there would be
costs involved
Customers tend to enjoy strong bargaining power when:
There are only a few of them
The customer purchases a significant proportion of output of an industry
They possess a credible backward integration threat that is they threaten to buy the
producing firm or its rivals
They can choose from a wide range of supply firms
They find it easy and inexpensive to switch to alternative suppliers
6.3 Threat of Substitute Products
A substitute product can be regarded as something that meets the same need. Substitute products
are produced in a different industry but crucially satisfy the same customer need. If there are
many credible substitutes to a firms product, they will limit the price that can be charged and will
reduce industry profits.
As an example, consider the many substitutes that consumers now have to buying a newspaper
for their news:
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The extent of the threat depends upon
The extent to which the price and performance of the substitute can match the industrys
product
The willingness of customers to switch
Customer loyalty and switching costs
If there is a threat from a rival product the firm will have to improve the performance of their
products by reducing costs and therefore prices and by differentiation.
6.4 Degree of Competitive Rivalry
If there is intense rivalry in an industry, it will encourage businesses to engage in
Price wars (competitive price reductions),
Investment in innovation & new products
Intensive promotion (sales promotion and higher spending on advertising)
All these activities are likely to increase costs and lower profits.Several factors determine the
degree of competitive rivalry; the main ones are:





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Factor Note
Number of competitors in the
market
Competitive rivalry will be higher in an industry with many
current and potential competitors
Market size and growth prospects Competition is always most intense in stagnating markets
Product differentiation and brand
loyalty
The greater the customer loyalty the less intense the
competitionThe lower the degree of product
differentiation the greater the intensity of price
competition
The power of buyers and the
availability of substitutes
If buyers are strong and/or if close substitutes are
available, there will be more intense competitive rivalry
Capacity utilisation The existence of spare capacity will increase the intensity
of competition
The cost structure of the industry Where fixed costs are a high percentage of costs then
profits will be very dependent on volumeAs a result there
will be intense competition over market shares
Exit barriers If it is difficult or expensive to exit an industry, firms will
remain thus adding to the intensity of competition


























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7.0 Diamond model of Michael Porter for the Competitive Advantage of Nations

The Diamond model of Michael Porter for the Competitive Advantage of Nations offers a model
that can help understand the competitive position of a nation in global competition. This model
can also be used for other major geographic regions.

Traditionally, economic theory mentions the following factors for comparative advantage for
regions or countries:

A. Land
B. Location
C. Natural resources (minerals, energy)
D. Labor, and
E. Local population size.

Because these factor endowments can hardly be influenced, this fits in a rather passive (inherited)
view towards national economic opportunity. As a rule Competitive Advantage of nations has
been the outcome of 4 interlinked advanced factors and activities in and between companies in
these clusters. These can be influenced in a pro-active way by government.

7.1 The Diamond Four Determinants of National Competitive Advantage - Four attributes
of a nation comprise Michael Porter's "Diamond" of national advantage.

Factor Conditions i.e. the nation's position in factors of production, such as skilled labour
and infrastructure
Firm Strategy, Structure and Rivalry i.e. conditions for organization of companies, and the
nature of domestic rivalry).
Demand Conditions i.e. sophisticated customers in home market
Related Supporting Industries


Contrary to conventional wisdom, Porter argues that the "key" factors of production (or
specialized factors) are created, not inherited. Specialized factors of production are skilled labor,
capital and infrastructure.

"Non-key" factors or general use factors, such as unskilled labor and raw materials, can be
obtained by any company and, hence, do not generate sustained competitive advantage.
However, specialized factors involve heavy, sustained investment. They are more difficult to
duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate
these factors, they are valuable).

The role of government in Porter's Diamond Model is "acting as a catalyst and challenger; it is to
encourage or even push companies to raise their aspirations and move to higher levels of
competitive performance. They must encourage companies to raise their performance, stimulate
early demand for advanced products, focus on specialized factor creation and to stimulate local
rivalry by limiting direct cooperation and enforcing anti-trust regulations.



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7.3 Overview of The Competitive Advantage of Nations (The Diamond Model)

Porter believes standard classical theories on comparative advantage are inadequate (or even
wrong).
According to Porter, a nation attains a competitive advantage if its firms are competitive. Firms
become competitive through innovation. Innovation can include technical improvements to the
product or to the production process

7.3.1 Factor Conditions

Factor conditions refers to inputs used as factors of production such as labour, land, natural
resources, capital and infrastructure. This sounds similar to standard economic theory, but Porter
argues that the "key" factors of production (or specialized factors) are created, not inherited.
Specialized factors of production are skilled labour, capital and infrastructure.

"Non-key" factors or general use factors, such as unskilled labour and raw materials, can be
obtained by any company and, hence, do not generate sustained competitive advantage.
However, specialized factors involve heavy, sustained investment. They are more difficult to
duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate
these factors, they are valuable.

Porter argues that a lack of resources often actually helps countries to become competitive (call it
selected factor disadvantage). Abundance generates waste and scarcity generates an innovative
mindset. Such countries are forced to innovate to overcome their problem of scarce resources.
How true is this?

Switzerland was the first country to experience labour shortages. They abandoned labour-
intensive watches and concentrated on innovative/high-end watches.

Japan has high priced land and so its factory space is at a premium. This lead to just-in-time
inventory techniques (Japanese firms cant have a lot of stock taking up space, so to cope with
the potential of not have goods around when they need it, they innovated traditional inventory
techniques).

Sweden has a short building season and high construction costs. These two things combined
created a need for pre-fabricated houses.

7.3.2 Demand Conditions

Michael Porter argues that a sophisticated domestic market is an important element to producing
competitiveness. Firms that face a sophisticated domestic market are likely to sell superior
products because the market demands high quality and a close proximity to such consumers
enables the firm to better understand the needs and desires of the customers (this same
argument can be used to explain the first stage of the IPLC theory when a product is just initially
being developed and after it has been perfected, it doesn't have to be so close to the
discriminating consumers).

If the nation's discriminating values spread to other countries, then the local firms will be
competitive in the global market.
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One example is the French wine industry. The French are sophisticated wine consumers. These
consumers force and help French wineries to produce high quality wines. Can you think of other
examples? Or counter-examples?

7.3.3 Related and Supporting Industries

Porter also argues that a set of strong related and supporting industries is important to the
competitiveness of firms. This includes suppliers and related industries. This usually occurs at a
regional level as opposed to a national level. Examples include Silicon valley in the U.S., Detroit (for
the auto industry) and Italy (leather-shoes-other leather goods industry).

The phenomenon of competitors (and upstream and/or downstream industries) locating in the
same area is known as clustering or agglomeration. What are the advantages and disadvantages of
locating within a cluster? Some advantages to locating close to your rivals may be;

potential technology knowledge spillovers,
an association of a region on the part of consumers with a product and high quality and
therefore some market power, or
an association of a region on the part of applicable labour force.

Some disadvantages to locating close to your rivals are:

potential poaching of your employees by rival companies and
obvious increase in competition possibly decreasing mark-ups.

7.3.4 Firm Factors or Forces

Strategy,
Structure and
Rivalry

Strategy - Capital Markets

Domestic capital markets affect the strategy of firms. Some countries capital markets have a
long-run outlook, while others have a short-run outlook. Industries vary in how long the long-run
is. Countries with a short-run outlook (like the U.S.) will tend to be more competitive in industries
where investment is short-term (like the computer industry). Countries with a long run outlook
(like Switzerland) will tend to be more competitive in industries where investment is long term
(like the pharmaceutical industry).


Individuals Career Choices

Individuals base their career decisions on opportunities and prestige. A country will be competitive
in an industry whose key personnel hold positions that are considered prestigious.
Does this appear to hold in the U.S. and Canada? What are the most prestigious occupations?
What about Asia? What about developing countries?

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Structure

Porter argues that the best management styles vary among industries. Some countries may be
oriented toward a particular style of management. Those countries will tend to be more
competitive in industries for which that style of management is suited.

For example, Germany tends to have hierarchical management structures composed of
managers with strong technical backgrounds and Italy has smaller, family-run firms.

7.3.5 Rivalry

Porter argues that intense competition spurs innovation. Competition is particularly fierce in
Japan, where many companies compete vigorously in most industries.
International competition is not as intense and motivating. With international competition, there
are enough differences between companies and their environments to provide handy excuses to
managers who were outperformed by their competitors.

7.4 The Diamond as a System

The points on the diamond constitute a system and are self-reinforcing.
Domestic rivalry for final goods stimulates the emergence of an industry that provides
specialized intermediate goods. Keen domestic competition leads to more sophisticated
consumers who come to expect upgrading and innovation. The diamond promotes
clustering.
Porter provides a somewhat detailed example to illustrate the system. The example is the
ceramic tile industry in Italy.
Porter emphasizes the role of chance in the model. Random events can either benefit or
harm a firm's competitive position. These can be anything like major technological
breakthroughs or inventions, acts of war and destruction, or dramatic shifts in exchange
rates.
One might wonder how agglomeration becomes self-reinforcing
When there is a large industry presence in an area, it will increase the supply of specific
factors (ie: workers with industry-specific training) since they will tend to get higher returns
and less risk of losing employment.
At the same time, upstream firms (ie: those who supply intermediate inputs) will invest in
the area. They will also wish to save on transport costs, tariffs, inter-firm communication
costs, inventories, etc.
At the same time, downstream firms (ie: those use our industry's product as an input) will
also invest in the area. This causes additional savings of the type listed before.
Finally, attracted by the good set of specific factors, upstream and downstream firms,
producers in related industries (ie: those who use similar inputs or whose goods are
purchased by the same set of customers) will also invest. This will trigger subsequent
rounds of investment.

7.5 Implications of the Competitive Advantage of Nations for Governments

The government plays an important role in Porter's diamond model. Like everybody else, Porter
argues that there are some things that governments do that they shouldn't, and other things that
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they do not do but should. He says, "Governments proper role is as a catalyst and challenger; it is
to encourage or even push companies to raise their aspirations and move to higher levels of
competitive performance". Governments can influence all four of Porter's determinants through a
variety of actions such as;

Subsidies to firms, either directly (money) or indirectly (through infrastructure).
Tax codes applicable to corporation, business or property ownership.
Educational policies that affect the skill level of workers.
They should focus on specialized factor creation. (How can they do this?)
They should enforce tough standards. (This prescription may seem counterintuitive.

What is his rationale? Maybe to establish high technical and product standards including
environmental regulations). The problem, of course, is through these actions, it becomes clear
which industries they are choosing to help innovate. What methods do they use to choose? What
happens if they pick the wrong industries?

7.6 Criticisms about the Diamond Model

Although Porter theory is renowned, it has a number of critics. Porter developed this paper based
on case studies and these tend to only apply to developed economies.

Porter argues that only outward-FDI is valuable in creating competitive advantage, and inbound-
FDI does not increase domestic competition significantly because the domestic firms lack the
capability to defend their own markets and face a process of market-share erosion and decline.
However, there seems to be little empirical evidence to support that claim.

The Porter model does not adequately address the role of MNCs. There seems to be ample
evidence that the diamond is influenced by factors outside the home country.

Weve visualized and documented 30 business models that you can use in your own business
model brainstorm or business plan. Weve explored different markets (retails, e-commerce,
telecom,..) and added financial figures where relevant. Enjoy!

When you are designing new business models, its extremely inspiring to learn from successful and
failed business model patterns. 80% of our creative ideas come from analogy thinking! We have
defined a common, visual language to present business model types with 16 building blocks. This
common language enables you to easily communicate business models to different audiences, and
to quickly generate new variations and revenue models of the future. Browse through the
business model database, and find inspiration to develop your own monetization model.

7.7 Part I: 12 Business Models to learn from

Mint | to top

Mint.com is a free online personal finance service that aims to be an easy and secure way to
manage and save money online. The service is accessible anywhere, anytime over the web.
Mint.com also tries to save users money by suggesting ways to save that are personalized and
objective. The company claims that users are presented with an average of $1,000 in savings
Page 45 of 72

opportunities in their first session. The service also sends users email and SMS alerts about
upcoming bills, low balances or unusual spending.

Starbucks | to top

Starbucks is an international coffee company and the largest chain of coffee shops in the world.
Some of the stores operate through a franchise model, others are part ofa joint venture with other
companies. Due to their respect for fair trade and special initiatives such as My Starbucks idea,
partnerships with Apples iTunes and their own morning news program, Starbucks was able to
transform the perception of drinking coffee from purchasing a commodity to being an experience.

PatientsLikeMe | to top

Patients Like Me is a company which gathers and sells medical data. They do this by providing an
online platform to share real-world health experiences in order to let people help themselves,
other patients like you and organizations that focus on medical conditions. Patients Like Me can
make profit by selling all available data to other organizations.

Kiva | to top

Kiva Microfunds (commonly known by its domain name: Kiva.org) is an organization that allows
people to lend money via the internet to microfinance institutions in developing countries from
around the world. Kiva is a non-profit company supported by loans and donations from its users
and through partnerships with businesses and other institutions. Kiva itself does not charge any
interest. The loans are then passed on to independent local partners who manage them for their
region.

Klout | to top

Klout allows users to track the impact of their opinions, links and recommendations across a
social graph. Data is collected from the content users create, how others interact with that
content and the size and composition of their networks. Klout identifies influencers and provides
tools for users to monitor their influence.

Zynga | to top

Zynga is a social network game development company. The company develops browser-based
games that work both stand-alone and as application widgets on social networking websites such
as Facebook, Google+, Myspace, etc. Five of Zyngas games (CityVille, Castleville, Zynga Poker,
Farmville and Empires & Allies) are among the most widely used game applications on Facebook.

Google Adwords | to top

Google AdWords is Googles main advertising product and main source of revenue. AdWords
offers pay-per-click (PPC) advertising, cost-per-thousand (CPM) advertising, and site-targeted
advertising for text, banner, and rich-media ads. The AdWords program includes local, national,
and international distribution.


Page 46 of 72

Nespresso | to top

Nespresso is the brand name of Neslt Nespresso S.A., an operating unit of the Nestl Group.
Nespresso machines brew espresso from patented coffee capsules,
a type of pre-packed single-use container of ground coffee and flavourings. With their special club
system, they built an experience model around a commodity. The concept (machines, capsules,
service) is subject to over 1700 patents, which protect Nespressos ownership until the first patent
expires (2012).

Zipcar | to top

ZipCar is an American membership-based car sharing company, providing an easy reservation
service to its members, billable by the hour or day. With cars available in all main cities in the US,
Canada and UK, ZipCar also focuses on university campuses. With over 650.000 community
members (called Zipsters), the ZipCar business model has proven profitable and has been copied
worldwide.

Dropbox | to top

Dropbox is a web-based file hosting service that uses cloud storage to enable
users to store and share files and folders with others across the internet, using file
synchronization. Dropbox has a free basic plan and several payable subscription plans for more
storage.

Team Fortress | to top

Team Fortress is a free to play team- and class-based online multiplayer video game, developed by
VALVe Corporation. It is distributed online through the Steam service, a platform that sells or
distributes all kinds of online games.

As a free-to-play title, Team Fortress gets its income from micro transactions for unique in-game
equipment through Steam. People can buy gear, weapons and hats to personalize their character.
They can even design their own digital in-game products and sell them through Steam. The game
itself revolves around two teams, each with access to nine distinct characters, battling in a variety
of game modes set in different environments.

Ebay | to top

Ebay Inc. is an online auction and shopping website that focuses on P2P networks. People and
(small) businesses can buy and sell a broad variety of goods and services worldwide. With
operations in over 30 countries, Ebay is a notable success story of the web 2.0 generation. Services
such as Buy it Now, online classified advertisement- systems and online money transfer service
Paypal have made Ebay a market leading company.

7.8 Part II: 30 cases + 120 brainstorm cards

In total there are 30 business models that are visualized using the Business Model Kit. The 12
samples from above + extra info + 18 additional cases are bundled in 1 PDF. Download & print the
PDF so you can use this material in your own in-house workshop or brainstorm session.
Page 47 of 72


Imagine that when you buy a pair of jeans youre offered an agreement to sign before you pay: I
hereby promise to cold -wash, line-dry this clothing item, and own it for at least three years or
ensure
it is given away for someone else to enjoy. When you sign, you are rewarded instantly with a
coupon for cash back. The rebate is the estimated financial value of the carbon-dioxide emissions
you save by avoiding hot-water washing, and by machine drying your jeans over the lifespan of
the item. The clothing company is able to provide this discount by aggregating its consumers
carbon credits and selling them on the open market.

This model provides financial incentive es for both the clothing company and the consumer to
alter behavior. Far from fail-proof, this scenario is not yet being played out in any store near you.
But some version is not far off, as pioneering companies pilot innovative approaches to survive
and thrive in a more sustainable economy.

Today, business leaders face not only the economic fallout of the financial crisis, they face the
substantial challenge of transitioning to a low-carbon economy that is constrained by dwindling
natural resources. Indeed, consumption rates are such that we would need six planets to fill our
current demand for raw materials.

As awareness of our situation grows, the public will demand goods and services that are even
more environmentally sustainable. Massive efforts are required to reduce the amount of materials
we useincluding freshwater, minerals and oil, biodiversity, and marine resources.
Its clear that business as usual is no longer possible as we transition to a low-carbon economy.
Innovative business models offer pioneering companies an early start toward the future. They can
signal to consumers how to make sustainable choices and provide reward for both the consumer
and the shareholder. We have some interesting examples to learn from and build upon. I see four
categories of innovation that, with more development and experimentation, will ensure business
success in a reset world.

7.9 The Real Value Model: Integrating the Cost of Environmental Markets into Consumer
Goods

Right now, when you drink a bottle of water or take a shower, you dont pay for the watershed
protection provided by a distant mountain or hillsides filtration process. What if you did? Would
the higher price impact how much you consume?

When the value of environmental services is not commoditized and traded, its de facto price is
zero. Environmental services include carbon sequestration, which helps regulate our global
climate system; watershed filtration, which ensures water quality to local sources; and biodiversity
conservation, which increases ecosystem resilience and provides a host of other direct benefits.
Once a market is established for these services, pricescan be assigned, the services can be traded,
and profits can be made.






Page 48 of 72

7.10 Sustainable Business Models - Time for Innovation

BSR | Sustainable Business Models 2

This is neither new nor small potatoes. For example, in 1995 the United States launched the first
large-scale market in trading permits, or allowance of sulfur-dioxide (SO2) emissions. The
allowance trading system provides incentives for energy conservation and technology innovation
that can both lower the cost of compliance and yield pollution-prevention benefits. In fact, the
SO2 trading program has achieved reductions in emissions ahead of schedule in its first phase.
Since then, weve witnessed the creation of multimillion-dollar markets in greenhouse gases,
wetlands, clean water, and even in the conservation of endangered species.

As these markets develop, their power can be integrated into business models and harnessed to
help consumers make smart choices. Heres an illustrative case study: Due to local regulation in
New South Wales, Australia, individuals can bundle their validated reduction in carbon emissions
and sell them on the NSW carbon market.

An entrepreneurial company, Easy Being Green, created a business trading energy-efficient light
bulbs for individuals carbon credits. When the price for carbon was high, this was a nicely
profitable business that gave consumers a financial reward for switching to an energy-efficient
product. Price volatility in the carbon market caused this pioneering venture to go belly up.
Indeed, failures will always be a part of the pioneering landscape, especially when commodities
have unstable market support.

7.11 The Game-Changer Model: De-Materialization via Disruptive Technology

Got an iPod or MP3 player? Do you pay to download music from the internet? Consider yourself a
disruptive consumer (in a good way)! Apples disruptive business model eliminated the need for
polymer-based CDs. By selling music online, Apple de-materialized one aspect of the industry
and created an entirely new business. Above-ground mining is another example of a disruptive
business model.

The Belgium-based materials technology group Umicore SA transformed itself from a traditional
provider of metals to its customersit mined the earth in Africa and Latin America for a wide
variety of materials. Today, it is able to recycle or recover 17 metals, of which seven are precious
metals. This model not only prevents increased environmental destruction from continued mining,
it rewards heavy industry for recycling their materials by creating a market for them.

De-materialization can take us a fair way down the path toward sustainability. Most models rely
on technology. For example, as telephonic interfaces with banking become more sophisticated,
they will replace paper train, plane, and other forms of ticketsand possibly car keys. Thus as
technology advances, so will the opportunities to displace materials.
However, the real trick is to combine the benefits of de-materialization with a disruptive business
model that alters behavior for a significant reduction.

7.12 The Qualifying Model: The Wal-Mart Effect

The Qualifying Model uses the power of a business most important relationshipsthose with
customers and suppliersas an effective lever to support sustainability. Wal-Marthas effectively
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changed the environmental footprint of many of its suppliers by simply insisting on certain
environmental standards. The model is that of a stick rather than carrot, and itis a deceptively
simple business model:
Use certain sustainability criteria askey components in determining your suppliers and your
customers.

BSR | Sustainable Business Models 3

Using environmental criteria with your suppliers is a well-established means for creating niche
goods such as organic foods, Forest Stewardship Council (FSC) paper and wood products, and
ocean-friendly fish (Marine Stewardship Council or MSC). In these examples, the price premium is
usually passed to the consumer, who is informed about the content of the good by a seal or mark
on the package. Wal-Mart has taken this model beyond niche and is, for the most part, not passing
on increased cost to the consumer. Market size permits this behavior, and the spinoff impacts for
other distributers are yet to be understood.

Applying criteria to customer selection is less understood than supplier criteria but equally
effective as a Qualifying Model. The 2009 winner of the Financial Times Sustainable Bank of the
Year Award, Europes Triodos Bank will lend only to financially viable businesses that provide
either explicit social or environmental benefits.

As a result of investigating a potential clients involvement in their community or environmental
programs, the bankers create another important benefit: They strike a relationship between
lender and banker. This model has encouraged businesses that are potential lenders to become
proactive supporters of sustainability. It has also rewarded Triodos investors. CEO Peter
Blomattributes the banks stellar performance throughout the financial crisis to the intangible
benefits of lending only to those they know well and who are engaged in their local communities.

The Bikini Model: Sell Less, Make More

For most business leaders, profits are predicated on selling more. This model flips that paradigm
on its head and still results in a healthy profit. One of the fundamental challenges we face in
societies that are fed on overconsumptionis how to foster client contentedness withless
especially after we have spent decades telling them theyll be happy only if they consume more.

Its a fine mess, but we do have some interesting pioneers to point the way. The bikini is our
inspiration because the less fabric involved, the more the consumer tends to pay for it. Some
companies have switched from selling products to selling services. A popular example of this
model comes from Interface, which switched from selling carpets to renting carpeting services.

Another example comes from DuPontsindustrial paints business, which switched from selling
paint by volume to selling the service of painting cars. DuPont is paid based on the number of
carspainted, not the quantity of the paint used. By perfecting the painting method and improving
its paints, the company reduced the quantity of paint required per car, which lowered both the
cars cost and its environmental footprint.

The Bikini Model, like the swimsuit, does more with less. Only in this case, the model results not in
greater sex appeal but in enhanced product durability and more opportunities to reuse and
recycle the commodity. Many of the products and services in this scenario will require a disruptive
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business model. For example, I am waiting for the water company that stops selling plastic bottles
full of water, and sells empty durable (yet chic) bottles with built-in filters so that we can fill with
ordinary tap water when were on the go.
Bikinis arent jeans, and I, as a consumer, am not yet ready to pay more for jeans with less
material. However, I do welcome the day when I am rewarded for keeping my clothes longerin
other words, for consuming less. These are the core behavioral changes that could be supported
by the carbon-credit scheme noted earlier. If the company splits the value of the carbon savings, it
could drive value from selling less, all the while keeping me well-covered. This type of innovative
business model is needednow. Good companies can adapt and innovate themselves out of any
crisis, be it related to the economy or






































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8.0 Leader Attributes and Core Leader Competencies
The core leader competencies stem directly from the Army definition of leadership:
Leadership is influencing people by providing purpose, motivation, and direction while
operating to accomplish the mission and improve the organization.
The definition contains three basic goals: to lead others, to develop the organization and its
individual members, and to accomplish the mission. These goals are extensions of the Armys
strategic goal of remaining relevant and ready through effective leadership. The leadership
requirements model outlines the attributes and competencies Army leaders develop to meet
these goals.

8.1 Core Leader Competencies
The core leader competencies emphasize the roles, functions, and activities of what leaders do.
The following discussions and figures provide additional detail on component categories and
actions that help convey what each competency involves. The action-based competencies do not
include attributes of character (for example, enthusiasm, cooperativeness, flexibility), which are
described separately.
Leads
Leading is all about influencing others. Leaders and commanders set goals and establish a vision,
and then must motivate or influence others to pursue the goals. Leaders influence others in one of
two ways. Either the leader and followers communicate directly, or the leader provides an
example through everyday actions. The key to effective communication is to come to a common
or shared understanding. Leading by example is a powerful way to influence others and is the
reason leadership starts with a foundation of the Army Values and the Warrior Ethos.
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Serving as a role model requires a leader to display character, confidence, and competence to
inspire others to succeed. Influencing outside the normal chain of command is a new way to view
leadership responsibilities. Leaders have many occasions in joint, interagency, intergovernmental,
and multinational situations to lead through diplomacy, negotiation, conflict resolution, and
consensus building.
To support these functions, leaders need to build trust inside and outside the traditional lines of
authority and need to understand their sphere, means, and limits of influence. (Figures A-2
through A-5 identify the first four competencies and associated components and actions.)





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Leader Attributes and Core Leader Competencies


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A-4 FM 6-22 12 October 2006 Leader Attributes and Core Leader Competencies


Develops
Developing the organization, the second category, involves three competencies: creating a
positive environment in which the organization can flourish, preparing oneself, and developing
other leaders. The environment is shaped by leaders taking actions to foster working together,
encouraging initiative and personal acknowledgment of responsibility, setting and maintaining
realistic expectations, and demonstrating care for peoplethe number one resource of leaders.
Preparing self involves getting set for mission accomplishment, expanding and maintaining
knowledge in such dynamic topic areas as cultural and geopolitical affairs, and being self-aware.
Developing others is a directed responsibility of commanders. Leaders develop others through
coaching, counseling, and mentoringeach with a different set of implied processes. Leaders also
build teams and organizations through direct interaction, resource management, and providing for
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future capabilities. (Figures A-6 through A-8 [pages A-6 through A-8] identify the three
developmental competencies and associated components and actions.)




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Leader Attributes and Core Leader Competencies


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Achieves
Achieving is the third competency goal. Ultimately, leaders exist to accomplish those endeavors
that the Army has prescribed for them. Getting results, accomplishing the mission, and fulfilling
goals and objectives are all ways to say that leaders exist at the discretion of the organization to
achieve something of value. Leaders get results through the influence they provide in direction
and priorities. They develop and execute plans and must consistently accomplish goals to a high
ethical standard. (Figure A-9 identifies the eighth core leader competency and associated
components and actions.)







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Leader Attributes and Core Leader Competencies


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8.2 Attributes
The core leader competencies are complemented by attributes that distinguish high performing
leaders of character. Attributes are characteristics that are an inherent part of an individuals total
core, physical, and intellectual aspects.
Attributes shape how an individual behaves in their environment. Attributes for Army leaders are
aligned to identity, presence, and intellectual capacity. (See figures A-10 through A-12.)










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Leader Attributes and Core Leader Competencies



















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9.0 SWOT Analysis - How to do it properly!

Definition

1. Swot analysis an analysis of an organizations strengths and weaknesses alongside the
opportunities and threats present in the external environment.
[1]

2. Swot analysis involves the collection and portrayal of information about internal and
external factors which have, or may have, an impact on business.
[2]

3. It is a framework that allows managers to synthesize insights obtained from an internal
analysis of the companys strengths and weaknesses with those from an analysis of
external opportunities and threats.
[3]


Understanding the tool

What is SWOT analysis? 0The answer to the question is simple: its a tool used for situation
(business or personal) analysis! SWOT is an acronym which stands for:
Strengths: factors that give an edge for the company over its competitors.
Weaknesses: factors that can be harmful if used against the firm by its competitors.
Opportunities: favorable situations which can bring a competitive advantage.
Threats: unfavorable situations which can negatively affect the business.
Strengths and weaknesses are internal to the company and can be directly managed by it, while
the opportunities and threats are external and the company can only anticipate and react to them.
Often, swot is presented in a form of a matrix as in the illustration below:


Swot is widely accepted tool due to its simplicity and value of focusing on the key issues which
affect the firm. The aim of swot is to identify the strengths and weaknesses that are relevant in
meeting opportunities and threats in particular situation.

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Benefits

Swot tool has 5 key benefits:
Simple to do and practical to use;
Clear to understand;
Focuses on the key internal and external factors affecting the company;
Helps to identify future goals;
Initiates further analysis.

Limitations

Although there are clear benefits of doing the analysis, many managers and academics heavily
criticize or dont even recognize it as a serious tool. According to many, it is a low-grade analysis.
Here are the main flaws identified by a research:
Excessive lists of strengths, weaknesses, opportunities and threats;
No prioritization of factors;
Factors are described too broadly;
Factors are often opinions not facts;
No recognized method to distinguish between strengths and weaknesses, opportunities
and threats.

9.1 How to perform the analysis?

Swot can be done by one person or a group of members that are directly responsible for the
situation assessment in the company. Basic swot analysis is done fairly easily and comprises of
only few steps:
Step 1. Listing the firms key strengths and weaknesses
Step 2. Identifying opportunities and threats

Strengths and Weaknesses

Strengths and weaknesses are the factors of the firms internal environment. When looking for
strengths, ask what do you do better or have more valuable than your competitors have? In case of
the weaknesses, ask what could you improve and at least catch up with your competitors?

9.2 Where to look for them?

Some strengths or weaknesses can be recognized instantly without deeper studying of the
organization. But usually the process is harder and managers have to look into the firms:
Resources: land, equipment, knowledge, brand equity, intellectual property, etc.
Core competencies
Capabilities
Functional areas: management, operations, marketing, finances, human resources and
R&D
Organizational culture
Value chain activities
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Strength or a weakness?

Often, companys internal factors are seen as both, strengths and weaknesses, at the same time. It
is also hard to tell if a characteristic is a strength (weakness) or not. For example, firms
organizational structure can be a strength, a weakness or neither! In such cases, you should rely
on:

Clear definition. Very often factors which are described too broadly may fit both strengths and
weaknesses.

For example, brand image might be a weakness if the company has poor brand image.
However, it can also be a strength if the company has the most valuable brand in the
market, valued at $100 billion. Therefore, it is easier to identify if a factor is a strength or a
weakness when its defined precisely.

Benchmarking.

The key emphasize in doing SWOT is to identify the factors that are the strengths or weaknesses
in comparison to the competitors. For example, 17% profit margin would be an excellent margin
for many firms in most industries and it would be considered as a strength. But what if the average
profit margin of your competitors is 20%? Then companys 17% profit margin would be considered
as a weakness.

VRIO framework.

A resource can be seen as a strength if it exhibits VRIO (valuable, rare and cannot be imitated)
framework characteristics. Otherwise, it doesnt provide any strategic advantage for the company.

9.3 Opportunities and threats

Opportunities and threats are the external uncontrollable factors that usually appear or arise due
to the changes in the macro environment, industry or competitors actions. Opportunities
represent the external situations that bring a competitive advantage if seized upon. Threats may
damage your company so you would better avoid or defend against them.

9.4 Where to look for them?

PESTEL. PEST or PESTEL analysis represents all the major external forces (political, economic,
social, technological, environmental and legal) affecting the company so its the best place to look
for the existing or new opportunities and threats.
Competition. Competitors react to your moves and external changes. They also change their
existing strategies or introduce new ones. Therefore, the company must always follow the actions
of its competitors as new opportunities and threats may open at any time.
Market changes. The most visible opportunities and threats appear during the market changes.
Markets converge, starting to satisfy other market segment needs with the same product. New
geographical markets open up allowing the firm to increase its export volumes or start operations
in a new country. Often niche markets become profitable due to technological changes. As a
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result, changes in the market create new opportunities and threats that must be seized upon or
dealt with if the company wants to gain and sustain competitive advantage.

Opportunity or threat?

Most external changes can represent both opportunities and threats. For example, exchange rates
may increase or reduce the profits gained from exports. This depends on the exchange rate, which
may rise (opportunity) or fall (threat) against the home country currency. The organization can
only guess the outcome of the change and count on analysts forecasts. In such cases, when
organization cannot identify if the external factor will affect it positively or negatively, it should
gather unbiased and reliable information from the external sources and make the best possible
judgement.

9.5 Guidelines for successful SWOT

The following guidelines are very important in writing a successful SWOT analysis. They eliminate
most of SWOT limitations and improve it's results significantly:

Factors have to be identified relative to the competitors. It allows specifying whether the
factor is a strength or a weakness.
List between 3 5 items for each category. Prevents creating too short or endless lists.
Items must be clearly defined and as specific as possible. For example, firms strength is:
brand image (vague); strong brand image (more precise); brand image valued at $10
billion, which is the most valued brand in the market (very good).
Rely on facts not opinions. Find some external information or involve someone who could
provide an unbiased opinion.
Factors should be action orientated. For example, slow introduction of new products is
action orientated weakness.















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SWOT analysis example A
This is a basic example of the analysis:
SWOT analysis of Company "A"
Strengths Weaknesses
1. Second most valuable brand in the
world valued at $76 billion
2. Diversified income (5 different
brands earning more than $4 billion
each)
3. Strong patents portfolio (15,000
patents)
4. Investments in R&D reaching 4
billion a year.
5. Competent in mergers &
acquisitions
6. Have an access to cheap cash
reserves
7. Effective corporate social
responsibility (CSR) projects
8. Localized products
9. Highly skilled workforce
10. Economies of scale or economies of
scope
1. Investments in R&D are below the
industry average
2. Very low or zero profit margins
3. Poor customer services
4. High employee turnover
5. High cost structure
6. Weak brand portfolio
7. Rigid (bureaucratic) organizational
culture impeding fast introduction of
new products
8. High debt level ($3 billion)
9. Brand dilution (the firm has too
many brands)
10. Poor presence in the world's largest
markets

Opportunities Threats

1. Market growth for the main firm's
product
2. Growing demand for renewable
energy
3. New technology, that would drive
production costs by 20% is in
development
4. Our country accession to EU
5. Changing customer habits
6. Disposable income level will
increase
7. Government's incentives for
'specific' industry
8. Economy is expected to grow by 4%
next year
9. Growing number of people buying
online
10. Interest rates falling to 1%
1. Corporate tax may increase from
20% to 22% in 2013
2. Rising pay levels
3. Rising raw material prices
4. Intense competition
5. Market is expected to grow by only
1% next year indicating market
saturation
6. Increasing fuel prices
7. Aging population
8. Stricter laws regulating environment
pollution
9. Lawsuits against the company
10. Currency fluctuations

(If you need more examples for SWOT factors please go to our SWOT analyses section)
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9.7 Advanced SWOT

At the most, swot is considered to be only a reference to further analysis as it has too many
limitations and cannot be used alone in the situation analysis. The previous guidelines identified in
this article meet the most of swot limitations except one: prioritization of factors. An advanced
swot goes a step further and eliminates this important drawback.
In a simple swot, strengths and weaknesses or opportunities and threats are equal to each other,
therefore a minor weakness can balance a major strength. Without prioritization, some factors
might be given too much or too little emphasis and the most relevant factors might simply be
overlooked.
The aim of advanced swot is to identify the most significant factors of the analysis from all the
items listed on it. How to perform it?
Step 1. Identify strengths, weakness, opportunities and threats.
Step 2. Prioritize them.
(The first step was discussed earlier so please refer to it when doing advanced swot analysis. See
example B when reading further instructions.)

9.8 Prioritization

Strengths and weaknesses are evaluated on 3 categories:

Importance. Importance shows how important a strength or a weakness is for the
organization in its industry as some strengths (weaknesses) might be more important than
others. A number from 0.01 (not important) to 1.0 (very important) should be assigned to
each strength and weakness. The sum of all weights should equal 1.0 (including strengths
and weaknesses).
Rating. A score from 1 to 3 is given to each factor to indicate whether it is a major (3) or a
minor (1) strength for the company. The same rating should be assigned to the weaknesses
where 1 would mean a minor weakness and 3 a major weakness.
Score. Score is a result of importance multiplied by rating. It allows prioritizing the
strengths and weaknesses. You should rely on your most important strengths and try to
convert or defend your weakest parts of the organization.

Opportunities and threats are prioritized slightly differently than strengths and weaknesses. Their
evaluation includes:

Importance. It shows to what extent the external factor might impact the business. Again,
the numbers from 0.01 (no impact) to 1.0 (very high impact) should be assigned to each
item. The sum of all weights should equal 1.0 (including opportunities and threats).
Probability. Probability of occurrence is showing how likely the opportunity or threat will
have any impact on business. It should be rated from 1 (low probability) to 3 (high
probability).
Score. Importance multiplied by probability will give a score by which youll be able to
prioritize opportunities and threats. Pay attention to the factors having the highest score
and ignore the factors that will not likely affect your business.
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9.9 SWOT analysis example B

This swot example is adopted from the previous example and additionally includes prioritization.
Underlined scores point to the most significant factors affecting the organization.
SWOT analysis of Company 'A' Importance Rating Score
Strengths
1. Second most valuable brand in the world
2. Diversified income
3. Strong patents portfolio (15,000 patents)
4. Investments in R&D reaching 4 billion a year
5. Competent in mergers & acquisitions
6. Have an access to cheap cash reserves
7. Effective corporate social responsibility (CSR) projects
8. Localized products
9. Highly skilled workforce
10. Economies of scale/economies of scope
0.03
0.01
0.15
0.10
0.05
0.02
0.03
0.01
0.08
0.02
1
2
3
2
3
1
1
1
2
3
0.03
0.02
0.45
0.20
0.15
0.02
0.03
0.01
0.16
0.06
Weaknesses
1. Investments in R&D are below the industry average
2. Very low or zero profit margins
3. Poor customer services
4. High employee turnover
5. High cost structure
6. Weak brand portfolio
7. Bureaucratic organizational culture
8. High debt level ($3 billion)
9. Brand dilution (the firm has too many brands)
10. Poor presence in the world's largest markets
0.03
0.08
0.10
0.05
0.03
0.02
0.03
0.03
0.01
0.12
2
3
2
2
3
1
1
1
1
2
0.06
0.24
0.20
0.10
0.09
0.02
0.03
0.03
0.01
0.24

Importance Probability Score
Opportunities
1. Market growth for the main firm's product
2. Growing demand for renewable energy
3. New technology is in development
4. Our country accession to EU
5. Changing customer habits
6. Disposable income level will increase
7. Government's incentives for 'specific' industry
8. Economy is expected to grow by 4% next year
9. Growing number of people buying online
10. Interest rates falling to 1%
0.10
0.01
0.13
0.05
0.05
0.02
0.03
0.01
0.08
0.02
2
1
1
3
1
3
2
2
3
3
0.20
0.01
0.13
0.15
0.05
0.06
0.06
0.02
0.24
0.06
Threats
1. Corporate tax may increase from 20% to 22% in 2013
2. Rising pay levels
3. Rising raw material prices
4. Intense competition
5. Market is expected to grow by only 1% next year
6. Increasing fuel prices
0.12
0.03
0.09
0.07
0.05
0.01
2
2
3
1
3
3
0.24
0.06
0.27
0.07
0.15
0.03
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7. Aging population
8. Stricter laws regulating environment pollution
9. Lawsuits against the company
10. Currency fluctuations
0.01
0.01
0.02
0.09
3
1
1
2
0.03
0.01
0.02
0.18








































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10.0 GAP Analysis
The difference between where we are and someone else is at the moment is a gap. The gap
could be positive (that is, we are in a better position) or negative (our position is worse). In
competitive intelligence, we study gaps (especially the negative ones) because we want to know
and explain what our competitors are doing to create a significant advantage for themselves.
So, we study and communicate the gaps and then we are done?
Nope. Identifying the known gaps (though not necessarily easy) is only the first step in a robust
gap analysis process. Here are the 5 steps to comprehensively think through gaps, to create simple
tracking methods and to ultimately get to the actions that will close the gaps.

1. Start with the known gaps.
Known gaps are the ones for which there is general agreement about their identity and
significance. For instance, we may know that competitor X is about to introduce their new product
which is 20% faster than any product that we have. Since there has been a press announcement,
live demonstrations which seem to confirm the claims and an established track record for the
competitor, we can firmly believe that the product and the claims for it are real. Furthermore, we
know that our customers highly value performance. Hence, this is a gap that is well characterized
and is significant to our competitive position.
To assemble a starting list of known gaps, solicit input from the management, business
development, marketing and sales teams. For each gap that they identify, make sure that it is
specific and well described, that the impact is estimated and each competitor which is better is
noted.
There will be some of these gaps which cannot be fully described. These are the potential gaps.
2. Create a backlog of potential gaps.
Potential gaps do not meet the full criteria to be considered as known gaps. There may be
information missing about the exact nature of the gap or its impact. Using the preceding example,
if we hear that our competitor is introducing a faster product sometime in the future, we might
conclude that this could be significant to us. However, it could make a large difference if it is 10%
faster in three years or 50% faster in six months. Without more information, it is also very difficult
to assess the potential significance of the gap. Still, knowing the competitor well may lead us to
believe that where there is smoke, there is fire. The proper action is to keep track of the
potential gap and to assign someone (e.g., the competitive intelligence function) to collect
information about it. Then, when the uncertainty threshold is crossed and the evidence is more
substantial, the potential gap can be escalated to a known gap status.
How do we look even further back in time to find things that lead to the potential gaps?
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3. Make a list of triggers which may lead to gaps.
Triggers are not gaps. Instead, they are events, activities, announcements and such that may signal
gaps in the future. Why are they important? They are important because companies rarely
operate in a vacuum. Public companies, especially, signal much of what they plan to do through all
types of disclosures. If we are attuned to these disclosures, we get hints of future strategic
directions. Continuing the faster product example, it is entirely possible that the competitor had
made patent filings years before the product was announced. They may have purchased the assets
of another company with specific technology competencies. They may be actively making venture
investments in small companies with complementary products. In an ongoing business, all of these
types of triggers are predictable. A trigger list can serve to organize the monitoring of such
triggers. Then, when several of them have tripped, it may be reasonable to investigate whether
or not a competitive gap is imminent.
Triggers are often driven by broader forces in the market.
4. List the key trends which affect the market.
It starts to get a little fuzzier in this category. Nevertheless, tracking demographic, technology,
product, legal and other areas is important. In technology, the broad trends of things getting
smaller, faster, cheaper and more communicative is not a revelation to most people. More
recently, the trends toward more social media, lowering energy consumption, increasing recycling
features and more emerging market support are becoming important. The key to trend monitoring
to find the ones that most affect customers (and, therefore, their buying decisions). After an
important trend is identified, then it is critical to understand the rate at which the trend is being
responded to in the market. The goal is to eventually identify the triggers (see step 3) which more
concretely describe when and how competitors might gain some advantage.
How do we maintain all of this information? Simple. Create four spreadsheets and track the known
gaps, potential gaps, triggers and trends. Last, establish action plans.
5. Assign actions for all areas.
Known Gaps
Assign each one to a person that must define and execute an action plan to close the gap. This
usually must be a manager with sufficient authority and ability to work across organizations
because all know gaps must be significant. Put another way, these are hard problems to solve
but their resolution is critical to a companys competitive position.
Potential Gaps
Assign these to the competitive intelligence function and require a periodic report to a responsible
manager. The goal is to actively determine whether to demote the gap if it is insignificant or to
escalate it when it can be fully characterized. The escalation process must be a part of a regular
review cycle or it could become ineffective due to its irregular or inconsistent use.

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Triggers
Assign these to the outward facing functions of your organization. These may be the business
development or product marketing teams. Their responsibility is to look for the specific trigger
information and feed it back to a coordinating competitive intelligence function. The CI team then
coordinates the evaluation of the triggers and decides when a potential gap has been identified.
Trends
Assign these to the market research team and the technology team. Their mission is to help the
organization understand when a trend accelerates to the point where there are specific,
compelling market responses occurring. Once the responses are being seen, then triggers are
identified for each competitor to understand how they intend to act.

Gap analysis can be a straightforward, organization energizing and fruitful process. The keys are
to discriminate the different types of information, assign the responsibilities correctly for each
and establish a process of regular review with management.

References
http://www.valuebasedmanagement.net/methods_porter_diamond_model.html
http://pacific.commerce.ubc.ca/ruckman/competitiveadvofnations.htm