Business Models and Portfolio

Management
John Keast

Concept of a
business strategy
• A pattern of decisions that determines and
reveals company objectives, purposes, goals.
• The principle policies and plans to achieve
the goals
• The scope of the business
• The type of organisation it aims to be
• Defines the contributions it intends to make
to stakeholders and the community
Source: Minzberg - The Strategy Process

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 Strategic Target
The
Strategic
Target

Strategy Development
Process

Present
Competencies Business
Who are the Customers ? & Technology Business
Focus
Performance

Vision
Requirements
Customers
to become a Gap Analysis
Competitors Financial and
World Class Company Strategy
Objectives Markets Business Objectives
Supplier
External
Drivers

Company
Values & Resources & Business
What do they Purchase? Plan
Behaviour Investments

2
 The essence of strategic
analysis is Examining
External Events
• The position of the business in the industry, examining
its size relative to other companies and ability to
compete
• Relationship with competitors
• Methods of securing business
• Activities across industry, examining long term trends
• Global demand reasons for expansion or consolidation
within different territories
• Actions being taken by competitors to secure advantage
• Credible “change the game” strategies that could
revolutionise the industry

Customers and Markets

3
 Porter‟s Five Forces
Model

Barriers to
Entry

Supplier Industry Buyer Power

Power Competitors

Threat of
Substitutes

Michael Porter‟s Five

Competitive Forces

• Threat of new entrants

• Bargaining power of suppliers
• Threats from substitute products or
services
• Bargaining power of buyers
• Rivalry among existing firms

4
 Porter‟s Generic
Strategies

Competitive Advantage
Low Cost Product uniqueness

Cost leadership Differentiation

(Industry Wide)
Broad Scope
Target Scope

strategy Strategy

Focus Strategy Focus Strategy

Narrow Scope

(Low Cost) (Differentiation)

Segment)
(Market

Five forces combined

with generic strategies

Source: http://b

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 Porter‟s Generic
Strategies

Competitive Advantage
Low Cost Product uniqueness

Cost leadership Differentiation

(Industry Wide)
Broad Scope
Target Scope

strategy Strategy

Stuck
Focus Strategy in the
Focus Strategy
Narrow Scope

middle!
(Low Cost) (Differentiation)
Segment)
(Market

Product and Market

Positioning
Product
Existing Improved New
Product Product Product

Existing Current
Updated Replacement
Market products
Market

Extended New Variant New

Market Applications Products Model

New New Market

Innovation
Market Customer Gap

6
 The Puttick Grid
High Product Complexity Low

High

Uncertainty

Low

Key Parameters –
Complexity and Uncertainty

Complexity – numbers of ... Uncertainty of demand – problems with

– products and variants (including or changes in factors such as ...
customisation) – Specification
– layers in bills of material
– quality
– tiers in supply chain
– process reliability
– purchased items
– suppliers, contractors – level of demand
– processes – external influences (e.g. politics,
– transactions
weather)
– etc.
– fashion changes
– supply changes
– competitors‟ actions
– etc.

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 The Puttick Grid
High Product Complexity Low

High
Super Value Goods Fashion / Jobbing

Uncertainty

Consumer Durables Commodities

Chemicals

Low

Sector
classification
High Product Complexity Low

High Aerospace Cosmetics

Defence Perfumes
Professional Electronics Textiles
Heavy Electrical Equipment Packaging
Process Plant Food and Drink
Railway Equipment Jobbing Builders
Shipbuilding
Major Construction

Uncertainty
Automotive Simple Components
Volume Consumer Durables Paper
* White Commodity Tools
* Brown Bulk Chemicals
Conventional Machine tools Primary Metals
Glass
Building Materials

Low

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 Product Life-cycle

High Product Complexity Low

High Long lifecycle Very quickly out of date

Upgraded Very rapid depreciation
Re-fit Suddenly Needed

Uncertainty
Medium lifecycle Consumable
Face Lift
Second hand market

Low

The customer‟s
perception
High Product Complexity Low

High Requirements present a real “I must own one”

challenge
Few other suppliers have the
capability
Some risk of failure must be
accepted
Expect to pay for the privilege
Owning one will raise my image
Prepared to pay for exceptional
service
Rare capability that is urgently
needed
Can put us ahead of competitors

Uncertainty
Recognised as good make Numerous alternative suppliers
Plenty of choice Requirements easy to satisfy
Not expected to pay silly prices Expect low price today
Well proven products / services Expect even lower price tomorrow
Service exceeds expectations Service and quality are given
Functionality satisfies needs
Prepared to pay for something
extra
Low

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 Key Parameters – Complexity
and Uncertainty

High Product Complexity Low

High

“Agile”
Knowledge Acquisition Knowledge Acquisition
Product Creation Product Creation
(Functional Design) (Market design)

Uncertainty

Knowledge Acquisition Knowledge Acquisition

Product Supply Product Supply
(Flexibility) (Cost)
“Lean”
Low

Financial criteria
High Product Complexity Low

High
•High Margin
•Low Fixed Capital utilisation
•High Working Capital
• High Margin
• Low Fixed Capital utilisation
• Working Capital
–Contracting Low
–Special Products High

Uncertainty
•Medium Margin •Low Margin
•Medium Fixed Capital •High Fixed Capital utilisation
utilisation •Low Working Capital
•Low Working Capital

Low

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 Differentiation

• Price
• Fitness for purpose
• Availability
• Service (product support)
• Emotional Appeal

Differentiation

High Product Complexity Low

High
Super Value Goods Fashion

1.Fitness for purpose 1.Emotional appeal /

2.Service (product support) Fashionability
3.Price 2.Availability
?Emotional Appeal 3.Price

Uncertainty
Consumer Durables Commodities
=Emotional appeal
=Fitness for purpose 1. Price
=Service 2. Availability
=Price 3. Fitness for purpose

Low

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Becoming a world class
supplier

SWOT Analysis

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 SWOT Example
• Distributes full range of
components
• Brand leader for industrial
equipment
• Large number of industrial
customers
• Franchise covers wide area
• Poor range of pneumatic components
• No systems design capability
• Hose and fittings supplied by specialist
• Sales people have limited technical
capability

• Develop one stop shop for all • Catalogue houses supplying companies
services industrial directly
• Establish power unit • Loose key franchise to competitor
manufacturing facility • Companies failing to pay bills on time
• Purchase good pneumatic range • New technology equipment not available
of equipment
• Develop mobile equipment
expertise
Source: “Plan to Win”, John Garside, WMG

PESTEL

Political

Legal
Economic

Business
Strategy

Environmental Social

Technological

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 Becoming a world class
supplier: Core Competencies

Core Competencies

• Modern Organisations are in a race to build

world class competencies - not necessarily
products
• For example Honda‟s core competencies in
engine and power-trains gives it a competitive
edge in car, motorcycle and lawn mower
products
• Core competencies
– Provide potential to a wide variety of markets
– Make significant contribution to customer benefits
associated with new products
– Provide competitive advantage & difficult to imitate

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 Core Competence

• “…a skill/asset/technology that underpins

the growth of the business; differentiates
the business from its current and future
competitors…”.
• Attributes of a core competence
– Attitudes of the staff.
– Skills within the company.
– Value delivered.
– Market requirements met.
– Best in class.
– Product or service differentiator.
– Difficult to imitate.

Definitions
Winning Competencies
Those competencies which provide a source of differentiation in the
perception of the customer and will improve the probability that the
customer will make initial and repeat purchases.
e.g. Rapid Product Introduction
Very High Productivity
Elastic Capacity

Enabling Competencies
Those competencies that ‘enable’ the business to operate but are
unlikely to be a source of competitive advantage. Failure may cause
embarrassment but not bankruptcy.
e.g. Conformance
Administration
Planned Maintenance

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 Identifying Core
Competence
• Are our skills truly superior?
• Would independent evaluation show that
we are better in this area than leading
competitors in technical terms or customer
opinion?
• How sustainable is the superiority?
• Assuming they knew how, how quickly
could a competitor imitate our
competence?

Technology Route Map

“Crown Jewel” technologies

2001 2002 2003 2004 2005 2006 2007

Customer -
Market development
Maintenance - Distributed - More electric More electric Fly by
free materials architectures secondary engine controls light
Demand programmes engine controls flight controls

CorrosionResistant
Corrosion ResistantActuator
Actuator

System High Performance

High Performance Engine
Engine Controls
Controls
demonstrator
NewElectric
New ElectricAircraft
Aircraft

StainlessActuator
Stainless Actuator
Component/ ElectronicController
Electronic Controller
subsystem

PowderedStellite
Powdered Stellite
Technology PowerElectronics
Electronics
project Power

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 From Core Competencies
to Core Products

• Core products are embodiments of one or more core

competencies
• They often lead to a proliferation of end products
• Core products are the components or sub-
assemblies of end products
• Honda‟s engines are core products which lead to a
wide variety of end products
• Essential to differentiate between core
competencies, core products and end products
because businesses compete by different rules in
each market sector

Becoming a world class

supplier: Portfolio Management

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 Why Portfolio
Management

• Fragmented value propositions

• Difficult to differentiate
• No game changers
• Biased view of the same market
• Redundant activities and conflicting goals
• Competition for resources

Innovation is going
down

Source: http://www.stage-gate.com/downloads/wp/wp_50.pdf

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 Goals of Portfolio
Management

• Value Maximization
• Balance
• Business Strategy Alignment
• Pipeline Balance
• Sufficiency

Product and Process

Development
Research and Extent of Product Change
Advancement
Development New Core Next Generation Addition Derivatives
Products Core Products to Product and
Family Enhancements
Extent of Process Change
Radical
New Core Processes Breakthroughs

Next Generation Process Next Generation

or Platform
Single Department Upgrade
Enhancement
Hybrids, and
Tuning/Incremental Change Derivatives

Types of Development Projects,

Wheelwright, S.C. and Clark, K.B., Revolutionizing Product Development, Quantum Leaps in Speed, Efficiency and Quality, The
Free Press, 1992.

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 Example Current State
Analysis

Source: http://www.stage-gate.com/downloads/wp/wp_50.pdf

Example current state

analysis of risk v rewards

Source “Winning at New Products, Cooper

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 Break Even Analysis

How to manage a
portfolio
• Align portfolio with strategy
– Strategic Buckets (Top Down approach)
• Maximise Portfolio Value (Bottom Up Gate control)
– Committee of experts, balanced scorecard
• Strategic alignment
• Product advantage
• Market attractiveness
• Ability to leverage core competencies
• Technical feasibility
• Reward vs. risk.
– Expected commercial Value

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 Strategic Buckets

Source: http://www.stage-gate.com/downloads/wp/wp_50.pdf

Use Expected Current

Value (ECV) approach

Source: http://www.stage-gate.com/downloads/wp/wp_50.pdf

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 Benefits of portfolio
management
• High impact, high value activity:
• Maximizes the return on your product innovation investments
• Maintains your competitive position
• Achieves efficient and effective allocation of scarce resources
• Forges a link between project selection and business
strategy
• Achieves focus
• Communicates priorities
• Achieves balance
• Enables objective project selection
• Top performers emphasize the link between project selection
and business strategy.

Business Planning

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 What is a Business
Model

A business model describes the rationale of

how an organization creates, delivers, and
captures value (economic, social, cultural, or
other forms of value).
Source :Business Model Generation, A. Osterwalder, Yves Pigneur, Alan
Smith, et al, self published, 2010

Business Model
Canvas Tool

• Business Model Canvas Tool:

– A strategic management and entrepreneurial
tool, to describe, design, challenge, invent,
and pivot your business model.

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 Business Model
Patterns

• Disaggregated - Telecoms
• Long Tail - Amazon
• Multilateral Platforms - Nintendo
• Freemium - Skype, Youtube
• Hook and bait - Gillette, Printers, Nespresso
• Open Business Models – Innocentive
• Premium - RR Cars, Bugatti Veyron
• Professional open source, -Aras
• Bricks and clicks - B&Q, M&S

Set Based Concurrent

Engineering: Apply it to your
Business Planning

Source: LeanPPD.eu WP4.1 Report

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 Business Model
Canvas

Key Value Customer

Key
Partners Activities Proposition Relationships Customer
segments

Key Channels
Resources

Cost
Revenue
structure
Streams

Source: businessmodelgeneration.com

Value Proposition
Customer Fit

fit

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 The Value Proposition
Canvas

Gain
Gains
Creators

Products Customer
and Jobs
Services
Pain
Pains
relievers

Business Model
Design: How?

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 A LEAN APPROACH

LEAN

Lean Product
Lean
Lean Logistics & Process Lean Startup
Management
Development

DESIGN EXECUTION

Business Model Build-Measure-

Canvas & Learn Cycle
Value Proposition
Canvas

The three levels of

testing

• Value Proposition
• Product Proposition
• Scalability

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 Business Model Testing

LEAN STARTUP CYCLE

• Build: Define the Minimum Viable
Product
– to confirm or discard your most
important hypotheses
• The Value hypothesis:
– your value proposition is aligned
• The Growth hypothesis:
– your model can be repeated
systematically

Source The Lean Startup © Eric Ries

Don‟t
scale too
soon!

Source: http://www.hpmuseum.org/garage/garage.htm

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 Top Ten Start Up Errors

• Don't assume a small percentage of a large market

• Don't scale too soon
• Don‟t focus on the pitch rather than the prototype
• Don't assume a need for vast sums of money for start up.
• Keep PowerPoint „Pitches‟ to Venture capitalists short.
• Don't do things serially
• 51% gives control of a company
• We have filed patents
• Hire in your own image
• Don't become friends with the venture capitalist, under promise and
over deliver
• Don't assume that venture capitalists really add value

Source: Guy Kawasaki, https://www.youtube.com/watch?v=HHjgK6p4nrw

References

• Porter, M.E., (1980) Competitive Strategy, Free Press, Philip Kotler,

Marketing Management, Analysis, Planning, and Control, Prentice
Hall, 1975(3rd edition)
• Treacy, M. and Wiesema, F. (1993) "Customer intimacy and other
Value Disciplines", Harvard Business Review.
• Smith, W.R. (1966) Product Differentiation and Market
Segmentation as Alternative Marketing Strategies. Journal of
Marketing,
• Millar, D. (1992) "The Generic Strategy Trap", Journal of Business
Strategy vol 13, no 1,
• Baden-Fullen, C. and Stopford, J. (1992) Rejuvenating the Mature
Business, Harvard Business School Press, Boston,
• Garside, J, (1998), “Plan to Win”, Macmillan Press Ltd

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