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CHAPTER 2 FOUNDATION THEORY

2.1 BUSINESS MODEL CANVAS & NINE BASIC BUILDING

BLOCKS

Figure 2-1 Business Model Canvas. Osterwalder & Pigneur (2010)

“It is the most likely pictured how an organization create a value, deliver the value

and capture the value and affect the customers to pay for it, and exchange it into

profit” (Osterwalder&Pigneur, 2010).

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Business Model Canvas drawing is compare to direction map to business model

preparation. User also use Business Model Canvas to anticipate market situation, to

estimate manpower and financial needed. Strategic selection is possible from

studying Business Model Canvas. The business model is similar like a blueprint for

strategy to be implemented through organizational structures, process and system.

2.1.1 CUSTOMER SEGMENTS

Customer is the centre of any business model. Customer segmentation can be

powerful means to identify unmet customer needs. Customer Segments contain

customer’s demographics (age, race, religion, gender, education level, income, size),

geography (where they live and work), psychographic (social class, lifestyle and

personality characteristics). Customer segments explains how to group customer into

each segment to better understand real demand and gain value customer. According

to Business Model Canvas, customer will become different segments if:

• Different requirement/criterion

• Different distribution channel

• Different income level

• Different from common relationship

• Customer willing to pay more for different premium

Other advantage of good customer segmentation will make a firm stay step ahead

from competitors in the market or possible to penetrate into more niche market.

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2.1.2 VALUE PROPOSITION

Figure 2-2 The Six Pillars of Value Proposition Source: Finkelstein, S.; C. Harvey & T.Lawton, 2007, Breakout Strategy: Meeting the Challenge of Double Digit Growth

“The Value Propositions in Building Block describes the bundle of products and

services that create value for a specific Customer Segment” (Osterwalder & Pigneur,

2010, P.22)

According to model from (Osterwalder & Pigneur,2010) Value Proposition contain

of:

• Newness like innovation that customers have been experienced before.

• Performance like to improve product and operational process with result as a

better product, better quality.

• Customization like ability to modify standard product or service to meet

specific customer need.

• Getting the job done like product or service which make customer finish task

easier or reduce the process of doing something to make customer life easier.

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• Design like unique form with good function reflect unique image make it

stand out from competitors’ product.

• Brand like corporate value to make customer loyal and appreciate to

repurchase even it’s not in the same category but in same brand only.

• Price is very sensitive issue but depend on strategy, which come after value

evaluation for each market segment.

• Cost Reduction will allow higher margin to mark up for more profit or

provide competitive price in cutting price strategy.

• Risk Reduction like product and service bundle with insurance coverage.

Product design with more safety concern or come with guarding and

protection also included.

• Accessibility like create better channel for customer to approach the product.

• Convenience/usability is value from design for shorten process or easier to use

with higher confident.

2.1.3 KEY ACTIVITIES

The key activities are the most important task that the business has to carry out in

order to accomplish the business purpose. The key activities have to be based on the

business value propositions to the consumers and finally end up into successful

operations.

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Figure 2-3 The Generic Value Chain Developed by Porter. Source: Barney & Hesterly (2010)

Value chain is the set of business activities in which it engages to develop, produce,

and market its product or services. The management-consulting firms McKinsey

suggest that the creation of value almost always involve six distance activities:

technology development, product design, manufacturing, marketing, distribution, and

services. Firms can develop distinctive capabilities in any or any combination of

these activities (Barney & Hesterly, 2012, p.90-93)

Second generic value chain by Michael E. Porter contain two large categories:

• Primary activities

• Support activities

Primary activities include inbound logistics, production, outbound logistics, sales and

marketing and service. Support activities include infrastructure and human resource

management & development. The primary activities mainly associated with the

production process while support activities assist a company to accomplish the

primary tasks.

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2.1.4 CHANNEL

Chanel in the Building Block have a role how to connect our value proposition and

delivered it to the customer.(Osterwalder & Pigneur, 2010). Channel is

communication method from customer to products and services forward and

backward. Deliver value proposition to customer. After sales services and purchase

pushing also utilize channels.

2.1.5 CUSTOMER RELATIONSHIP

Customer Relationship in the nine Building Block can be defined as relationship with

the customer how the company want to be attached with the customer, how can the

company maintain a good relationship with the customer, how the company want to

treat the customer, and make them keep loyal (Osterwalder&Pigneur,2010).

Customer Relationship Management will maintain existing customer and gain new

customer properly. Information from Customer Segment is useful for CRM activities.

2.1.6 REVENUE STREAM

Revenue stream is result from value proposition successfully to gain income from

specific Customer Segment and Market as plan in nine block but when revenue come

from other customer segment, that is mean pricing mechanism involved.

The pricing mechanism chosen can also become a different factor determines the

revenues generated. According to (Osterwalder&Pigneur,2010) There are two main

pricing mechanism types

• Fixed Pricing rigid price structure in market such as electricity, water supply

and building material.

• Dynamic Pricing is fluctuating from market situation such as gold, exchange

rate, oil and gas.

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2.1.7 KEY RESOURCES

Key Resource is very important for entrepreneur to run the business, earn revenue,

value proposition, and sustain profitability. Key Resource can be many aspects

(Osterwalder & Pigneur,2010):

• Human, intellectual (Brand, Patent, Copyright)

• Financial (Cash, Credit, Cheque)

• Physical, asset (Building, Factory, Vehicle)

2.1.8 KEY PARTNERSHIP

Key Partnership elaborate about relationship between suppliers and partner. The

companies are doing a partnership with a different organization, to optimize their

business models and make their self-bigger in economics of scale, reduce risk they

are going to take with diversified it, ore acquire resources from co-partner.

(Osterwalder & Pigneur,2010) There are different types of partnership:

• Strategic alliance between non-competitors

• Competition strategic partnership between competitors

• Joint ventures to develop new business

• Buyer-Supplier relationship to assure reliable supplies

2.1.9 COST STRUCTURE

In this block is expense description from the whole eight blocks. This block is

function as financial forecast and planning. All fixed cost and variable cost will be

displayed. It could have many cost options for consideration.

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2.2 PORTER’S FIVE FORCES MODEL

Figure 2-4 Michael Porter's Five Forces of Competitive Position Model

2.2.1 RIVALRY

Competitive advantage in the market force firm to improve on value chain and

industry. Improvement on price, product differentiation, distribution channel and

supplier relationship are become strategy.

2.2.2 THREAT OF SUBSTITUES PRODUCT AND TECHNOLOGY

Competition engaged by outside industry such as new material approach like using of

aluminium to replace glass or use plastic to replace metal in packaging industry.

Compact film camera was replaced by digital camera and now will be replaced by

smart phone.

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2.2.3 THREAT OF BUYER POWER

Buying power is related to market interm of demand and supply. High demand and

low supply, bargaining from buyer power is not effect on manufacturer much but in

low demand and high supply. Bargaining power will create cut throat price to

manufacturer.

2.2.4 THREAT OF SUPPLIER POWER

For the manufacturer who need to purchase raw material, labour and know how.

Supplier relationship is crucail to provent pressure firm by changing of delivery date,

quantity, quality and brand which are influence to business.

2.2.5 THREAT OF ENTRANT

In non-monopoly market. New firm can enter and exit business freely. Barrier ot

entry is the market share protection for existing player, mostly relate to government

regulation, patent and Intellectual Property (IP).

2.3 BLUE OCEAN STRATEGY

Blue Ocean strategy is based on book published in 2005 and written by W. Chan Kim

and Renée Mauborgne, professors at INSEAD and co-directors of the INSEAD Blue

Ocean Strategy Institute. Based on a study of 150 strategic moves spanning more than

a hundred years and thirty industries, Kim & Mauborgne argue that companies can

succeed not by battling competitors, but rather by creating ″blue oceans″ of

uncontested market space.

The goal of blue ocean strategy is not to beat the competition, but to make the

competition irrelevant.

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2.3.1 RED OCEAN AND BLUE OCEAN

Red oceans represent all the industries in existence today. This is the known market

space.

“In red oceans industry boundaries are defined and accepted, and the competitive

rules of the game are known. Here companies try to outperform their rivals to grab a

greater share of existing demand.”

Blue oceans represent all the industries NOT in existence today. This is the unknown

market space.

“Blue oceans, in contrast are defined by untapped market space, demand creation,

and the opportunity for highly profitable growth. Although some blue oceans are

created well beyond existing industry boundaries, most are created from within red

oceans by expanding existing industry boundaries, as Circe do Soleil did. In blue

oceans, competition is irrelevant because the rules of the game are waiting to be set.”

The difference between Blue Ocean and Red Ocean can be shown below:

Table 2-1 Red Ocean versus Blue Ocean

Red Ocean Strategy Blue Ocean Strategy

Compete in existing market space Create uncontested market space

Beat the competition Make the competition irrelevant

Exploit existing demand Create and capture new demand

Make the value-cost trade off Break the value-cost trade off

Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost

Align the whole system of a firm’s activities in pursuit of differentiation and low cost.

2.3.2 VALUE INNOVATION

Blue Ocean takes approach not to benchmark against their competitors. Instead, they

change the focus; from beating the competition to creating a leap in value for the

buyers and the company such that make the competition become irrelevant. This

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approach will open up new and uncontested market space, which called as Blue

Ocean.

Innovation without dramatic increase in value tends to be technology driven, while in

the other hand, a pure technology innovation is easy to replicate by competition.

2.3.3 STRATEGY CANVAS

Blue Ocean strategy use Strategy Canvas tools to give an immediate snapshot of how

the business/product/services stacks up against competition. It serves two purposes;

the first purpose is to capture the current state of play in the known market place that

allows the users to view the factors which the industry competes on and where the

competition currently invests. The second purpose is to propel the users to action by

reorienting their focus from competitors to alternatives and from customers to

noncustomers of the industry.

Figure 2-5 Strategy canvas model. Source: Kim & Mauborgne (2015)

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2.3.4 FOUR ACTION FRAMEWORK

The four-action framework is used to add new values to the strategic canvas value

curve. The four actions taken here are:

• Eliminate: Which of the factors that the industry takes for granted should be

eliminated?

• Reduce: Which factors should be reduced well below the industry standard?

• Raise: Which factors should be raised well above the industry standard?

• Create: Which factors should be created that the industry has never offered?

Figure 2-5 Four Actions Framework. Source: Kim & Mauborgne (2015)

2.4 PERCEPTUAL MAPPING

Perceptual mapping is a tool used by market researchers to compare products (and

potential products) based on the perception of customers. It is a two dimensional

graph with vertical axis and a horizontal axis. Each axis has a pair of opposite

attributes at each end of the axis. The main purpose of the map is to easily identity of

consumers’ images toward some brands, services or products that are in the market or

will be introduce to the market.