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Seminar

Business planning and modelling of ICT operators

October 2009

Ernst Nordström

ernstn@bizopt.se

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Agenda

1. Introduction

2. Business planning

3. Business modelling

4. Revenue management

5. Conclusion

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Business planning

• Business planning encompasses all the goals, strategies and actions that you envision taking to ensure your business’s survival and growth.

• A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals.

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Business plan structure 1

• Cover page and table of contents

• Executive summary

• Business description

• Business environment analysis

• Industry background

• Competitive analysis

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Business plan structure 2

• Market analysis

• Marketing plan

• Technical plan

• Operations plan

• Management summary

• Financial plan

• Attachments and milestone

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ICT business planning

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Business modelling

• Business modelling is the process of planning and designing business models—it is an important input to strategic management, usually by assuring the qualitative results.

• Business model that can be understood as a snapshot of reality that enables effective modelling and analysis of different aspects of the business.

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STOF business model framework for ICT operators

• Services– Offered service/application/content portfolio

• Technology– System realisation

• Organisation– Means to achieve operator goals

• Finances– Economic performance of operator

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Business model structure

• Service domain– market segment– value model– service portfolio– competitive strategy

• Technology domain– technology model

• Organisation domain– players, roles and relationships model

• Financial domain– revenue model– cost model– pricing strategy

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Market segment

• Distinct from other segments (different segments have different needs)

• Homogeneous within the segment (exhibits common needs)

• Responds similarly to a market stimulus and

• Can be reached by a market intervention

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Value model

• Value proposition includes identification of the key value drivers and elements, which enable the company to differentiate itself from the competitors

• Value configurations includes network of partners, which describe how the value is created, who contribute to it (i.e. relationships), and how it is distributed and finally, consumed

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Service portfolio

• Set of products/services offered by a company is called portfolio

• A portfolio conveys the value proposition of the company

• From the customers' perspective, products are viewed as a bundle of benefits, not attributes

• A number of motivation factors for explains adoption of ICT services and synthesis of consumer value

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Competitive strategy

• Generally speaking the common goal of all business strategies is to attain and maintain sustainable competitive advantage

• According to Michal Porter's theory there are two basic types of competitive advantage: the cost and the differentiation

• Therefore, competitive advantage prods the firm to provide superior value to the customer and superior profits for its business.

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Technology model

• Communication networks consists of a core network that interconnects end systems via access networks

• Access and core networks are based on wired or wireless transmission of digital information

• Public Switched Integrated Network (PSIN) provides economy of scale by using a single network infrastructure for all services which access the network via a common host-network interface

• Statistical multiplexing allows efficient network utilization and is the main advantage of packet switching over circuit switching

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Players, roles and relationships

• Players: participating entities in a business model. It can either be 1) a business entity that provides services or 2) customer that consumes services.

• Roles: functionalities of players in a business model. A player can take one or more different roles.

• Relationships: illustrates the exchange of information between two roles/players/layers in the system.

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Revenue model

• The revenue model states how to generate revenue from customers

• On Internet, business models are often based on advertising and free usage, possibly extended with a premium model that gives extra content at some minor fee

• Revenue sources for ICT operators include payment for services, content, rental of customer premise equipment, and advertising

• Demand from customers and the pricing of services determine the amount of revenue

• ICT players may implement revenue sharing with some other player(s), in order to establish stable revenue streams and reduce the risk taking

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Cost model

• Knowing the cost per service is very important for pricing decisions, benchmarking, profitability analysis, simulation for possible introductions of new technology or services etc.

• Capital expenditures (CapEx) costs contribute to the fixed infrastructure of the company and they are depreciated over time. They are needed to expand the services to the customers.

• Operating expenditures (OpEx) costs do not contribute to the infrastructure itself and consequently are not subject to deprecation.

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Pricing strategy

• The suppliers aim at maximising the profit, which is the difference between revenue and cost.

• The consumers aim at maximising the consumer surplus, which is the difference between consumer value (a.k.a utility or maximum willingness to pay) and price.

• Factors to consider the design of pricing scheme include technology risks, availability of resources, competition, supplier and consumer behaviour, price discrimination and regulation.

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Qualitative analysis of business models

Major metrics of the star model:

1. Power against suppliers

2. Power against customer bargaining

3. Power against new entrants

4. Power against substitution

5. Power against competition

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Qualitative analysis of business models

Minor metrics of the star model:

1. Customer loyalty: stable customer base2. Product usability: interactivity between product

and consumer3. Secured solution: enabling security with the

company and its services4. Market regulation: business operation within a

regulated market5. Customer satisfaction: immediacy of

satisfaction

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Goggle vs. YouTube star model

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Measures of consumer and supplier benefit

• Consumer surplus (CS) is given by consumer value minus price

• Consumer value is also referred to as utility or maximum willingness to pay

• Price is given by the service tariff• Producer surplus (PS) or profit is given by

revenue minus cost • Revenue is given by customer demand and

service tariff• Cost includes capital and operational

expenditures

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Stochastic model of operator selection

Operator 1

Operator Nf

customer arrival

.

.

.

P1

Pf

CS1: functionality, quality, price

CSf: functionality, quality, price

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Techno-economic analysis of business cases

• Techno-economic analysis is the process of analysing different business cases to find out adequate technological solution and/or the overall profitability of the case

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Financial indicators

• Payback period• Net Present Value (NPV)• Return on Investment (ROI) • Internal Rate of Return (IRR)• Net Cash Flow (NCF)• Discounted Payback Period (DPP)• Discounted Cash Flow (DCF)• Operating income• Revenue per service class

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Revenue management

• Select service portfolio (including value-added services and channel/VoD content) so that revenue is improved

• Select prices for charging of system usage so that revenue is improved

• An accurate consumer value model is necessary for successful RM decisions

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Future work

• Study portfolio and price design in oligopoly markets under assumption the consumer value function is known