How business model captures downstream cost and revenue?

After a firm readies a product ex-factory it incurs further cost in delivering it to the market to be sold to derive revenue. While upstream there is only cost and no revenue at all downstream on the other hand allows firm to derive revenue along with associated cost. Business model captures the entire scenario in lively manner:

Value proposition: Firm must offer a unique and unbeatable value proposition to the market place. This offer has dimensions such as standards in terms of quality, duration & utility and features that are advanced and user friendly ones. There is cost structure related to selling & marketing and the revenue stream that arises after goods are sold.

Key activities: The key activities must set a firm apart from fellow customers with unique differentiation in the manner it conducts its customer relationship, selects channels of distribution and caters to differentiated customer segments whose needs and desires the firm has understood well and factored into in its value proposition. All these affect downstream cost and revenue ultimately.

Key resources:  Investing in key resources means the firm has skilled marketing staff, financial muscle in undertaking advertisement and promotional blitz that allow it to bulldoze its ways through high-intensive competition.

Customer relationship: Undoubtedly maintaining all round customer relationship is a must for every firm that needs market success. How intense this relationship is and how frequently firm is in touch with its customer base are matters that impact sales turnover. There is a cost associated with this activity too. However the overall benefit in the form of customer loyalty and increased and/or repeat purchases on the part of customer pool counterbalance downstream cost.

Channels: Distribution of products takes place via channels. This is where firm reaches the customer first time and thereafter continues to maintain contacts. These customers belong to one of the few segments firm plans to cater to. The channels cover communication, sales and marketing in addition to after-sales service. To make channels of distribution effective firm must out-lay cost in downstream.

Customer segments: Firms create value for a particular customer base that is often segmented in terms of market niche and need assessment based upon, demography, purchase value and buying patterns. Vital point is firm must utilize them effectively with a well-integrated and cost-efficient marketing program to deliver value.

Net revenue stream: The final net revenue stream that arises in the downstream has been generated after incurring the cost structure of upstream where the product was brought to the factory gates and the downstream cost of selling & distribution to a segmented market using customer relationship. Net revenue stream is therefore gross revenue minus the cost structure arising out of production as well as selling & marketing in downstream.

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

How business model captures upstream cost?

In any production environment the cost of turning out a product consumes large money up-front. This cost and the sources of it need to be captured precisely in a business model so that cost over-lay is understood by the staff in a firm. The awareness that cost is already incurred acts as a motivating factor for the staff especially those in the marketing division to re-coup it sooner or later. Here comes help from business model:

Value proposition: Firm must offer a unique and unbeatable value proposition to the market place. This offer has dimensions such as standards in terms of quality, duration & utility and features that are advanced and user friendly ones. The pricing ranges ex-factory, wholesale and retail prices. Out of these ex-factory is the pricing point that is of prime concern in the upstream. The cost structure is further analysed into its sources:

Key Partners: As regards to the cost structure in  production line, key partners of the value chain include suppliers of materials, license holders who have given the  firm the use of copyrights & patents and finance supplier such as lending institutions. Vital fact here is how their motivation runs in getting the product at the factory gates.

Key activities: These are specific activities required to be undertaken to create the value proposition. While the entire gamut of the operation process is incorporated in the key activities sector, there are few of these that set you apart from fellow competitors. Much attention is focussed in these specific ones along with keeping the production cost at reasonable level in order to compete in the market later.

Key resources: Under this category we have capital, material, logistics and human resources that are to be utilised by the firm to create the value proposition. In addition, financial resources in the form of debt and equity are required to finance the operation. The ratio between capital & material is a significant one. High innovative companies have more of capital resources such as production facility and R&D. Similarly debt-equity ratio has a bearing as high leverage brings much pressure upon operational cost.

In the up-stream only the cost of production of a product or service is structured and not the selling & marketing cost. Here the emphasis is to understand the dynamics of cost at the gates of factory. Simply put it is the overall cost of creating value.

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

What makes bad business strategy?

Professor Richard Rumelt, an authority in strategy execution says “Bad strategy ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests… it also covers up its failure to guide by embracing the language of broad goals, ambition, vision, and values.” He recommends avoiding four pitfalls to avoid a bad strategy:

1. Failure to face the problem: “A strategy is an approach to overcoming obstacles. If you fail to identify and analyse the obstacles, you don’t have a strategy”. This in nutshell is the cores reason for many a strategy to go bad from the initial formulation stage to the subsequent execution stage.

2. Mistaking goals for strategy: “Setting goals without a supporting strategy can mislead the organization”.  Rumelt cites a military general who may justly ask his troupes for “one last push,” but the goal still needs to be supported by a clearly defined strategy.  A good strategy will create the conditions that will make the “push” effective and worthy of the effort required”.

3. Bad goals galore: A long list of goals cobbled together at planning session, or a set of ideas that no one has a clue about what to do or how to get there, are signs of bad goals. Here the setting of goals does not facilitate focusing energy on very few high impact items. Neither these goals build a bridge between the obstacles that are contemplated to be solved and the required action steps that must be taken within a given time frame.

4. Fluff: Professor Rumelt defines Fluff as a “Restatement of the obvious, combined with generous sprinkling of buzzwords that masquerade as expertise designed to mask the absence of thought.” He cites an example of “fluff” from a retail bank which declares “Our fundamental strategy is one of customer-centric intermediation.”

Avoiding these pitfalls would enable firms to make good strategy; otherwise these firms would continue to be in the bad strategy bracket

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist

 

Here comes business strategy that makes real estate business a success

Real estate tycoons rule the world. Good example is Donald Trump. He made his money and fame in real estate before venturing into presidency. What is the business strategy that guided him: simple it is known as ECM an acronym for economic, construction and marketing feasibility.

Economic Feasibility

Fine print in economic feasibility is the hidden-value a piece of land offers to a developer. When I said hidden value it means nobody before you ever walked into that land. Mainly off the market, sometimes wedged between two big plots that are more conspicuous than the one you have picked up with an assured potential growth in the next few years. 

Three aspects require critical view: location of the property, the demographic structure at present and the demand and competition for real estate in that area. Because potential growth is going to give you the forecast return of the property. So by factoring a degree of uncertainty in the future market you have to size up with risk and return profile covering cost and revenue streams along with overall profit that you get out of the project.

Construction feasibility

In real estate development there are two stages. One relates to the land development and other is building. Raw land development is a sunk cost and does not give any return because it cannot be monetized. This includes implementing zoning regulations, paving roads, laying utilities and providing space for recreation, reserving part of the land un-built to facilitate movement of air and light. The second part of erecting the building is time and money consuming as you have to conform to building regulations and the architectural design that provides all modern conveniences in an aesthetic manner.

Marketing feasibility

Last but not least is the marketing aspect. At the drawing stage you can come with any marketing and pricing plan. Yet construction spans into few years and the cost over-run is immense. You have got to be smart in understanding the value proposition tomorrow and cost stream today. This is critical task indeed. 

A key barometer is to look at the current market pricing of comparable properties in the surroundings and project the likeable price that could prevail in time to come. Having done this it is the marketing promotion that matters a lot. It would be better to use two business tactics: either make a mock unit and skim the market for pricing or start the promotion blitz when 90% of the construction is done.

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist