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