ENG491
Technology
Entrepreneurship
Building a Lean,
Scalable Startup
Fall 2011 – Fall 2012
Emre Oto
www.eng491bu.org
Follow on Twitter: @eng491
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Activities
 Most
important things a company must do to
make its business model work and operate
successfully
 Differ
depending on business model type.
 Examples:



For Microsoft: Software development.
For Dell: Supply chain management.
For McKinsey: Problem solving.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Activities
 Production

Predominantly for manufacturing firms
 Problem
Solving
 Platform
/ Network
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Activities
Problem Solving

Coming up with new solutions to individual
customer problems.

The operations of consultancies, hospitals, and
other service organizations are typically
dominated by problem solving activities.

Calls for activities such as knowledge
management and continuous training.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Activities
Platform / Network

If Key Resource is a platform

Key Activities in this category relate to platform management, service
provisioning, and platform promotion

Networks, matchmaking platforms, software, and even brands can
function as a platform.

Examples:

eBay’s business model requires that the company continually develop and
maintain its platform: the Web site at eBay.com.

Visa’s business model requires activities related to its credit card transaction
platform for merchants, customers, and banks.

Microsoft’s business model requires managing the interface between other
vendors’ software and its Windows operating system platform.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Resources

Most important assets required to make a business
model work

Key resources can be physical, financial, intellectual,
or human.

Key resources can be owned or leased by the
company or acquired from key partners.

Different Key Resources are needed depending on
the type of business model:


A microchip manufacturer requires capital-intensive
production facilities
A microchip designer focuses more on human resources.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Resources
 Physical
 Intellectual
 Human
 Financial
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Resources
Physical
 Includes
physical assets such as manufacturing
facilities, buildings, vehicles, machines, systems,
point-of-sales systems, and distribution networks.
 Example:


Retailers
Carrefour: Enormous global network of stores and
related logistics infrastructure.
Amazon.com: The latter has an extensive IT,
warehouse, and logistics infrastructure.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Resources
Intellectual

Brands , proprietary knowledge, patents and
copyrights, partnerships, and customer databases

Intellectual resources are difficult to develop but when
successfully created may offer substantial value.

Brand: Consumer goods companies such as Nike and
Sony

Know-how and IP: Technology companies such as
Microsoft, SAP, and Qualcomm
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Resources
Human

Every enterprise requires human resources, but
people are particularly prominent in certain
business models.

Human resources are crucial in knowledgeintensive and creative industries.

Agencies, software companies, pharma business

A pharmaceutical company relies heavily on
human resources: Its business model is predicated
on an army of experienced scientist and a large
and skilled sales force
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Key Resources
Financial
 Cash,
lines of credit, etc. all kinds of
financial resources



to sustain the business
to attract key employees
to incentivize customers etc
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Cost Structure

This building block describes the most important costs
incurred while operating under a particular business model.

Creating and delivering value, maintaining Customer
Relationships, and generating revenue all incur costs.

Such costs can be calculated relatively easily after
defining Key Resources, Key Activities, and Key Partnerships.

Some business models, though, are more cost-driven than
others.

Example: “no frills” airlines

Business models have been built entirely around low Cost Structures.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Cost Structure

Costs should be minimized in every business model.

Low-cost structures are more important to some
business models than to others.

Therefore it can be useful to distinguish between two
broad classes of business model Cost Structures:


Cost-driven and value-driven
Many business models fall in between these two extremes
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Cost Structure

Cost-driven:




Focus on minimizing costs wherever possible.
Aims at creating and maintaining the leanest possible
Cost Structure, using low price Value Propositions,
maximum automation, and extensive outsourcing.
No frills airlines, such as Pegasus, Atlas Jet, SunExpress
typify cost-driven business models
Value-driven:




Some companies are less concerned with the cost
implications of a particular business model design,
They instead focus on value creation.
Premium Value propositions and a high degree of
personalized service usually characterize value-driven
business models.
Luxury hotels, with their lavish facilities and exclusive
services, fall into this category.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Characteristics of Cost Structures

Fixed costs


Variable costs


COGS
Economies of scale




Salaries, rents, physical manufacturing plants
Cost advantages that a business enjoys as its output expands.
Larger companies, for instance, benefit from lower bulk purchase
rates.
This and other factors cause average cost per unit to fall as output
rises.
Economies of scope


Cost advantages that a business enjoys due to a larger scope of
operations.
In a large enterprise, for example, the same marketing activities or
Distribution Channels may support multiple products.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
The Resource-based View
 The
primary objective of business-level strategy
is to create “sources of sustainable competitive
advantage”.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Sustainable Competitive
Advantage

Capability: “bundle” of assets or resources to perform a business
process (which is composed of individual activities)
 E.g. The product development process involves
conceptualization, product design, pilot testing, new product
launch in production, process debugging, etc.

All firms have capabilities. However, a firm will usually focus on
certain capabilities consistent with its strategy.
 For example, a firm pursuing a differentiation strategy would
focus on new product development. A firm focusing on a low
cost strategy would focus on improving manufacturing process
efficiency.

The firm’s most important capabilities are called competencies.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Competencies vs. Core Competencies
vs. Distinctive Competencies

A competency is an internal capability that a
company performs better than other internal
capabilities.

A core competency is a well-performed internal
capability that is central, not peripheral, to a
company’s strategy, competitiveness, and
profitability.

A distinctive competence is a competitively valuable
capability that a company performs better than its
rivals.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Examples: Distinctive Competencies

Toyota, Honda, Nissan


Intel


Low-cost, high-quality manufacturing capability
and short design-to-market cycles
Ability to design and manufacture ever more
powerful microprocessors for PCs
Motorola

Defect-free manufacture (six-sigma quality) of cell
phones
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Where are we?
 We
are discussing sustainable competitive
advantage, and have defined Competencies:

Assets  Capabilities  Competencies  Competitive Advantage
 Next
is competitive advantage.
 A competitive advantage is simply an
advantage you have over your competitors.
 A competency will produce competitive
advantage provided:
A) it produces value for the organization, and
B) it does this in a way that cannot easily be pursued by
competitors.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Sustainable Competitive Advantage

However, we said the primary objective of business-level
strategy was to create sources of sustainable
competitive advantage (SCA).

How do we know SCA when we see it? What is it? When
is it considered “sustainable”?

To produce SCA, the capability must:
1. Produce value
2. Be rare
3. Inimitable
4. Nonsubstitutable
5. Be exploitable by the organization
VRIN model
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Sustainable Competitive Advantage

The VRIN characteristics mentioned are individually
necessary, but not sufficient conditions for a sustained
competitive advantage

Within the framework of the resource-based view, the
chain is as strong as its weakest link

The resource should display each of the four
characteristics to be a possible source of a sustainable
competitive advantage
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Sustainable Competitive Advantage
The Question of Value


Capabilities are valuable when they enable a
firm to conceive of or implement strategies that
improve efficiency and effectiveness.
To be valuable, the capability must either
 Increase efficiency (outputs / inputs)
 Increase effectiveness (enable some new
capability not previously held)
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Sustainable Competitive Advantage
Rareness

Valuable resources or capabilities that are shared by
large numbers of firms in an industry are therefore not
rare, and cannot be a source of SCA.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Sustainable Competitive Advantage
Imitability
Valuable, rare resources can only be sources of SCA if firms
that do not possess them cannot obtain them. They must be
“imperfectly imitable”, i.e. impossible to perfectly imitate
them.


Ways imitation can be avoided:
 Unique Historical Conditions (Caterpillar, e.g.)

Causal Ambiguity (why resources create SCA is not
understood, even by the firm owning them)


Imitating firms cannot duplicate the strategy since they do not
understand why it is successful in the first place.
Social Complexity (trust, teamwork, informal relationships,
causal ambiguity where cause of effectiveness is uncertain)

E.g. A competitor steals all the scientists in an R&D lab and
relocates them to a new facility. But, the “dynamics”,
“culture” and “atmosphere” are not the same.
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Sustainable Competitive Advantage
Substitutability


There must be no equivalent resources that can be
exploited to implement the same strategies.
Forms of substitutability:


Duplication: Although no two management teams are
the same, they can be strategically equivalent, produce
the same results.
Substitution: Very different resources can be substitutes,
e.g.



A charismatic leader with a clear vision for a strategic
planning dept.
A superior marketing strategy for a recognized brand name.
A superior technical support group for an intelligent
diagnostic software package
ENG491 Technology Entrepreneurship
Week #8 «Key Resources and Cost Structure»
Notes on “Sustainable”
 Sustainable
last forever.
 Sustainable
does not mean the advantage will
suggests the advantage lasts long
enough that competitors stop trying to
duplicate the strategy that makes the
advantage sustained.