Lean Canvas Business Model Analysis Free Essay
Lean Canvas Model Appraisal
The Lean Canvas Model is a technique used for creating business models. It is an adaptation of the business canvas model. It is specifically used for startup businesses. The main objective of the lean canvas model is to outline the model of the new business clearly and concisely on one page. The lean canvas model has nine key components. These include the top problems, customer segments, value proposition, solutions, advantages, revenue streams, cost structure, key metrics, and channels (Maurya, 2012).
The importance of the business model is it increases the visual thinking capacity of the investors and the entrepreneur. It allows for quick and concise information on the business plan at a glance. The business model also allows for iterative thinking where each employee can add an idea or think into the different segments of the model. Another advantage of this is it allows the entrepreneur to quickly see the interconnection between the different segments of the business. The business model allows for concise and creative thinking without mixed-up ideas lost in prose writing. The one-page business model is easier and more convenient for investors to read through and share via pictures (Ries, 2011).
Interpretation of the elements of the Lean Canvas Model
The next component is the customer segments. This is used to describe the target consumer, their needs, and wants. The aim of this is to identify where the interests of the market lie. A startup company has limited resources therefore it has to limit itself to providing the consumer with the most essential commodity. A company must complete this market segmentation process to thrive. Target consumers are classified according to their respective roles in the organization. This ranges from the economic buyers, the technical buyers, and the end users of the product. The process of determining a startup company’s target consumer is precise in that the product is innovative and has the possibility of rejection by the consumer. The day in a life or application strategy may be applied to aid in this process. It involves the description of the consumer’s day before and after the purchase and use of the company’s product. The results of this exercise may help choose the most receptive market and target it for maximum profits (Christensen, 2004).
Concerning demographic factors, studying the population and age structures in a particular country could help determine whether or not the product of the company will receive a good response and amass a large clientele. The factors to consider before introducing a new product or company in a new country are the economic and financial state of the market to establish the purchasing power and patterns of spending.
The natural factors involve the shortage of product raw materials, level of pollution, and ongoing sustainable projects. The company should use these factors to determine a market gap to be filled and the needs of the target consumers in a foreign country. The technological environment encompasses studying the pace at which the technological market in the country changes. Also, the response the market usually has to new technologies. Research on these past trends may help the company determine whether the business opportunities in that country will be beneficial.
A community’s culture will strongly influence its response to certain goods and services. The company will decide, using this information, which of its products will do well in which country (Lambing, 2000). These factors may lead to the alienation and complete blackout of certain products from markets targeted without appropriate research.
The next component is the value proposition. This is a term used to outline the benefits of a particular product. These benefits encompass the functional and psychological benefits the product accrues to the consumer. This value must be considered from the consumer’s point of view and not the organization's. The consumer must consider the value of the product to be superior to the competition and set it apart from the rest. The product must be a necessity and not simply a commodity. All the product’s attributes represent its value to the consumer. When developing a value proposition, the startup must take into account the consumer segments and the problems. This is why entrepreneurs must have relevant information concerning both the product and their target market (Aaker, 1996).
The business model value proposition forms the backbone of the business venture. It outlines how the business plans on acquiring its clientele and creating brand loyalty to retain these clients or consumers. This component shows how the business plans to make money and the nature of the partners and key operations it will have (Meaden, 2012). The value of goods and services determines the response the consumer will have to the company as a whole. The service industry is more complicated because the customer tends to respond to the service provider. This starts with the physical environment of the premises to the attitude of the service provider.
Another key component is the key metrics that determine the success of a startup. Metrics are the key activities within the startup that must be measured and monitored. These include sales revenue and data may be used to determine how the company will be fair in the market and its performance in comparison to the competitors. Measurement of consumer loyalty and attraction is done using surveys, direct feedback through questionnaires, or interviews at the point of purchase and carrying out an analysis of the purchase practices. The cost of attracting new customers is measured by dividing the total cost of acquisition, such as advertisement and marketing, by the number of new customers. Continuous monitoring of staff productivity is a very crucial aspect of business management. Monitoring the size of the gross margins measured using total sales revenue. The higher the gross margin, the higher the number of profits the company makes. This is especially important for startups to ensure the efficiency and productivity of their production process are improving with time, as is expected. Calculating monthly profits as well as losses allows startup investors to predict the future of the business. Companies with margins below 60% experience many difficulties growing. Examining the operational costs of a business every month is very important during the early years of a business. Keeping these costs at a minimum may have a positive impact on the growth of a business. The final key metrics to be observed are the variable costs incurred size of the inventory and the total labor hours used for each function (Osterwalder, 2002).
The channels are the avenues used to communicate the value proposition to the target market. These channels need to be chosen wisely especially in the case of a startup company to ensure profitable consumer acquisition. This means the company is expected to budget for this wisely. Another point to consider is whether these channels will allow full exposure to the target market. The entrepreneur must study his/her target consumer and with this knowledge pick the most affordable channel that is sure to reach the consumer. These channels range from the internet to the media be it radio or television advertisements.
Revenue streams describe the process by which revenue is generated in the market and the target margins of profit to be achieved. Revenue generation is through the sale of products, leasing of property, subscriptions, and financial support from investors. This set will describe how the company will collect revenue from the value propositions. Startup companies may take a long time before they turn a profit because a new product takes a long time to be adopted into the market. Also, profits in a startup may be low because most of the returns are plowed back into the business for new employees and marketing fees. Entrepreneurs must be prepared to work without any personal profits during the first year of their business. This is essential to reap the benefits of proper finance management in the future (Kotler, 1986). Following the resource dependency theory, an organization’s goal is to lower dependence on external organizations in the supply of limited resources within its environment and obtain a mechanism for influencing them to procure the requisite resources. The strength of an organization’s linkage to another for a certain resource is motivated by two factors. One factor is the level of importance of the resource to the survival of the organization. Valuable and scarce inputs like raw materials and parts, as well as resources like distribution outlets and consumers, are primal to the survival of the organization. The second factor is the length to which external organizations have control over the resources. Organizations are dependent on their environment for the requisite resources for survival and growth. Organizations, therefore, attempt to manage individual transactions with other organizations to secure access to the resources on which they depend. This functions to accord managers’ help in choosing an inter-organizational strategy by facilitating them with the capacity to weigh the savings in transaction costs attained from the use of a specific mechanism of linkage against the bureaucratic costs associated with operating the linkage mechanism. Since this modus operandi affords to focus on costs ascribed to different mechanisms of linkage to lower uncertainty, it can make better predictions than a resource-dependent modus operandi concerning when the company ought to choose a particular inter-organizational strategy
Strategic alliances can be utilized in the management of not only symbiotic interdependence but also competitive interdependencies. Various competitors can cooperate and develop a joint venture for establishing a common technology that will function to save them a copious amount of money, although they may be competing for consumers once their final products enter the market. Another advantage of these alliances is deterring new entrants or harming existing competitors. Organizations may also enter strategic alliances in developing a new technology that they can consequently protect from their rivals by securing defending patents.
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The cost structure of a business model shows the expected expenditure of the startup business. This allows the entrepreneur to outline a proper budget and financial requirements for the investors. These costs include fixed, variable and operational costs. The fixed costs include rent, utilities, phone and communication bills, accounting, postal costs, technological costs, advertising and marketing, and employee wages. Variable costs include the costs of goods sold, packaging costs, customer service, direct sales and marketing salaries, and commissions. This part of the business model will seek to show whether or not the costs are aligned with the value propositions. The costs must be sustainable so as not to lead to consumption of all profits hindering company growth.
The entrepreneur is said to have an unfair advantage over the other businesses in that they are at liberty to develop a new business model. Another advantage is that a startup has an additional risk of failure because its products are untested and unproven. This confers the entrepreneur an advantage over a well-established firm. Startup ventures are more prepared to handle anything ranging from slight market changes, to consumer preference changes and are more prepared to accept and handle these risks (Chesbrough, 2010). Most entrepreneurs have the unfair advantage of domain experience. This is the fact that most entrepreneurs introduce products into an industry they are familiar with where they have inside information. This also creates very important networks for the entrepreneur to utilize during the startup period of his/her business. The people in an entrepreneur’s network are his or her greatest potential source of capital, clients, employees, and feedback. Before jumping into an entrepreneurial endeavor it’s essential to take an inventory of the resources in one’s network.
A practical example is the Subscription business model used by companies like Amazon.com Technology. The business model describes the Subscription model applied by the company. The business model's top problems for this company are the provision of access to online video streaming, unlimited access to articles both for social media and news, and online purchase and download for books and gadgets, such as the kindle. The customer segments outlined in this company's business model are divided into three consumer sets, the developer and seller customers. The company has 7.6 million customer accounts.
The value proposition in this model is providing unlimited access to customers at a recurring, reasonable price. The company also seeks to offer the consumer a wide variety of products to choose from. The channels used in this model rely exclusively on an internet connection; websites and software applications for mobile phones are used. Revenue streams are through subscription fees and purchases of Amazon items. Key metrics used in the business model aim to measure customer satisfaction, these include, websites tailored for consumer and editorial reviews as well as manufacturer information on products.
The key factors contributing to the success of Amazon are centered on cost structure and customer relationships. The company remains profitable by keeping its cost low relative to the pricing. Once revenue from subscription fees is above the costs, the company is set to succeed. Maintenance of good customer relationships and loyalty has been achieved through satisfactory automated websites which are easy to navigate and free shipping offers after customers spend a set amount of money, to encourage an increase in the size of the basket. Amazon communicates information to its consumers, such as; delivery date estimates, inventory availability, and shipment delivery notifications. These factors and activities have made Amazon one of the leading profitable businesses in the world.
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