1. New Business Ventures Session #4&5: Business Model & Market Entry Choices BALAGOPAL VISSA INSEAD 1, Ayer Rajah Avenue Singapore 138676 --- Office: (65) 67995382 Hand phone: (65) 94244573 Email: balagopal.vissa@insead.edubalagopal.vissa@insead.edu These notes are intended to support class discussions. They should not be considered a comprehensive set of issues to be dealt with.

2. The story so far.. Module #1 focused on how entrepreneurs make decisions while pursuing opportunity Module #2 shifts our attention to the content of their decisions on business models, entry strategy and positioning

3. Business Models are… …Stories + Numbers that explain how a firm creates value & appropriates its share Storyline = Who is the customer and how to create value for him / her / it Numbers = How do we make money on this

4. What is Value Creation in a Supply Chain…. Buyers Firm Suppliers Products/Services Resources Source: Adapted from Brandenburger & Stuart (1996) ($) Value Created Buyer willingness to buy Supplier willingness to sell (i.e. Opportunity cost) Price Cost Firm’s appropriation of created value

5. Value Created & Value Appropriated Value Appropriated Value Created

6. A Business Model Enables  Value creation by Increasing buyer willingness to buy Decreasing supplier opportunity cost  Value appropriation by Enhancing the firm’s bargaining position

7. Choices underlying a business model WHO: is our customer? in terms of customer segments in terms of geographic regions WHAT: do we sell our customers? in terms of products & services HOW: do we make and distribute products to customers? in terms of how to get the products to the customers in terms of operations in terms of alliances with vendors & complementors

8. A good business model entails… Making clear choices Making difficult choices – recognizing tradeoffs Making consistent choices Internally – Mutually reinforcing choices Aligned with developing capabilities and resources Externally – Realistic about demand and supply conditions Sensible assumptions on competitive conditions

11. In sum… ACG’s Business Model seems Clear on the choices underlying the “who- what-how” Internally consistent Realistic about external assumptions

12. Critical challenge in market entry How do you manage the tension between over- investment and premature abandonment?

13. Planning under uncertainty about market acceptance 1. Break down investments to account for their impact on current / future profitability 2. Evaluate the major risks / uncertainties underlying each investment 3. Identify the timing of market signals that will resolve uncertainties 4. Develop contingency plans

14. Key principles underlying the framework Test products / processes through “toe- hold” stakes Invest early in assets with high salvage values Defer investments in assets that are specialized to a particular group of customers or suppliers

16. Key takeaways – “Transient” Opportunity Industry is attractive because it has formidable entry barriers >> Entrepreneur wants to enter but can’t Industry is unattractive because it’s too easy to enter >>Entrepreneur doesn’t want to enter Re-frame the entry question as : How do I make money in the meantime (i.e. before equilibrium)?

17. Key Takeaways – Risks Vs Return in Market Entry Enter through toe-hold stakes wherever possible Classify investments based on how they impact profitability – present & future Identify & look out for “GO-NO GO” market signals on your investment

18. ACG renamed Adesemi in 1998 Went bankrupt in 2000. Monique cites following reasons: –TTCL’s incompetence –Later, (after privatization) TTCL’s hard negotiations on margins –Technical integration with TTCL’s network affected operating days –Cultural differences –Pre-mature attempts at expansion How it ended…..

19. What happened to ACG? “Central to our business model was the assumption that Adesemi would receive a commission on the thousands of additional phone calls it generated each day on the network of the national phone company, Tanzania Telecommunications Company Limited (TTCL). Such an arrangement is the industry norm throughout the world. But no matter how much we pleaded or cajoled, TTCL refused to pay us any commission...” Monique Maddy, 2000