How can your organization become a market driven one? In order to be market driven, companies must do more than update their strategy or sales and marketing departments, they must transform their entire business toward the ultimate goal of continually responding to the ever changing requirements of their customers.

Achieve this and the business will be successful by delivering real value to its customers over and above that of its competitors. Another way to say this is that one of the advantages of being market driven is that relationships with customers can be more enduring than other type of competitive advantage.

To be market driven the whole organization should have the customer as a major point of focus. This customer focus begins with the setting of corporate strategy and must be reinforced through the organizational structure and the setting of targets. Diagrammatically, you can think of this as follows.

As can be seen from the above diagram the customer permeates all aspects of the business. Marketing strategy will derive from the corporate strategy, which in turn drives ALL the activities of the organisation. How well this execution happens will ultimately be seen in the results. To ensure the whole organization is focussed on the customer, bonuses and other incentives and rewards should be linked to customer focussed behavior in addition to results. As mentioned, the customer permeates the entire business, however having said that the most important aspects to link to the customer are corporate strategy and the KPIs.

When translating the corporate strategy into the sales and marketing strategy there are three points to consider:

1. Market Segmentation

Which markets does the company want to target? Common ways to perform segmentation include by geography, by psychographics, and by benefits sought by the customer.

2. Customer Segmentation

Within a given market, what customer profiles does the company want to target?

3. Target Setting

What are the targets for the company? Here targets need to be set which ensure the organization is fully focussed on its customer. Note that this means much more than hitting sales or margin targets. Targets need to be picked which demonstrate that the business is becoming more and more customer focussed. Examples include customer satisfaction scores and customer lifetime value.

Ultimately what you should be looking to achieve is a good understanding of the market you intend to serve, combined with an understanding of what customers want and their priorities when making a purchasing decision. To back this up you need to put measurable targets (KPIs) in place that show the organization is moving in the right direction.

This is not a one-time process – the cycle of listening and understanding the market and your customer and then taking steps to meet that need should be continually repeated. It can be a good idea to continually use a Deming Cycle (plan, do, check, act) to achieve this.

Previously we examined the business model of insurance comparison sites using the business model canvas as a template. In this article we’ll examine the business model of personal credit check sites. These sites allow customers to view their credit rating and the factors that influence it. The basic premise is that customers than then if they wish, take steps to improve these factors so that they find it easier to get credit.

Let’s go through each of the 9 sections of the canvas in turn.

1. Customer Segments

These companies target the mass market consumer segment. Within that segment customers are likely to be larger credit users with a number of outstanding loans, but this is not a definite.

2. Value Proposition

The value proposition is that using this software can make it easier for you to get your next loan, essentially, that you should care as much about your credit score as companies do. Your credit check history obviously changes over time, and some companies allow you to subscribe so you can ensure your credit history reflects reality over time. As a hook to the subscription many companies offer the initial credit check for free.

3. Channels

The are two main channels to reach the customer. The first is channel is direct via the website. The second is via affiliates. The business will often recruit affiliates to direct potential customers to the website. If any of this traffic converts to a real customer then the affiliate will receive a cut of the revenue, either on a one-time or monthly basis.

4. Customer Relationships

The relationship with the customer is usually self-service, in that the customer uses the website themselves without any help to view their credit history. There will also typically be customer support via both email and telephone to assist where customers have problems.

5. Revenue Streams

Monthly recurring revenue is received from each customer. This makes it important for this type of business to understand the customer lifetime value of the average customer in order to properly determine its advertising budget and other costs.

6. Key Resources

The website and the platform behind it are the key resource of this type of business.

7. Key Activities

Marketing is a major activity for this type of business, both towards the consumer themselves and also to potential affiliates. Continuous platform development is another major activity.

8. Key Partnerships

Although this type of business has many affiliates, the key partnerships will be with those businesses the platform must integrate with in order to provide an accurate and comprehensive credit report.

9. Cost Structure

From examining the previous 8 aspects of the business model it should come as no surprise that the major costs for this type of business focus on marketing activities and ongoing platform development.

Summary

This type of business is very similar to financial product comparison sites in terms of cost structure, channels, key resources and activities. The main difference is that this type of business actually has a product to sell whereas financial product comparison sites don’t.

* Image by Andres Rueda

Systems thinking provides a way to understand how different factors influence each other within a whole. This type of problem cannot be easily understood by traditional reductionist or logical thinking. But what exactly is systems thinking?

Giving a definition of systems thinking is difficult as it’s something that is best understood through experience. Let’s start to build our experience…

Consider the following question: how do you tell the height of a skyscraper using a barometer? Niels Bohr famously answered this exam question along the following lines…

• that you could tie a piece of string to the barometer and lower it from the top of the skyscraper, then measure the length of the string plus the barometer to get the height of the building.
• that you could drop the barometer from the top of the building and measure the time it took to hit the ground, then use this time as the basis for calculating the height of the building.
• that you could measure the length of the shadow cast by the vertical barometer and measure the length of the shadow cast by the building, then use some simple proportional mathematics to calculate the height of the building.
• that you could take a reading of the air pressure on the ground and at the top of the building, then convert the millibar difference into feet to get the height of the skyscraper.
• finally he pointed out that the easiest way to find the height of the building would be to knock on the janitor’s door and ask him to tell you the height of the building in exchange for a nice new barometer.

Apart from showing how clever Niels Bohr is, this story highlights a couple of points relevant to systems thinking. Firstly, that different people can look at a given situation from different perspectives. Secondly, that these people with their opinions and views are also part of the situation.

Now imagine that you have a weekly decision making meeting in work. The meeting isn’t working – trivial decisions are being debated for hours with certain individuals reluctant to back down on any given point. At the end of the meeting everyone feels exhausted and like they have been to battle. Now imagine that you want to understand why the meeting isn’t working so as you can improve it. What would you do?

One logical approach is to analyse everyone who attends the meeting and decide for that person if they are contributing to or detracting from the meeting being successful. You could then remove the most destructive person from the meeting in the hope the meeting improves.

It’s quite unlikely that the meeting would improve as as result of this action, as your analysis only looked at the constituent parts or components of the meeting and not the relationship between all the people in the room. It is the relationships and interactions between all the people in the room that is making the meeting unsuccessful, and not one individual in isolation.

This is where systems thinking comes in by helping us to analyse problems as a whole. You can think of systems thinking as simply a toolbox of tools to help us examine complex systems such as the meeting example above in a holistic way.

* Image by dgray_xplane

I’ve recently been investigating mobile advertising and have been amazed to discover so many different advertising options available to online advertisers. Here are just some of the different types I’ve encountered…

Banner Ads

These are squares or rectangles containing adverts on a website. They can earn a publisher money either on a pay-per-click (PPC) or pay-per-thousand-impressions (CPM) basis. These banners link directly to the advertisers site and so attract potential customers to the advertisers site.

Email Marketing

Companies contact existing customers through email with the aim of both building a relationship with them, and encouraging them to return and purchase more. This can be done through a variety of means including cross selling, rewarding loyalty, up selling, providing notification of special offers etc.

Bridge Ads

These adverts appear as the user moves from one page to another within a publisher’s website. Users don’t request to see these adverts but they are easy to skip if the user would rather ignore them. When clicked they again take the user to the advertisers web site.

Pop Up Ads

These typically appear when a user loads a new page, or after a short time delay when they have loaded the new page. Personally, I find these ads intrusive as they really interrupt what I’m doing but it is this interruption that the advertiser hopes will bring more potential customers to their website.

Sponsorship

In an effort to build brand awareness and win new customers, advertisers often sponsor a site or a section of a site where their adverts appear. Another common type of sponsorship is where the advertiser sponsors a competition held by a site.

Affiliate Ads

Here the advertiser doesn’t pay for the advert to be placed on the publisher’s site. Nor does the advertiser pay when an advert is clicked. Instead, the publisher only gets paid when a user clicks through from the publishers site and actually makes a purchase.When this happens the published (or affiliate) will earn a commission on the sale, typically ranging anywhere from 5% to 50% of the sale price depending on the type of product purchased.

Search Engine Optimisation

This isn’t as clear cut to understand as the types of advertising described above. Here the aim is to optimise your web pages to make them search engine friendly as well as increasing the number of links to your site using a variety of techniques. Both of these have the impact over time of increasing the position of your site for specific search terms in search engines. If the search terms are relevant to the products you sell this will drive more potential customers to your site.

Finally…

I’ve specifically been looking at mobile advertising providers such as Madvertise UK, but I’ve been amazed by how many options are available to those looking to advertise online, and how many factors within those options are important in order to maximize the return on your investment.

The CEOs of major corporations earn multiple millions of dollars. The press and public often express outrage at how much these business leaders earn and yet almost everyone agreess that good CEOs and leadership teams earn their money. What exactly is it that these great leadership teams do that makes their companies so great?

One way to examine this question is to look at what is common to all great businesses. One thing you will notice in all great organizations is that all the employees have a real sense of purpose. They work hard, efficiently as a team, innovating and improving both product and process rapidly day after day.

A major task of company leadership then is to promote this type of behavior in order for the organization to be very successful. A weapon for senior executives to promote these behaviors is the moral compass.

A moral compass (or moral purpose) is a meaningful value that resonates with employees, appeals to their inner self, making them believe (not think) they are doing something worthwhile. Essentially, the employees must feel they are working on a mission, not just working on a project or in a 9 to 5 job.

A great story illustrating moral purpose comes from the time of the Nasa space programme to put man on the moon. It is about a janitor who is asked by a reporter what his role is within the organization, and replies, “I’m helping to put a man on the moon”. That’s moral purpose! Where everyone is committed towards the same goal no matter how large or visible their individual contribution is.

Another simple example is Wal-mart, where staff have the simple purpose of giving customers a great deal, or Apple, who make customers love the mundane but necessary task of interfacing with computers.

Notice that the moral purpose should never be about making money. An organization making more money is not very important for almost all employees. Social contribution and making the world a better place however, is. Organizations need to work to find the moral purpose closest to their strategic intent.

In terms of how to spread your moral intent through the organization in a way that connects with people, some simple tactics include:

• Turn your vision into a story
• Tie a part of bonuses to behavior and realization of the moral intent
• Create a moral purpose strong enough that employees want to rise above average
• Leverage the energetic people within the organization to act as evangelists for the moral intent.

Summary

The moral compass is a conceptual tool which appeals to a higher sense of good within employees, enabling them to rise above a standard level of employee performance. The key to creating a moral compass is to create a sense of contribution to society or of doing good for mankind within your employees. Great CEOs and leadership teams know how to tap into the moral compass of their employees to make their company successful.

* Image by daynoir

Hedging is defined as an investment intended to lower the risk of negative price movements in an asset. In business, hedging is typically used to protect a business from major negative changes in the cost of raw materials. Essentially, hedging is a tool that can help businesses minimise or negate costly changes to input prices.

The Simplest form of Hedge

In its most simple form a hedge involves the purchase of insurance against future events. In our personal lives we use home insurance to hedge against the risk of our house burning down, amongst other things. Of course, nobody expects their house to burn down, but there is a risk it could happen, so to protect ourselves from this we pay a premium to have home insurance as a hedge against this risk.

In a business context the simplest form of hedge might be done by taking out a futures contract. An airline, for example, might want to hedge against changes in the price of fuel. To do this the airline might make a hedge to buy fuel at a set price in the future, avoiding the risk that political unrest in the middle east (for example) could significantly drive up fuel prices in the intervening period.

The business would obviously have to pay to take out this hedge against future price rises. If however, the price of fuel fell during this period, then yes, the hedge has been unnecessarily purchased, however, the fall in the fuel price may mean the business is on the whole paying no more than when the futures contract was purchased.

Margin Protection

Ultimately, and I hope you can see this from the above example, hedging is about bringing stability to a business. This stability can be defined as the ability for a business to maintain its margins regardless of whether the price of a raw material moves up or down.

Under certain circumstances it may not make sense for a business to use hedging, even if it depends on a raw material whose price is volatile. If a business has a very strong financial position then it may be more profitable under all but the most extreme of circumstances to ride out this price volatility and save money by avoiding the cost of purchasing numerous hedges.

Summary

In its simplest form you can think of hedging as insurance against the risk of future events occurring, thus bringing stability to a business. The example provided above is very simple. There are of course many different reasons why a company may wish to use hedging including to protect itself against business foreign exchange fluctuations. There are also many different ways to hedge, including forward exchange contracts for currencies, pairs trading, futures contracts for interest, and money market operations for currencies, to name just a few.

* Image by Living Walls Instant Hedges

Price comparison sites allow users to compare the prices of different products within a particular domain, for example, home and car insurance.

Let’s examine the price comparison website business model in terms of the Business Model Canvas introduced in a previous article, by going through each of the 9 building blocks in turn. To keep things simple we’ll stick to consumer focussed companies rather than business to business companies.

1. Customer Segments

Most of these types of business will target the mass market consumer segment, but smaller companies may target niches of consumers, for example, the owners of performance cars or the owners of expensive homes.

2. Value Proposition

The value proposition is based on offering a low price. This type of business is saying that by comparing all of the companies in the market we can get you the best insurance deals, parcel delivery/courier deals, and even broadband deals.

3. Channels

There are typically two channels that this business model will use. Direct to consumer via the Internet is one, and via affiliates is the other. The affiliates will then advertise the comparion site on their website and take a cut of any products sold.

4. Customer Relationships

The relationship with the customer is initially self-service, in that the customer does all the work to obtain a quote themselves. Often telephone and email backup is provided if there is a problem, or to help the customer make their payment.

5. Revenue Streams

The revenue streams are based on selling the products of others, the comparison site does not have any products of its own. Revenue is typically a percentage of each product sold.

6. Key Resources

The key resource in this type of business is the platform itself. The platform will either take batch feeds or communicate in real-time with each of the product providers. It must also provide a uncomplex user experience and journey to the customer.

7. Key Activities

The key activities of this type of business are twofold. They must be focussed on marketing, both to customers and to affiliates to drive eyeballs to the site. They will also be focussed on platform development, constantly improving the platform in a number of ways, including adding new products and making changes to increase the conversion rate.

8. Key Partnerships

The key partnerships will be with those businesses with whom the platform must integrate in order to sell their products.

9. Cost Structure

The majority of costs incurred in this type of business come from marketing activities. The next biggest cost will be the human resources needed to maintain and develop the platform. For an insurance comparison business the cost structure will be very different to traditional insurers, as an insurance comparison business is not an insurance business but a platform business using marketing to attract consumers.

Summary

The above descriptions should make the price comparison site business model easy to understand at a high level. Below you will see this information sketched on to the business model canvas we looked at previously:

If you were interested in developing this model further or disrupting the market then a next step might be to get people together from diverse backgrounds and examine ideas around what could be changed in each box of the business model canvas to gain a competitive edge.

When you think in an abstract way businesses can appear very complex, after all, all businesses above a certain size contain multiple departments with often competing activities, internal processes, multiple partners, suppliers, and customers etc.

If we try and think about all of this at once it can become very confusing and especially difficult to understand the core of what a particular business is about. This is where a Business Model Canvas can come in very handy. It shows you on a single page the big picture of how a business operates. Because it shows everything on a single page it makes it easy understand the business model, and easy to share and communicate the business model..

Building Blocks

There are nine building blocks which comprise the Business Model Canvas. Let’s briefly describe each in turn:

1. Customer Segments

Every business needs to serve one or more customer segments. Businesses can define their own customer segments, but standard ones include mass market, niche customer segments, and customer problem based customer segments.

2. Value Proposition

This defines what customer problem is being solved and what need is being filled. Typical characteristics to base a value proposition on include performance, cost savings, reduction of risk, and price.

3. Channels

Channels are the routes by which a business’ products and services are delivered to market. Channels fall into two broad categories. Direct, such as engaging a sales force or selling direct to the consumer through the Internet, and Indirect, such as being a wholesaler or selling through affiliates.

4. Customer Relationships

A relationship is established with each customer segment that a business serves. Examples of customer relationships include personal assistance, communities, and self-service.

5. Revenue Streams

Products and services (value proposition) which are successfully sold to customers will result in revenue streams. There are many different types of revenue stream including subscription fees, licensing, renting, and brokerage fees.

6. Key Resources

These are the key assets and organization needs in order to deliver the value proposition. They could be physical resources or human resources, for example.

7. Key Activities

An organizations key resources will perform a number of key activities. This could be anything from factories producing goods through to problem solving.

8. Key Partnerships

Are any key partnerships in place to make the business model work? It is for example a common occurrence to outsource the non-core activities of an organization. It is also common to offshore and outsource manufacturing to save money.

9. Cost Structures

Running an organization results in costs, and we refer to these as the cost structure.

The Business Model Canvas

If the description of the building blocks have left you very confused, then the canvas makes a lot more sense when you see one. I’ve copied and uploaded a Business Model Canvas Template so you can use it to model existing business models or experiment with new ones.

One thing to notice about the Business Model Canvas is that those elements to the left of the value proposition essentially represent costs to the business, whereas those elements to the right of the value proposition generate revenue for the business.

Business make investments and acquisitions for a whole array of different reasons. All investments and acquisitions have a financial aspect to them and it is this financial side of the investment I want to look at here.

I think a guiding principle for all but the most maverick of businesses and investors should be:

Letters of Intent are very common in business transactions and help organisations to avoid misunderstandings right from the initial stages of a deal or transaction. Other commonly used names for letters of intent include heads of terms, term sheets, and memorandums of understanding.

As you can probably imagine, the detailed terms and conditions involved in a commercial transaction can be very complex. To aid the process in allowing the two organizations to reach a formal and final commercial agreement, a letter of intent is frequently used. Heads of Terms can be a great way for organizations to agree the high-level commercials of a deal, and provide a roadmap to get to the deal, without yet undergoing the expense of having formal legal contracts drawn up.

Are Letters of Intent Legally Binding?

Whether or not a letter of intent is legally binding should be stated on the first page of the agreement. To this affect you will often see “subject to contract” written on the first page, however, you can’t rely in all instances to not be legally binding. Also, whilst the entire Heads of Terms may not be legally binding, some items of it may be, and should be explicitly stated as such, for example, it is common to specify that confidentiality should be maintained, or to specify the jurisdiction where breeches of contract should be heard.

Advantages of Letters of Intent

The main advantages of a letter of intent are as follows:

• Their creation can bring to light and then clarify any misunderstandings or potential misunderstandings early in the deal process, before both organizations begin to invest large sums of money involving layers etc in a formal process.
• They provide an early opportunity to introduce some binding terms, such as non-disclosure.
• They can lay down a staged schedule to reach a formal deal that both sides agree on and are happy with.
• They increase the confidence of both organizations to move forward.

Disadvantages of Letters of Intent

The main disadvantages of letters of intent are as follows:

• They can become legally binding under certain circumstances when this was not the intention of the organizations.
• By agreeing to a letter of intent at an early stage in the process you may hinder your ability to negotiate a better deal late in the process.
• If a long time is taken to agree a letter of intent, then this may effectively result in the deal being negotiated twice, with the heads of terms merely being some kind of initial compromise agreement.
• Both competition and international law may be applied to the letter of intent.

Summary

In summary, heads of terms can be very useful for clearing the path and schedule towards complex deals between organizations. Obviously, you need to be mindful of their pitfalls and do not need to use them for simple transactions.

* Image by aresauburn™