Module 2: Understanding agribusiness models

Learning objectives
Participants will gain knowledge about:

 The concept of agribusiness models

 The Business Model Canvas

Contents
2.1 Introduction

2.2 Management vs. leadership

2.3 The Business Model Canvas

2.4 Example of a Business Model Canvas

2.5 After deciding a business model

References

2.1 Introduction
According to the article Business Models, Business Strategy and Innovation by David J.
Teece developments in the global economy have changed the traditional balance between
customer and supplier. New communications and computing technology, and the
establishment of reasonably open global trading regimes, mean that customers have more
choices, variegated customer needs can find expression, and supply alternatives are more
transparent. Businesses therefore need to be more customer-centric, especially since
technology has evolved to allow the lower cost provision of information and customer
solutions. These developments in turn require businesses to re-evaluate the value
propositions they present to customers in many sectors, the supply side driven logic of the
industrial era has become no longer viable.

This new environment has also amplified the need to consider not only how to address
customer needs more quickly, but also how to capture value from providing new products
and services.

1
Without a well-developed business model, innovators will fail to either deliver or to capture
value from their innovations. This is particularly true of Internet companies, where the
creation of revenue streams is often most perplexing because of customer expectations that
basic services should be free.

A business model articulates the logic and provides data and other evidence that
demonstrates how a business creates and delivers value to customers. It also outlines the
architecture of revenues, costs, and profits associated with the business enterprise delivering
that value.

Or as the Danish entrepreneurship professor Soren Haugaard says: The art of business is to
combine product and market to a profitable form

The issues related to good business model design are all interrelated, and lie at the core of the
fundamental question asked by business strategists: how does one build a sustainable
competitive advantage and turn it to profit?

In short, a business model defines how the enterprise creates and delivers value to customers,
and then converts payments received to profits.

To profit from innovation, business pioneers need to excel not only at product innovation but
also at business model design, understanding business design options as well as customer
needs and technological trajectories. Developing a successful business model is insufficient
to assure competitive advantage as imitation is often easy: a differentiated (and hard to
imitate) yet effective and efficient business model is more likely to yield profits. Business
model innovation can itself be a pathway to competitive advantage if the model is
sufficiently differentiated and hard to replicate for incumbents and new entrants alike.

Business model ends up as a business plan

In essence, a business model embodies nothing less than the organizational and financial
architecture of a business. It is not a spreadsheet or computer model, although a business
model might well become embedded in a business plan and in income statements and cash
flow projections. But, clearly, the notion refers in the first instance to a conceptual, rather
than a financial, model of a business.

It makes implicit assumptions about customers, the behavior of revenues and costs, the
changing nature of user needs, and likely competitor responses. It outlines the business logic
required to earn a profit (if one is available to be earned) and, once adopted, defines the way
the enterprise ‘goes to market’.

Another description of a business model

The business guru, Peter Drucker, an Austrian-born American management consultant,
educator, and author, whose writings contributed to the philosophical and practical

2
foundations of the modern business corporation, said a business model is to answer the
following three questions:

1. Who are the target customers?

2. What are the values for the customers?
3. How are the values delivered to the customers?
Business modelling theory has many other academic researchers, who elaborate further on
the above definition. This course is not an academic exercise in business modelling but a
course where you learn how to effectuate and implement a good business model in a new
business.

2.2 Management vs. Leadership

Peter Drucker has a quote saying: “Leadership is doing the right things. Management is
doing things right”

Leadership

 By saying that “leadership is doing the right thing” he is referring to his business
model definition: To develop a good business, you must know who your customers
are, what value you deliver to the customers and how you get in contact with your
customers. In short “What to do”

To help you to do the right thing The Business Model Canvas is a good tool.

Management

 By saying “management is doing things right” he is referring to how the entrepreneur

is managing her business in terms of sales, purchase, sales channels, marketing,
product development, communicating to stakeholders, setting the right price,
organizing the paper work etc. In short “How to do it”.

To implement and describe how “you do things right” you will use the business plan.
In the next modules there will be focus on making a business plan for your new company but
first an introduction to the Business Model Canvas, a tool that helps generate a business
model.

2.3 The Business Model Canvas

The most used business model material in colleges and Universities in the world today is The
Business Model Canvas by Alexander Osterwalder and is described in the book Business
Model Generation.

3
 Source: https://strategyzer.com/canvas/business-model-canvas

What Osterwalder has done is to take a helicopter and look down on a typical business, big or
small. From this height he has been able to point out 9 building blocks that a business is built
from. Instead of only describing the 9 buildings blocks in text he has taken a canvas and
drawn all the building blocks. Like this:

Source: https://strategyzer.com/canvas/business-model-canvas

4
How to us The Business Model Canvas
As an entrepreneur or an entrepreneurship trainer you draw the canvas on the wall, a black
board or on a big sheet of paper. You now can see with your own eyes se the building blocks
of any company. From here you design the business model for your new company. Discuss
and design with friends, partners, and fellow students how to make the best equation between
“Value Proposition” and “Customers” and the connection between the two must be described
in the Channels building block.

The canvas is a good way of keeping track of the discussion.

Below is a description of each of the 9 building blocks and later an example of how it can be
effectuated.

1) Key Partner: In order to optimize operations and reduce risks of a business model,
organizations usually cultivate buyer-supplier relationship. Complementary business
alliances also can be considered through joint ventures or strategic alliances between
competitors or non-competitors.

E.g. if a group of women pepper growers wants to start selling pepper online they could
make a partnership with young website professionals in the nearby town. The women deliver
products and the web people deliver web technology

2) Key Activities: The most important activities in executing a company's value proposition.
As an example for a street food shop: the key activity would be purchase of raw food,
preparing food, sales of food.

3) Key Resources: The resources that are necessary to create value for the customer. They
are considered assets to a company that are needed to sustain and support the business. These
resources could be human, financial, physical and intellectual.

4) Value Proposition: (the center building block). The core of this business model lies in
developing a Value Propositions and it is defined as: The collection of products and services
a business offers to meet the needs of its customers. According to Osterwalder, a company's
value proposition is what distinguishes it from its competitors. The value proposition
provides value through various elements such as newness, performance, customization,
"getting the job done", design, brand/status, price, cost reduction, risk reduction,
accessibility, and convenience/usability.

If you want to approach customers who are looking for a cure for headache a good value
proposition for your shop will be to sell headache pills.

The value propositions may be:

 Quantitative – price and efficiency

5
  Qualitative – overall customer experience (sale of headache pill) and outcome (no
more headache & can go to work again)

5) Customer Relationships: To ensure the survival and success of any businesses,

companies must identify the type of relationship they want to create with their customer
segments. Various forms of customer relationships include:

 Personal Assistance: Assistance in a form of employee-customer interaction. Such

assistance is performed during sales in a shop and/or after sales.

 Dedicated Personal Assistance: The most intimate and hands-on personal assistance
in which a sales representative is assigned to handle all the needs and questions of a
special set of clients.
To sell and perform massage is dedicated personal assistance.

 Self Service: The type of relationship that translates from the indirect interaction
between the company and the clients. Here, an organization provides the tools needed
for the customers to serve themselves easily and effectively.
You could provide a basket so the customer collects the items herself.

6) Channels: A company can deliver its value proposition to its targeted customers through
different channels. Effective channels will distribute a company’s value proposition in ways
that are fast, efficient and cost-effective. An organization can reach its clients through its own
channels e.g. Store front, website, partner channels (major distributors), or a combination of
them all.

7) Customer Segments: the far-right building block in the canvas is described as this: To
build an effective business model, a company must identify which customers it tries to serve.
Various sets of customers can be segmented based on their different needs and attributes to
ensure appropriate implementation of corporate strategy to meet the characteristics of
selected groups of clients. (Read more about customer segmentation in module 7 & 8)

8) Cost Structure: This describes the most important monetary consequences while
operating under different business models. The cost structure will often be described in an
operating budget (See module 10).

9) Revenue Streams: The way a company makes income from each customer segment.
There can be several ways to generate a revenue stream. E.g. sale per item, per kilogram or a
monthly subscription.

2.4 Example of a Business Model Canvas

In this example a group of women pepper growers have decided that they will try to sell their
pepper seeds via a webshop. They have drawn the 9 building blocks a new business model is
build around using the wall of their store room as a canvas. When everyone involved in

6
creating a new business model can see The Business Model Canvas it becomes easier to talk
about each building block

The women start discussing how to manage the different building blocks and one of the
women are putting up labels on the canvas with the findings.

Picture 2: Pepper tree. Source: pixabay.com

1) Key Partner: The women know they are professional in growing, collecting, drying and
packaging the seeds. They have for years done this and sold the seeds to middlemen who
come by their farms and buy for further sale. But selling online via a webshop they have no
idea what to do. So they need to partner up someone who knows operating a webshop. One
of the women has a son who works in the nearby city actually managing a webshop for a
textile factory. They decide to ask him for help.

When the seeds are sold through the webshop, the seeds must be posted to the buyer so they
must be able to deliver the seeds to a post office every day. To a start when there are few
buyers the seeds can be transported by bicycle to the post office 7 km away.

2) Key Activities: The activities needed to be able to sell seeds online are:

 Growing

 Harvesting

 Drying

 Packaging in nice 25/50 g bags

 Packaging for sending overseas

 Transport to post office

7
  Managing and marketing of the webshop
3) Key Resources: The resources needed in order to grow and send pepper seeds:

 Access to farmland with pepper trees

 Knowledge to grow and process pepper seeds

 Packaging facilities

 Webshop
4) Value Proposition: The women have for some time been discussing how they can benefit
more financially of their hard work. They have experienced by their own eyes that the price
paid by the middlemen and the price in the supermarkets is 40 times higher. They have also
experienced that tourist passing by their small stand at the market are exited to hear how they
grow their pepper and the tourists are ready to pay a much higher price for their pepper.

This led to them to the idea that they might be able to sell directly to the overseas tourists in
their homeland and to the middleclass in Asia by adding extra value to the pepper seeds, the
value of being organic and grown by women in the rural areas.

5) Customer Relationships: When being online the women cannot talk directly to the
customers so the have to find ways to connect to the online customer. Pictures say more than
many words so the webshop must be packed with authentic pictures and videos from the
production process of the pepper. The webshop partner can use his smartphone to take
authentic pictures of the women in the group.

6) Channels: The channel that connects the value proposition in this example is the
webshop.

7) Customer Segments: The women pepper group will have different customer segments.

 They will probably continue selling to the middleman as long the webshop sale is low

 The consumers reach through the stand at the market

 Online customers overseas

 Online customers, metropoles in Asia

8) Cost Structure: The main extra costs for setting up a webshop to sell the seeds and
thereby creating a new business model are:

 Design of webshop

 Staff to manage and marketing of webshop

 Purchase of packaging material

8
9) Revenue Streams: The way the new business model generates income is:

 Online sales of pepper products

The finished Business Model Canvas will look like this:

Picture 3: How the canvas looks after being used to make a business model for a pepper
webshop. Source: Writers own work

2.5 After deciding a business model

With the help of the Business Model Canvas you have found your business model for selling
organic pepper seeds online to customers in Europe and USA. You can start writing your
own personal business plan.

The next modules will teach you how to create a business plan using the inputs from the
Business Model Canvas, illustrated like this:

9
Picture 4. Business model must now be described in a business plan.
Source: Writers own work

10
References
[1] Business Models, Business Strategy and Innovation by David J. Teece: Long Range
Planning, Volume 43, Issues 2–3, April–June 2010, Pages 172-194

David J. Teece has a Ph.D. in economics from the University of Pennsylvania. His research
interests span industrial organization, business strategy, organizational economics, and public
policy. He is the author of over 200 published articles and books. His most recent book is
Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth
(Oxford University Press, 2009). He has four honorary doctorates and was the co-founder
and Vice Chairman of LECG Corporation. Institute for Business Haas School of Business
University of California, Berkeley, California 94720.

[2] Osterwalder, A., Pigneur, Y., 2010. Business Model Generation: A handbook for
Visionaries, Game Changers, and Challengers. John Wiley & Sons. Prencipe, A., Davies, A.,
Hobday

Find more information and download of a Business Model Canvas at:

https://strategyzer.com/canvas/business-model-canvas

11