Cost structure

This presentation given by students of MBA in Entrepreneurship.

1. ENTREPRENEURSHIP COST STRUCTURE PRSENTED BY: ANKIT SAND UMA SHARMA DIWANSHU GAUR (MBA-III SEMESTER) PRESENTED TO: ASST. PROF. JYOTI TANWAR GROUP – 6 TH

2. Table of content Osterwalder’s Business Model Canvas Definition of cost structure Types of cost structure Characteristics of cost structure Types of Business by cost structure Case Study Key Questions to ask

3. OSTERWALDER’S BUSINESS MODEL CANVAS BOXES Customer segments Value propositions Channels Customer Relationship Revenue streams Key resources Key Activities Key Partnership Cost structure This model is given by Mr. Alexander Osterwaldern who is a Swiss business theorist

4. COST STRUCTURE A method to determine how much it will cost a company to manufacture a product and how much profit will be recognized from manufacturing the product . The expense that a firm must take into account when manufacturing a product or providing a service .

5. Input (Raw Material) Processing Storage (Cold Storage) Transportation (Logistics) Marketing & Sales After sale service BASIC COST STRUCTURE FOR ALL ORGANISATION

6. 4 T’S MODEL OF COST STRUCTURE Tariff (TAX & DUTIES) TRANSPORTATION (LOGISTICS) TIME COST TRANSACTION (BUYING AND SELLING INSTANCE) COST

7. Types of cost structures includes: Transaction cost Sunk cost Marginal cost Fixed cost The cost structure of the firm is the ratio of fixed costs to variable costs. One example is ‘no frills’ airlines like South West which are completely focused on reducing costs.

8. CHARACTERISTICS OF COST STRUCTURES Cost structures have multiple characteristics. These are highlighted below ; Fixed costs Variable costs Economies of scale Economies of scope

9. Economies of scale The higher the volume, the lower the overall cost per unit.  Economies of scale is the cost advantage that arises with increased output of a product.  Economies  of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit  fixed cost  because these costs are spread out over a larger number of goods. Economies of scale may also reduce  variable cost  per unit because of  operational efficiencies

10. Economies of scope Economies of scope  refer to the reduction of costs when a business invests in multiple markets or a larger scope of operations. The average cost of production is therefore expected to decrease if a company opts to increase the number of goods it produces. A company will have a structure in place already along with all the departments such as Marketing, Finance or HR operating, so the company can increase their scope and hence economize the entire structure . EX:. P&G

11. TYPES OF BUSINESSES BY COST STRUCTURE Costs will always remain a major concern for all businesses. It is in fact the universal concern. However, some businesses make it an organizational mission to minimize costs as much as possible and all their strategies and tactics are derived from this one goal. Hence businesses can be categorized into two extremes based on the volume of goods produced; both ends of the spectrum are either cost driven or values driven. Realistically though, companies usually fall somewhere in the middle of this spectrum Cost-driven Values-driven

12. Cost-driven B usiness model which is utterly focused on reducing costs. This is essentially a race to the bottom. This make impact on the other building blocks. A business which is cost-driven focuses on creating a lean cost structure through offering cheaply priced value propositions, a high degree of automation, and outsourcing of costly functions. It is important to lower your prices based on internal costs and expenses rather than in response to what the competition is doing.

13. Values-driven A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or value its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Not all companies drive their business based on costs. Some focus completely on the  value  they are providing to their customers . This strategy is characterized by complete focus on the creation and delivery of a high value, value proposition which is highly customized to the customer segment’s preferences. Luxury hotels opt for a values driven approach. The Hyatt prides itself on its customer services and amenities. They put a lot of effort into creating an experience which customers are willing to pay top dollar for. Employees of the hotel are encouraged to anticipate individual customer’s needs right down to greeting a repeat customer by name and providing them with a room with their preferences already in place.

14. CASE STUDY: GOOGLE

15. Key questions to ask When doing a thorough analysis of your business model, it is imperative to ask the following  questions when filling in the Cost Structure building block of the  business model canvas ; What are the fundamental costs derived from my business model? Which  Key Resources  represent a significant expense to the business? Which Key Activities represent a significant expense to the business? How do your Key activities drive costs? Are the above mentioned activities matched to the Value Propositions for your business? By exploring different permutations of your business model, do the costs remain fixed or become variable? Is your business more values driven or cost driven?