Entrepreneurship

Building an Effective Business Model

Chapter Objectives

1. Describe business models and discuss their importance

2. Identify and describe the two general types of business

models—standard and disruptive business models

3. Explain the components Business Model Template that

entrepreneurs can use to develop a business model for
their firm
4. Business Model Canvas
Her Campus Media

A national online magazine for college women with student

chapters across the USA
• Core competency
• Developing interesting content
• Low cost
• Accessibility of content
• Brands Advertisement
• Sponsorship visible on the websites
• Event based marketing
• Target Market
• College women

• Mission
• To produce on a daily basis, the
college life guide.
• Revenue Model
Business Models

• How organizations create, deliver and capture value

(Osterwalder et al., 2012)

• a firm’s underlying core logic and strategic choices for creating

and capturing value within a value network
• Stories that explain how enterprises work (Magretta, 2002)
• Dropbox – freemium
Importance of Business Model

• Serves as an ongoing extension of feasibility analysis

• A business model continually asks the question, “Does this

business make sense?”

• Focuses attention on how all the elements of a business fit

together and constitute a working whole

• Articulates a company’s core logic to all stakeholders,

including all employees
Diversity of Business Models

• There is no standard business model for an industry or for

a target market within an industry

• However, over time, the most successful business models

in an industry predominate

• There are always opportunities for business model

innovation
General Categories of Business Models

• Standard Business Models

• Standard business models depict existing plans or recipes

firms can use to determine how they will create, deliver, and
capture value

• Amazon = mail order business model and moved it online

• eBay = auction business model already existent
• Brichbox= subscription based model, innovation made are
the revenue stream
General Categories of Business Models

Business Model Representative Companies

Advertising Business Model Google, Facebook

Auction Business Model eBay, uBid.com
Bricks and Clicks Business Model Apple, Barnes & Noble

Franchise Business Model Panera Bread, 24-Hour Fitness

Freemium Business Model Dropbox, Pandora
Low-Cost Business Model Southwest Airlines, Walmart
Manufacturer/Retailer Business Model Fitbit, Tesla Motors
Peer-to-Peer Business Model Airbnb, Uber
General Categories of Business Models

• Disruptive Business Models

• Rare, that do not fit the profile of a standard business model

• They are impactful enough that they disrupt or change the

way business is conducted in an industry or an important
niche within an industry
Types of Disruptive BM

• New Market Disruption

• Addresses a market that was previously unserved
• Google AdWords- Organic snacks

• Low End Market Disruption

• When the firms in an industry continue to improve their products or services
to the point where they are actually better than a sizeable portion of their
clientele needs or desires

Raynair and Southwest

 General Categories of Business Models

Disruptive Business Models

Business Model Company or Companies That
Introduced It

Direct-to-Consumer Computer Sales (which Dell

allowed consumers to customize their computers)

Online Text Ads on Search Engines (allowed Yahoo, Google

advertisers to place ads for products that searchers
were already searching for)
Software as a Service (SaaS) (By moving software Salesforce.com
to the cloud, allowed users to access the software
and their data from anywhere there was an Internet
connection)
General Categories of Business Models

Disruptive Business Models

Business Model Company or Companies That

Introduced It

Cloud-based Service to Connect Riders and People Uber, Lyft

Willing to Provide Rides (Provided riders with an
app that connects them with the owners of private
cars)
Dell’ Business Models
Barringer/Ireland Business Model Template

• Barringer/Ireland Business Model Template

• Although not everyone agrees precisely on the
components of a business model, many agree that a
successful business model has a common set of attributes

• These attributes can be laid out in a visual framework or

template so it is easy to see the individual parts and their
interrelationships
Barringer/Ireland Business Model Template
Core Strategy

• A core strategy describes how the firm plans to compete

relative to its competitors

The primary elements of

core strategy
 Primary Elements of Core Strategy

• describes why it exists and what its business

model is suppose to accomplish
Mission
Statement • It gives a direction to the business

Basis of • What makes you ‘different’

Differentiation • limit of differentiation to 2-3 key points
• Refer to benefits rather than features
 Primary Elements of Core Strategy

Target Market • place within a larger market segment that

represents a narrow group of customers with
similar interests
• should be made clear in the business model
template

• Products and markets on which it will concentrate

Product/Mark • start with a narrow (or limited) product/market
et Scope scope, and pursue adjacent product and market
opportunities as firm grows
Resources

• The inputs used to produce, sell, distribute, and service a

product or service

• Important resources should be difficult to imitate and hard to

find a substitute for
• This stipulation is necessary for an individual company’s business model
to be competitive over the long term
Resources

• Core Competencies
• A specific factor or capability that supports a firm’s business
model and sets it apart from rivals

• various forms,
• technical know-how,
• an efficient process,
• a trusting relationship with customers,
• expertise in product design, and so forth

• Most start-ups will list two to three core competencies in their

business model template
Resources

• Key Assets
• assets that a firm owns that enable its business model to
work.
• The assets can be physical, financial, intellectual, or human.
• Physical assets include physical space, equipment, vehicles, and
distribution networks.
• Intellectual assets include resources such as patents, trademarks,
copyrights, and trade secrets, along with a company’s brand and its
reputation.
• Financial assets include cash, lines of credit, and commitments from
investors.
• Human assets include a company’s founder or founders, its key
employees, and its advisors.
Importance of Strategic Resources

• New ventures ultimately try to combine their core

competencies and strategic assets to create a sustainable
competitive advantage

• This factor is one that investors pay close attention when

evaluating a business

• A sustainable competitive advantage is achieved by

implementing a value-creating strategy that is unique and not
easy to imitate

• This type of advantage is achievable when a firm has strategic

resources and the ability to use them
Financials

• The third component of a firm’s business model focuses on its

financials

• how it earns - one of the most fundamental aspects of its business

model
 • the ways in it • describes the most

Cost structure
Revenue
makes money important costs
• Single and experienced
multiple streams • Identify
• E-g Restaurants, • whether the business
Beauty Salon is a cost-driven or
value-driven business.
• the nature of a
business’s costs
• The major cost
categories
Financials

• Financing/Funding
• Many business models rely on a certain amount of financing
or funding to bring their business model to life.
• At the business model stage projections do not need to be
completed to determine the exact amount of money that is
needed. An approximation is sufficient.
• There are three categories of costs to consider:
• Capital costs.
• One-time expenses, such as building a Web site and training initial
employees.
• Provisions for ramp-up expenses (most businesses experience costs
before they earn revenues).
Financials

• Financing/Funding (continued)
• Personal resources to fund their business
• own profits from day one
• an initial potion of funding or financing is needed
• The business model template should indicate the appropriate
amount of funding that will be needed and where the money
will most likely come from
Operations

• The final quadrant in a firm’s business model focuses on

operations
• Represent the day-to-day heartbeat of a firm.
Operations

• Product (or Service) Production

• how a firm’s products and/or services are produced
• For example, if a firm sells a physical product, the product
can be manufactured or produced in-house, by a contract
manufacturer, or via an outsource provider.
• This decision has a major impact on all aspects of a firm’s business
model.
• In case of service: brief description of how the service will be
produced
Operations

• Channels
• Delivery prod/service to customers
• Direct selling
• Through intermediaries (wholesalers etc)
• Combination of both

• Sales force that calls on potential customers to try to close

sales. This is an expensive strategy but necessary in some
instances.
Operations

• Key Partners
• Start-ups rely on key partners to perform important roles

• The table on the next slide identifies the most common

types of business partnerships.
 THE BUSINESS MODEL CANVAS

Start-up is unique, should not be treated as a smaller version of a

company
Business Model Canvas
KEY KEY VALUE CUSTOMER CUSTOMER
PARTNERS ACTIVITIES PROPOSITIONS RELATIONSHIPS SEGMENTS

KEY
RESOURCES CHANNELS

COST STRUCTURE REVENUE STREAMS

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Creating value requires Apple iPod/iTunes
infrastructure

Key Activities Customer Relationship

Obsessive brand
Hardware design
Loyalty
Marketing
Switching costs

Key Partners Key Resources Value Proposition Distribution Channel Target Customer

Record companies People Seamless music Retail stores Mass market

Apple Brand Experience Apple stores
OEMs Content agreements Apple.com
Ipod hardware Search, buy and Itunes Store
Itunes software Enjoy digital music

Cost Structure Revenue Model

People Large hardware revenues

Manufacturing Some music revenues
Marketing & sales

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