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04-Developing An Effective Business Model
04-Developing An Effective Business Model
04-Developing An Effective Business Model
business model(04)
Proposing a national online magazine for
college women.
Her
Campus Written by 4000-plus college journalists.
Media
Financing/ Revenue
Funding Streams
Cost Structure
• Revenue Streams
– A firm’s revenue streams describe the ways in which it
makes money.
– Some businesses have a single revenue stream while others
have several.
– For example, most restaurants have a single revenue
stream. Their customers order a meal and pay for it. Other
restaurants may have several revenue streams—including
meals, a catering service, product sales (such as bottled
barbeque sauce for a barbeque restaurant), and apparel
products with the name of the restaurant on them.
• Cost Structure
– A business’s cost structure describes the most important
costs incurred to support its business model.
– It costs money to establish a basis of differentiation,
develop core competencies, acquire and develop key assets,
and so forth.
– Generally, the goal for this box in a firm’s business model
template is threefold:
▪ Identify whether the business is a cost-driven or value-
driven business.
▪ Identify the nature of the business’s costs.
▪ Identify the business’s major cost categories.
▪Cost-driven business focuses on minimizing costs where
possible.
▪Value-driven business focuses on offering a high-quality
product or personalized service.
• 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 incur
costs before they earn revenues).
Initial capital infusion of $500,000 from founder
Esty Blake Mycoskie.
Profits from business Operations.
Operations
• Operations
– Operations are both integral to a firm’s overall business
model and represent the day-to-day heartbeat of a firm.
Key Product
Partners Production
Channels
• Product (or Service) Production
– This section focuses on 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.
– If a firm is producing a service rather than a physical
product, a brief description of how the service will be
produced should be provided.
⚫ Esty Website
⚫ Retail partners
Etsy
⚫ Temporary holiday storefronts
• Key Partners
– The final element of a firm’s business model is key partners.
– Start-ups, in particular, typically do not have sufficient
resources (or funding) to perform all the tasks necessary to
make their business models work, so they rely on key
partners to perform important roles.
⚫ Third-party developers
⚫ Local organizations and businesses
Etsy
⚫ Community and business alliances
Chapter Summary
• LO1. A business model is a firm’s recipe for how it intends to create, deliver, and capture
value for its stakeholders. In essence, a business model deals with the core aspects of how
a firm will conduct business and try to succeed in the marketplace. The quality of the
business model a firm develops, as well as the quality of how the model is executed, affect
the firm’s performance in both the short- and long term. How well the different parts or
elements of a business model fit together and are mutually supportive affects its quality.
The best business model is developed and executed in ways that are difficult for
competitors to understand and imitate. Moreover, the greater the difference between a
firm’s business model and those of its competitors, and assuming that the model has been
effectively developed, the stronger the likelihood a firm will be competitively successful.
Thus, an entrepreneurial firm wants to develop a business model that clearly specifies how
the firm intends to be uniquely different from its competitors and create value for
stakeholders as a result.
• LO2. There are several types of business models. However, it is important for an
entrepreneur to understand that no particular type of business model is inherently superior
to any other model. The “best” business model is the one that allows a firm to effectively
describe the value it intends to create for stakeholders and appropriately details the actions
it will take to create that value. Standard and disruptive business models are two well-
recognized categories of business models. Standard business models depict or reveal plans
or recipes firms can use to determine how they will create, deliver, and capture value for
stakeholders. Many of the standard models have been in existence for many years. When
selecting a standard business model, an entrepreneurial venture believes that it can
integrate the elements of that model uniquely as a means of creating value while
competing against rivals. Disruptive business models, which are rare, are ones that do not
fit the profile of a standard business model and are impactful enough that they disrupt or
change the way business is conducted in an industry or in an important segment or niche
of an industry. A new market disruption and a low-end market disruption are the two types
of disruptive models. A new market disruption finds a firm using a business model through
which it is able to address a market that was not previously served (think of Google as an
example). A low-end market disruption is possible when firms already competing in an
industry are providing customers with products or services that exceed their expectations-
-desires. This “performance oversupply” creates an opportunity for an entrepreneurial
venture to enter an industry to provide customers with a product or service functionality
that more closely approximates what they want. Low-cost business models are often used
to create a low-end market disruption (think of Southwest Airlines in the US and Ryanair in
Europe as examples).
• LO3. Comprehensive in scope, the Barringer/ Ireland Business model template features 4
major categories and 12 individual parts. As a tool, entrepreneurs can use this business
model template to describe, project, revise, and pivot its intended actions until they are
convinced that the model’s elements are integrated in a way that will yield an exciting and
viable business firm. Core strategy, which describes how the firm plans to compete relative
to rivals, is the first of the four major categories. The firm’s mission, the basis of
differentiation, target market, and product/ market scope are the parts of the core strategy
category. Resources, the second category, are the inputs a firm intends to use to sell,
distribute, and service its product or service. Core competency, is a specific factor or
capability that supports a firm’s business model and differentiates it from competitors and
key assets, or the assets a firm owns that enable its business model to work, are the
critical resources a firm needs to execute as called for by its chosen core strategy. The third
category, -
-financials, which is concerned with how the firm intends to earn money. Revenue streams,
which deal with the exact ways a firm earns revenue, cost structure, which includes the
most important costs (both fixed and variable costs) the firm will incur to support the
execution of its business model, and funding/ financing (dealing with how the firm will
support or cover its costs) are the parts of the financials category. Operations is the fourth
and financial category featured in the Barringer/ Ireland Business model Template. The
product (or service) production part of this category details the firm’s intended production
methods. The channels part specifies how products or services will be delivered to
customers, while the key partner part identifies others with whom the firm intends to
collaborate as a means of supporting its operations.