Chapter 1:

A business model = how to do business

• The business model of a firm or business unit is innovative when its activity system
is new in the product-market space
• A business model is geared toward total value creation, for all parties involved, not
only the focal firm

Business model innovation = how to do business in new/innovative ways

Business strategy = issues concerning the scope of a firm
Corporate strategy = centers on establishing and sustaining the competitive advantage of a
firm
4 Dimensions of a business model that can be a source of business model innovation =
1. Content (What does your firm do that’s innovative?)
Set of activities, these can change over time
2. Structure (How does your firm execute these innovations?)
how its various activities are linked, the mechanisms that link them, the sequence in
which they are linked
3. Governance (Who executes these innovations?)
identifies which stakeholders in the business model perform which activities
4. Value Logic (Why will the last 3 steps be innovative and successful?)
how it helps the focal firm create and capture value
Common Themes that characterize business models =
1. Centers on the logic of how value is created for all stakeholders, not only the value
of one firm
2. Activities performed by the local firm, partners, suppliers, customers play an
important role
3. System level, holistic approach (strategy that focuses on connecting everyone in the
organization to achieve main goals) to explain how firms do business
4. The business model is being used/emerging as a new area of analysis in the
business world
The business model extends the concept of the value chain by =
1. Emphasizing on value creation and delivery dynamics
2. Expanding firm and industry boundaries
3. Allowing for non-linear sequencing of interdependent activities
The business model = a system of interdependent activities that are performed by a focal
firm and partners + the mechanisms that link these activities together
An activity = the engagement of human-, physical-, and/or capital-resources of any part of
the business model with a specific purpose toward achieving the business’ goals
Activity system = set of interdependent and interconnected activities that are centered on
a focal firm. It consists of the activities that are conducted either by the focal firm or by
partners, customers, or vendors
Value creation = increasing the size of the pie, creating economic value for customers
employees and shareholder
Value appropriation = taking the bigger slice, capturing the value that is created, creating a
competitive advantage
10 Practice Questions Chapter 1:
What does business model innovation refer to?
a) How to do business in traditional ways
b) How to establish a competitive advantage
c) How to do business in new/innovative ways
d) How to expand firm boundaries

What is the primary focus of business strategy?

a) Creating economic value for stakeholders
b) Establishing and sustaining competitive advantage
c) Executing innovative activities
d) Expanding industry boundaries

Corporate strategy centers on:

a) Innovating business models
b) Value creation for all stakeholders
c) Establishing and sustaining competitive advantage
d) Expanding firm boundaries

Which dimension of a business model deals with the set of activities that can change over
time?
a) Content
b) Structure
c) Governance
d) Value Logic
In a business model, structure refers to:
a) How the firm creates and captures value
b) The logic of value creation for all stakeholders
c) How the firm executes innovative activities
d) The linkage and mechanisms that connect activities

Governance in business model innovation identifies:

a) The sequence of activities within the model
b) How value creation and delivery dynamics are emphasized
c) Which stakeholders perform specific activities
d) The holistic approach to achieving firm goals

Value Logic in a business model explains:

a) How the firm expands industry boundaries
b) Why the firm focuses on value creation for all stakeholders
c) How the firm executes innovative activities
d) Which activities are performed by the focal firm

Which common theme characterizes business models?

a) Focus on value creation for all stakeholders
b) Importance of activities performed by partners only
c) Narrow focus on the value of one firm
d) Lack of system-level, holistic approach

The concept of a business model extends the value chain by:

a) Emphasizing value creation and delivery dynamics
b) Restricting firm boundaries
c) Enforcing a linear sequence of activities
d) Focusing on individual activities instead of the system
What is an activity system in the context of a business model?
a) A specific purpose toward achieving business goals
b) A set of interconnected activities centered on a focal firm
c) The engagement of resources to create economic value
d) The process of capturing value for competitive advantage

Answers:

c) How to do business in new/innovative ways.

b) Establishing and sustaining competitive advantage.
c) Establishing and sustaining competitive advantage.
a) Content.
b) The linkage and mechanisms that connect activities.
c) Which stakeholders perform specific activities.
b) Why the firm focuses on value creation for all stakeholders.
a) Focus on value creation for all stakeholders.
a) Emphasizing value creation and delivery dynamics.
b) A set of interconnected activities centered on a focal firm.
Chapter 2
A digitally driven business model -> reduces transaction costs and enables new transaction
architectures or systems
• These new systems can address customer needs in new or superior ways and
therefore create superior value

The activity-based framework provided several advantages over the early transaction-based
framework =
1. Managers and entrepreneurs tend to think more naturally in terms of activities than
in terms of transactions
2. In the academic literature, transactions are often considered in isolation and not as
part of a system, as business model thinking requires
The activity system perspective is anchored in five received theories of value creation:
1. Schumpeterian innovation
• ‘Creative destruction’: following technological change, ideas coming from risky
initiatives in uncertain and complex environments become available to
entrepreneurs.
 • These ideas (Schumpeterian rents) become established practices
• The primary source of value creation is innovation

2. Resource-based view
o Marshaling and uniquely combining a set of complementary and specialized
resources and capabilities, may lead to value creation
o The demand side view points out that demand is what makes resources
valuable
o Resources can be considered the micro-foundations of business models
o Business model designers need to strike a careful balance between value
creation and appropriation
3. Transaction cost economics
o The central questions this theory addresses is why firms internalize
transactions that might otherwise be conducted in markets
o Transaction efficiency is a major source of value
4. Value chain analysis (Michael Porter)
o What activities should a firm perform and why?
o What is the configuration of the firm’s activities that would enable it to add
value to the product and to compete in its industry?
o Several steps:
1. Defining the strategic business unit
2. Identifying critical activities
3. Defining products
4. Determining the value of distinct activities
• Value is the amount buyers are willing to pay for what a firm provides them
• Drivers of product differentiation are policy choices, linkages, timing,
location, sharing of activities among business units, learning, integration,
scale, and institutional factors
• Strategic network theory
o Strategic networks are ‘stable interorganizational ties which are strategically
important to participating firms
o Why and how are strategic networks of firms formed?
o What is the set of inter-firm relationships that allow firms to compete in the
marketplace?
o How is value created in networks?
o How do firms’ differential positions and relationships in networks affect their
performance?
o The size of the network and the heterogeneity of its ties have a positive
effect on the availability of valuable information to the participants within
that network
o A network effect occurs when something becomes more valuable as the
amount of users increases

The business model is not a traditional strategy

o The business model complements the traditional strategy
o Competition in the 21st century is also among business models of focal firms
The business model is not all-encompassing -> The business model is not a business plan

10 Practice questions Chapter 2:

A digitally driven business model reduces transaction costs and enables new transaction
architectures by:
a) Increasing transaction complexity
b) Creating new sources of value
c) Eliminating customer needs
d) Focusing on traditional transaction-based frameworks

The activity-based framework provides advantages over the early transaction-based

framework because:
a) Managers and entrepreneurs prefer transaction-based thinking
b) Activities are considered in isolation and not as part of a system
c) It aligns with business model thinking
d) It reduces the need for value creation

According to the Schumpeterian innovation perspective, the primary source of value

creation is:
a) Resource combination and uniqueness
b) Marshaling complementary resources
c) Schumpeterian rents from established practices
d) Technological change and risky initiatives

The resource-based view suggests that value creation is achieved by:

a) Internalizing transactions for efficiency
b) Balancing value creation and appropriation
c) Defining critical activities in a business unit
d) Considering demand as the driving force for resource value

Transaction cost economics focuses on:

a) Internalizing transactions to reduce costs
b) Creating and capturing Schumpeterian rents
c) Analyzing the value chain to identify critical activities
d) Marshaling and uniquely combining resources

Value chain analysis, proposed by Michael Porter, emphasizes:

a) The formation of strategic networks among firms
b) The configuration of activities to add value and compete
c) Timing, location, and learning in value creation
d) Defining the strategic business unit and its products

Strategic network theory examines:

a) The availability of valuable information within networks
b) Product differentiation drivers and institutional factors
c) The impact of network size on competition
d) The demand side view of resource value

The business model complements traditional strategy because:

a) It encompasses all aspects of a firm's operations
b) It focuses solely on competition among business models
c) It eliminates the need for a business plan
d) It addresses value creation beyond traditional strategies

The business model is different from a business plan because:

a) It includes all aspects of a firm's operations
b) It focuses on value creation and competition
c) It outlines the strategic business unit's critical activities
d) It involves only transaction-based frameworks

Competition in the 21st century is also among:

a) Business models of focal firms
b) Resource combinations and uniqueness
c) Schumpeterian rents and innovation
d) Traditional strategies within industries

b) Creating new sources of value.

c) It aligns with business model thinking.
d) Technological change and risky initiatives.
b) Balancing value creation and appropriation.
a) Internalizing transactions to reduce costs.
b) The configuration of activities to add value and compete.
a) The availability of valuable information within networks.
d) It addresses value creation beyond traditional strategies.
b) It focuses on value creation and competition.
a) Business models of focal firms.

Chapter 3

Once the template of a business model has been set, it will be difficult to change

Entrepreneurs and general managers often don’t pay enough attention to the design of
their business model. There are several factors explaining this:
1. People aren’t used to thinking in terms of activities (vs. products) or
organizational systems (vs. functions)
2. People focus on what they are cognitively familiar with, resulting in blind
spots
3. Managers don’t pay close enough attention to blind spots
4. Failing to question the received business model
Those with a business model mindset -> think proactively and holistically about how to do
business. That is, when analysing business problems and opportunities, they think about
their firm’s system of activities

Two mindset traps:

o Focusing on the product/technology/process as a source of innovation
instead of the business model, requires a more system-level, holistic
perspective. This refers to the risk of getting trapped in the wrong level of
analysis
▪ Firms in this trap have difficulty unlearning the old model.
Improvements made to their business models are incremental, called
local unlearning, which prevents a more fundamental business model
overhaul
▪ Three distinct aspects of the level-of-analysis mindset trap:
1. Failure to pay attention to fundamental questions and worries
about the overall business logic
2. Failure to pay attention to long-term trends in market and
core technologies
3. Failure to think strategically about the business model
o Taking the business model as a given and following a dominant template,
such as the prevailing and most familiar business model in an industry. This
refers to the risk of being trapped in a specific business model template, and
of failing to realize that the business model is a variable that can be subject to
change. This is the familiarity trap

Business models -> can be conceived of as mental models that consist of concepts and
relations that organize managerial understandings about the design of activities and
exchanges that reflect the critical interdependencies and value-creation relations in their
firm’s exchange networks

2 cognitive practices used by founders of firms with highly innovative business models:
1 Industry-spanning search
▪ Occurs when managers actively search outside their industry for the
stimulus to develop a novel business model
▪ The opposite is industry-focused search, which occurs when managers
benchmark and copy elements from what they consider successful
business models in their own industry. This enables improved
efficiency through imitation, but without increasing novelty
2 Complex system thinking
1. Occurs when the leaders of a business model initiative display
exceptional awareness of their industry structure and functioning
2. Belief structures are characterized as complex based on the number
of concepts and the number of links between them
3. The opposite is internal efficiency thinking, which manifests itself
through a preoccupation with internal issues. This cognitive practice
promotes incremental rather than radical innovation (if any at all)
Successful implementation of cognitive practices = unilateral control over resources, which
enables key business model decision-makers to get things done the way they want

Under a power regime that favors organic decentralized decision-making, ->business model
innovations are less likely because, in order to reach consensus, radical proposals are
filtered out

Two generative cognitive processes – analogical reasoning and conceptual combination.

Both have a similar sequential structure consisting of the following steps
1. Identification of another business model (source model) that serves as a
template for the business model that needs to be innovated (target model)
2. Comparison of the source with the target business model to determine what
elements of the source may create value in the target
3. Integration of the elements from the source into the target business model
4. Modification of these elements to fit the target model better

Analogical reasoning =
• Stretching: applying an analogy to a new context, even in cases where there are
significant differences
• Bending: changing the firm activities to better fit the analogy invoked through
stretching. This creates better correspondence between the target and source
domains. The bending process focuses on changing the context of the analogy rather
than the analogy itself
• Positioning: utilizing stretching and bending as a source of differentiation and to
develop a competitive position in the market
Conceptual combination = comparing one or more source models with a target business
model, then focusing on the differences among them to generate ideas for modifying the
target model, or for creating an entirely new one

Business model issues can be framed as opportunities or threats

Threats = a tendency to behave rigidly, preventing the adoption of business model

innovation due to 2 effects:
1 Threats result in the restriction of information processing
2 Power and influence become more concentrated at higher levels of the
corporate hierarchy, reducing both flexibility and variation

Opportunities = often associated with positive projected outcomes and expectations of

gain, which in general helps overcome inertia (not making fast progress), motivate change,
and promote business model innovation

2 types of inertia:
1. Failure to change resource investment patterns (resource rigidity)
2. Failure to change organizational processes that use these resources (routine
rigidity)
Managerial leadership actions to foster employees’ business model mindset:
o Clear communication and specific training
o Leaders need to develop particular criteria for selection decisions about
which employees to hire.
o Employees see and emphasize managers’ behavioral and thinking patterns
through formal and informal interactions in meetings or business trips,
during which managers can convey specific business model-related cognitive
practices
o Modeling, which occurs when leaders display behaviours that employees
perceive as exemplary or inspiring

Fostering your own business model mindset:

o Anticipating: exploring future business model concepts. Anticipating ideally
allows a manager to implement business model innovations far enough in
advance that the firm can maintain its competitive position
o Distancing: gaining perspective about the current business model through
nurturing an outside-in perspective
o Abstracting: restating business models in conceptual terms
o Reframing: generating new perspectives and new business model
alternatives

10 Practice Questions Chapter 3:

Managers and entrepreneurs often neglect the design of their business model due to:
a) Lack of cognitive familiarity
b) Focus on product-centric thinking
c) Inattention to blind spots
d) Failure to question received business models

The "level-of-analysis" mindset trap refers to:

a) Difficulty in unlearning old business models
b) Focusing on product/technology/process innovation
c) Taking the business model as a given
d) Failure to think strategically about the business model

Industry-spanning search, as a cognitive practice, involves managers:

a) Benchmarking successful business models within their industry
b) Developing a novel business model through external search
c) Focusing on internal efficiency and incremental innovation
d) Copying elements from their own industry to improve efficiency

Complex system thinking, as a cognitive practice, is characterized by:

a) Awareness of industry structure and functioning
b) Preoccupation with internal issues
c) Benchmarking and imitation for incremental innovation
d) Use of analogical reasoning for business model innovation
Unilateral control over resources enables successful implementation of cognitive practices
because it:
a) Promotes industry-spanning search
b) Encourages complex system thinking
c) Facilitates decision-making aligned with key decision-makers' vision
d) Supports consensus building for radical proposals

Analogical reasoning in business model innovation involves:

a) Identifying new contexts and applying analogies
b) Modifying elements from the source model to fit the target model
c) Comparing source and target models to generate ideas
d) Changing the context of the analogy rather than the analogy itself

Conceptual combination, as a generative cognitive process, focuses on:

a) Stretching and bending firm activities to fit analogies
b) Comparing source models to modify the target model
c) Creating entirely new business models based on differences
d) Identifying threats and opportunities in the business model

Threats to business model innovation can lead to rigidity and resistance due to:
a) Restriction of information processing
b) Concentration of power and influence at higher levels
c) Failure to change resource investment patterns
d) Inattention to blind spots in the business model

Opportunities for business model innovation are associated with:

a) Positive outcomes and expectations of gain
b) Rigid behaviors and resistance to change
c) Failure to change organizational processes
d) Restriction of information processing

Managerial leadership actions to foster employees' business model mindset include:

a) Clear communication and specific training
b) Promoting resource rigidity and routine rigidity
c) Restricting information processing and concentrating power
d) Focusing on internal issues and incremental innovation

Answers:

c) Inattention to blind spots

b) Focusing on product/technology/process innovation
b) Developing a novel business model through external search
a) Awareness of industry structure and functioning
c) Facilitates decision-making aligned with key decision-makers' vision
b) Modifying elements from the source model to fit the target model
c) Creating entirely new business models based on differences
a) Restriction of information processing
a) Positive outcomes and expectations of gain
a) Clear communication and specific training

Chapter 4

A business model is a boundary-spanning system of interdependent activities that centers

on a focal firm, yet may encompass activities performed by its partners, suppliers, and
customers in the pursuit of value creation and capture

Business model innovation is not:

• Modified activities or exchanges
• Product or service innovations
• Corporate venturing

Quantitative measures of business model innovation:

• Interviews with top executives, founders, employees, investors, board members,
and customers
• On-premises real-time observation of board meetings and key firm activities
• Firm documents such as detailed business plans, investment memoranda, or
minutes of board meetings
• Archival data

Business model innovation entails several distinct benefits for the innovating focal firm:
• It complements other forms innovation
• No large upfront investment
• It can serve as an effective barrier to imitation
• Disruptive force in an industry

Value creation effects of business models beyond process or product innovation:

• Increase customers’ willingness to pay
• Lower the opportunity costs of suppliers
• Complement product innovation to create synergistic effects
• Create an entirely new market
• Allow a firm to create and exploit new opportunities in existing markets

Low capital expenditure may come from several sources:

• The newness of the needs to be met
• The innovative ways through which the matching of resources and needs is enabled
and more efficiently and effectively managed
• The uniqueness of the complementarity among all value co-creators that the focal
firm bridges and involves in the value-creation process

Theory of Disruptive Innovation = Established companies (incumbents) focus on improving

their offerings to the most demanding customers. New entrants target overlooked
segments, often at a lower price and with less sophisticated products and/or technology.
Over time, the newcomer gradually improves its offering and more and more mainstream
customers switch from the incumbent to the newcomer

Cons of business model innovation:

• Lack of protection from imitation by competitors
• Business model innovations are hard to protect legally
• Legitimacy risk
• Risk of increased complexity
• Risk of path dependency

10 Practice Questions Chapter 4:

A business model is best described as:

a) An isolated set of activities performed by a focal firm
b) A system of interdependent activities performed by multiple stakeholders
c) A product or service innovation strategy
d) Corporate venturing focused on new business opportunities

Which of the following is NOT considered business model innovation?

a) Modified activities or exchanges
b) Product or service innovations
c) Corporate venturing
d) Strategic partnerships with suppliers

Quantitative measures of business model innovation can include all of the following EXCEPT:
a) Interviews with top executives and founders
b) Real-time observation of board meetings
c) Analysis of firm documents such as business plans
d) Financial statements of the firm's competitors

One benefit of business model innovation is that it:

a) Requires a large upfront investment
b) Reduces the need for other forms of innovation
c) Prevents imitation by competitors
d) Disrupts the industry status quo

Business model innovation can create value by:

a) Increasing customers' willingness to pay
b) Reducing suppliers' costs
c) Enhancing product innovation synergies
d) All of the above

Low capital expenditure in business model innovation can be attributed to:

a) High costs associated with meeting new needs
b) Traditional ways of managing resources and needs
c) Unique complementarity among value co-creators
d) Limited involvement of stakeholders in the value-creation process
The theory of disruptive innovation suggests that incumbents focus on:
a) Targeting overlooked market segments
b) Gradually improving their offerings for demanding customers
c) Lowering prices to compete with new entrants
d) Developing sophisticated products and technologies

Which of the following is NOT a con of business model innovation?

a) Lack of legal protection from imitation
b) Legitimacy risk
c) Increased complexity
d) Reduction in path dependency

The risk of increased complexity in business model innovation refers to:

a) Difficulty in protecting innovations legally
b) Lack of legitimacy in the eyes of stakeholders
c) The potential for the business model to become overly complicated
d) Dependency on established incumbents for market entry

Path dependency is a risk associated with business model innovation, which implies:
a) Lack of legal protection for innovative business models
b) Potential imitation by competitors
c) Limited ability to deviate from existing patterns and practices
d) The need for large upfront investments in innovation

Answers:

b) A system of interdependent activities performed by multiple stakeholders

b) Product or service innovations
d) Financial statements of the firm's competitors
b) Reduces the need for other forms of innovation
d) All of the above
c) Unique complementarity among value co-creators
b) Gradually improving their offerings for demanding customers
d) Reduction in path dependency
c) The potential for the business model to become overly complicated
c) Limited ability to deviate from existing patterns and practices

Chapter 5:

Business model innovation rarely requires a technological breakthrough as a precondition

Design = an integrated and disciplined innovation process that builds creative insight from
deep knowledge

Product design centers on the broad relationship between the focal firm and its customers,
while business model design considers multiple stakeholders such as suppliers and partners
At the business model level, design is the particular configuration of activities enabled by
business model stakeholders and the resources they deploy

Design works well for ‘wicked’ problems. ‘Wicked’ = problems don’t have an obvious
solution because of incomplete, contradictory or changing requirements, complex
interdependencies, and high (social) complexity

Design drivers (DESIGN)

• Deployable resources (internal constraints)
• External environment (external constraints)
• Stakeholders’ activities (collaboration)
• Incumbents’ templates (drawing inspiration from existing business models)
• Goals to create and capture value
• Needs of customers

The acceptance of competing constraints = the foundation of design thinking

Technologies that can give rise to new business model designs:

• Big data analytics
• Mobile channels
• Social media
• Cloud computing
• Artificial Intelligence
• Machine learning
• Blockchain
• The Internet of Things (smart devices ‘talk to each other’
• Autonomous cars
• 5G

The decision at the system level about the bundle of activities performed by the focal firm
and its partners involves 2 steps:
• A conceptualization of the set of activities that will encompass the activity
system
• Considering the appropriate activity governance

Adapting the default template (the business model of the dominant incumbent firm of one’s
core industry) fosters efficiency at the expense of novelty/newness

Mindfulness = a state of active awareness needed to design great business models

Bm innovators need to think strategically about how to protect the value that their
innovation generates from appropriation by others

To increase the legitimacy of new business model content, bm innovators can select
legitimate customer-facing activities for inclusion in their designs, built around features
that are already familiar to their clients
The likelihood of imitation of legitimate business model content can be reduced by
generating incompatibilities with incumbents’ existing business models

To increase bm legitimacy, bm designers need to make legitimate structural elements

visible, while keeping novel elements that may lack legitimacy less visible

By outsourcing some activities to legitimate partners, firms can reassure other partners
about the legitimacy of their new bm governance arrangements

Partnering with incumbents reduces their willingness to imitate bm innovation by offering

them a strong value proposition (e.g. a revenue-sharing agreement)

10 Practice Questions Chapter 5:

According to the theory, does business model innovation require a technological

breakthrough as a precondition?
a) Yes, it always requires a technological breakthrough.
b) No, it rarely requires a technological breakthrough.
c) It depends on the specific industry.
d) Technological breakthroughs are irrelevant to business model innovation.

What does design refer to in the context of business model innovation?

a) The process of creating new technologies.
b) The integration of multiple stakeholders' activities.
c) The selection of appropriate partners for collaboration.
d) The creation of new products for customers.

In business model design, which stakeholders are considered apart from customers?
a) Suppliers and partners.
b) Competitors and regulators.
c) Shareholders and investors.
d) Consumers and employees.

What is a "wicked" problem in the context of design?

a) A problem with a clear and straightforward solution.
b) A problem that is difficult to define and understand.
c) A problem that requires complex mathematical calculations.
d) A problem that can be solved by existing technologies.

Which of the following is NOT a design driver in business model innovation?

a) Goals to create and capture value.
b) External environment constraints.
c) Deployment of available resources.
d) Market demand and customer needs.

Which of the following technologies can give rise to new business model designs?
a) Big data analytics.
b) Assembly line manufacturing.
c) Traditional advertising channels.
d) Conventional supply chain management.

What are the two steps involved in making decisions at the system level for a focal firm and
its partners?
a) Identifying constraints and setting goals.
b) Conceptualizing the activity system and determining appropriate governance.
c) Assessing market demand and selecting strategic partners.
d) Analyzing competitors and implementing cost-cutting measures.

Adapting the default template of the dominant incumbent firm fosters:

a) Novelty and newness.
b) Efficiency at the expense of novelty.
c) Disruption and radical innovation.
d) Collaboration with other firms.

How can business model innovators protect the value generated by their innovation from
appropriation by others?
a) By patenting their business model.
b) By securing intellectual property rights.
c) By thinking strategically about protection mechanisms.
d) By avoiding competition with incumbents.

How can business model designers increase the legitimacy of new business model content?
a) By incorporating familiar features for clients.
b) By keeping all elements visible and transparent.
c) By avoiding any association with existing business models.
d) By eliminating the need for legitimacy in business models.

Note: The correct answers for these questions are as follows:

b) No, it rarely requires a technological breakthrough.

b) The integration of multiple stakeholders' activities.
a) Suppliers and partners.
b) A problem that is difficult to define and understand.
b) External environment constraints.
All options listed (a, b, c, and d) are correct.
b) Conceptualizing the activity system and determining appropriate governance.
b) Efficiency at the expense of novelty.
c) By thinking strategically about protection mechanisms.
a) By incorporating familiar features for clients.
 Chapter 7

Discovery-driven planning (DDP) = tackles the inherent uncertainty around designing an

innovative new bm by proposing a framework for identifying and testing crucial
assumptions

At every learning point (i.e. milestone), entrepreneurial managers need to ask themselves a
range of questions about the bm opportunity, its underlying assumptions, and whether it
truly makes sense to continue with the project in its considered form

DDP consists of 6 interrelated steps

• Framing asks entrepreneurial managers to define long-term success by asking
a series of questions. It encourages managers to first think about the end
game for their projects and work back from there
• Benchmarking asks the entrepreneurial manager to peg the key revenue and
cost metrics against the market, and against the firms with the most
comparable business models. The purpose is to establish a realistic starting
point with the new bm project
• Specification of deliverables involves laying out all the activities that are
required to generate and deliver the customer experience; it involves being
clear and specific about the operational requirements of the various activities
(the what). Key assumptions that are made should be documented in a key
assumptions checklist.
• Testing, milestones, and parsimony involve action. Key assumptions about
the business model (step 3) should be tested (step 4) early on in the business
development process at milestones (step 5) that have been preselected or
even created because they allow for maximum learning at the lowest
possible cost

Advantages of DDP
• Companies can model the uncertainties and update their financial
projections as their experiments create new data
• Companies can experiment conceptually with business models before any
investment is required
• It promises to increase overall ROI by reducing the probability and expected
cost of failure
• It creates a series of go/no-go decision points that force a manager to
explicitly consider adapting the concept, pivoting to another concept, or
abandoning the project altogether
• It requires extensive communication among all those involved in the bm
project and helps to create alignment around a common vision
• DDP enables the injection of entrepreneurial techniques and initiatives into
established firms
• It communicates to the team that failure in bm projects conducted under
high uncertainty and severe resource constraints is OK
Challenges of DDP
• Business models are sometimes difficult to grasp conceptually
• Performing market tests of entire business models can be challenging and
requires careful thought
• It can be inherently difficult to admit that you don’t know everything, which
is required for DDP
• The requirement of intensive communication can also be a challenge since
communication-intensive processes can lead to disagreements and promote
interpersonal conflict
• DDP goes against the conventional planning philosophy
• Scientific evidence about DDP is barely adequate

Planning approaches related to DDP ↴

Parallel play: taking an active interest in others around oneself and mimicking what they’re
doing

Paradox of entrepreneurship: ranking alternative viable business models requires

knowledge that can only be gained through experimentation, but experimentation to
resolve uncertainty ultimately results in some level of commitment that can shape the
market and/or influence other paths, even to the point of foreclosing other business
model alternatives
• Some scholars suggest that before making a significant commitment,
entrepreneurs should conduct an extensive, largely commitment-free
search process
• Entrepreneurs should avoid making important, costly, and potentially
irreversible choices up front without properly considering the
alternatives

Effectuation: a logic of entrepreneurial action that starts with a focus on means. Five main
principles:
• Leveraging resources at hand: resources at hand include the venture
team members. In the case of a corporate venture, the resources and
capabilities of the corporation are also included here
• Keeping in mind affordable loss: instead of adopting a profit-
maximizing attitude, effectual bm designers are mindful about what
they are prepared to lose in the worst-case scenario
• Building partnerships: Instead of being obsessed with competition,
effectual entrepreneurs seek to build strategic partnerships with the
other firms and customers around them
• Leveraging unexpected contingencies: sometimes, uncertainty is so
severe that possible outcomes cannot be identified. These situations
are called ‘unknown unknowns’. Effectual bm designers need to keep
an eye out for these surprising events, and take advantage of them
• Controlling the near future: effectual entrepreneurial action calls for
focusing on the future’s controllable aspects
Pros Effectuation:
• Applicable in many situations
• Its main principles serve to lower both the cost and the risk of failure in
entrepreneurial venturing
• The conditions under which effectuation can be used to guide bm development are
intuitive and simple
• Effectuation allows for shifting goals
• Effectuation is consistent with the idea of running experiments
• Effectuation is good for boundary-spanning activities

Cons Effectuation:
• Effectuation is best suited for nascent markets and other environments
characterized by high levels of uncertainty
• It is largely driven by coincidence and trial-and-error
• Action implies commitment → paradox of entrepreneurship
• Effectuation can be combined with other planning-based approaches

Lean startup: a methodology that builds on the central ideas behind design thinking, DDP,
and effectuation
• The entrepreneurs’ subjective perception of a business model opportunity may be
very different from a validated one
• The goal of the lean startup is to shorten product development and rapidly discover
a viable business model
• Lean refers to focussing on avoiding unnecessary resources and waste
• A minimum viable business model represents the smallest set of activities needed to
falsify a bm hypothesis

Pros Lean startup:

• Reduced market risk
• Reduced capital expenditure and initial funding needs

Cons Lean startup:

• Cost of experimentation
• Disclosure of strategically important information
• Cost of damaged reputation
• Noisy signals
• Cost of organizational change

DDP is based on two main premises:

• Managers know what they don’t know and what they need to test
• They already have a pretty good idea of the market opportunity (i.e.
customer needs) and possible solutions (business models) to address it
10 Practice Questions Chapter 7

What is the primary purpose of Discovery-driven planning (DDP)?

a) To eliminate uncertainty in the design of a new business model.
b) To identify and test crucial assumptions in an innovative new business model.
c) To create a realistic starting point for a new business model project.
d) To establish go/no-go decision points for entrepreneurial managers.

Which step in the DDP framework involves defining long-term success and working back
from there?
a) Framing.
b) Benchmarking.
c) Specification of deliverables.
d) Testing, milestones, and parsimony.

What is one advantage of using DDP in business model innovation?

a) It guarantees a high return on investment (ROI).
b) It eliminates the need for experimentation.
c) It reduces the probability of failure.
d) It requires minimal communication among team members.

What is one challenge associated with DDP?

a) Difficulty in conceptualizing business models.
b) Lack of scientific evidence supporting its effectiveness.
c) Inability to perform market tests of entire business models.
d) The requirement for extensive communication.

Which planning approach suggests taking an active interest in others and mimicking their
actions?
a) Discovery-driven planning.
b) Parallel play.
c) Effectuation.
d) Lean startup.

What does the paradox of entrepreneurship suggest?

a) Entrepreneurs should avoid making costly choices upfront.
b) Entrepreneurs should commit fully to a business model from the start.
c) Entrepreneurial action is driven by trial-and-error.
d) Entrepreneurial action has minimal impact on the market.

What are the five main principles of effectuation?

a) Profit-maximizing attitude, resource leverage, competitive obsession, expected
outcomes, and future focus.
b) Minimizing losses, building partnerships, controlling the past, resource leverage, and
focusing on the present.
c) Resource leverage, affordable loss, building partnerships, leveraging contingencies, and
controlling the near future.
d) Experimentation, resource leverage, avoiding uncertainty, future focus, and minimizing
losses.

Which planning approach aims to shorten product development and discover a viable
business model rapidly?
a) Discovery-driven planning.
b) Parallel play.
c) Effectuation.
d) Lean startup.

What does the term "minimum viable business model" represent in the context of the lean
startup methodology?
a) The smallest set of activities needed to validate a business model hypothesis.
b) The most comprehensive business model that addresses all possible customer needs.
c) The ideal business model with maximum revenue potential.
d) The benchmarking metrics used to compare business models in the market.

What are the two main premises of Discovery-driven planning (DDP)?

a) Managers know what they don't know and they have a clear market opportunity.
b) Managers have no idea about customer needs and possible solutions.
c) Managers have extensive scientific evidence supporting DDP.
d) Managers rely solely on trial-and-error in the planning process.

Note: The correct answers for these questions are as follows:

b) To identify and test crucial assumptions in an innovative new business model.

a) Framing.
c) It reduces the probability of failure.
d) The requirement for extensive communication.
b) Parallel play.
a) Entrepreneurs should avoid making costly choices upfront.
c) Resource leverage, affordable loss, building partnerships, leveraging contingencies, and
controlling the near future.
d) Lean startup.
a) The smallest set of activities needed to validate a business model hypothesis.
a) Managers know what they don't know and they have a clear market opportunity.

Chapter 8

Customers are becoming increasingly involved in the development, production, and

delivery of the products and services that are intended for their consumption. Suppliers
are becoming tightly integrated into many firms’ R&D and production activities. These
phenomena can be described as the co-creation of value within a focal firm’s business
model

A value proposition is a hypothesis formulated by a focal firm about how much value it
creates for a stakeholder by way of providing tangible as well as intangible benefits that
fulfill the stakeholder’s needs, net of any costs that the stakeholder incurs and/or
perceives

Value propositions are subjective, not objective

The customer’s share is the value they capture, which is equal to the customer’s
willingness-to-pay minus the price paid

The focal firm’s share is the amount of value it manages to capture, which is equal to the
price the customer paid minus the cost paid to the supplier

The supplier’s share is the value it captures, which is the price the firm paid, minus the
supplier’s opportunity cost

4 ‘value-based’ strategies:
• Increasing the willingness-to-buy of customers of the firm
• Lowering the opportunity cost of suppliers (i.e. making it cheaper for a
supplier to work with the focal firm)
• Lowering the willingness-to-pay of customers for competing firms’ products
• Increasing the opportunity costs to suppliers of working with other firms

Viewed as an activity system, the business model can be characterized through design
themes, which refer to the system’s dominant value creation drivers

Common design themes include ↴

Novelty
• Adoption of new activities (content)
• New ways of linking activities (structure)
• New ways of governing the activities (governance)
• New ways to monetize the activity system by the focal firm (value
logic)
• Schumpeter defined innovation as the introduction of new products
or services, new methods of production, distribution or marketing, or
the tapping of new markets. But this definition doesn’t capture
business model innovations
• The unique characteristics of virtual markets make the possibilities of
business model innovation appear almost endless
• One dimension of innovation in business models refers to the
appropriate selection of participating parties
Lock-In
• Lock-In is the power to keep stakeholders as business model
participants
• E.g. switching costs, network externalities that derive from the
structure, content, and/or governance of the activity system
 • The value-creating potential of a business model also depends on the
extent to which it motivates customers to engage in repeated
transactions
• Several ways in which customer retention can be enabled by a
business model
• Loyalty programs that reward repeat customers
• A dominant proprietary design standard for business
processes, products, and services
• Establishing a trusting relationship with customers, such as by
offering them transaction safety and reliability guaranteed by
independent and highly credible third parties
• Switching costs might include the costs of switching firms after an
internet user has customized products, services, or information to his
or her needs
• Familiarity with the interface design of a website or app represents
customer learning and thus inhibits customers from switching to
other sites
• Positive network externalities: the utility that a user derives from
consumption of the good increases with the number of other agents
consuming the good
• Indirect network externalities may arise when economic agents
benefit from the existence of a positive feedback loop with another
group of agents
• An indirect network effect can be attributed to the complementary
nature of some of the major components of the network that
constitutes a business model
• Novelty and Lock-In are linked in two important ways
• Business model innovators have an advantage in attracting
and retaining customers with a strong brand
• Being first to market is an essential prerequisite to being
successful in markets characterized by increasing returns
Complementarities
• Complementarities are present whenever bundling activities within a
system provides more value than running activities separately
• Complementarities are also present whenever having a bundle of
goods provides more value than the total value of having each of the
goods separately
• Firms can leverage this potential for value creation by offering
bundles of complementary products and services to their customers
• Offline activities can complement online activities
• Business models may also create value by capitalizing on
complementarities among activities, and complementarities among
technologies
• Efficiency gains made possible by IT pave the way for the
orchestration and profitable exploitation of complementarities
• Weaving together activities enabled by distinct firms into the focal
firm’s business model is economically compelling when their
 incentives are aligned, that is, when the focal firm and the partner are
better off working together rather than independently
• Novelty is also linked with complementarities
Efficiency
• Efficiency-centered design refers to the ways in which firms aim at
achieving greater efficiency through the design of their activity
system. An efficiency-centered activity system aims at reducing
transaction costs
• The greater the transaction efficiency gains that are enabled by a
business model, the greater the value proposition of the business
model
• Efficiency enhancements can be realized in a number of ways
• Reducing information asymmetries between buyers and sellers
through the supply of more up-to-date and comprehensive
information
• Improved information

Certain efficiency features of a business model may be due to novel activities (what)

Efficiency can also derive from novel business model structures (how)

The efficiency value driver can also be helpful for fostering lock-in. A business model’s
efficiency features may serve to attract and retain customers and partners

The business model’s value creation lays the foundations for the focal firm’s value
appropriation by:
• codetermining the overall total value created, which is the upper limit to the
focal firm’s value appropriation
• Influencing the focal firm’s bargaining power in relation to other business
model stakeholders

Business model innovation may give rise to entrepreneurial rents. These monopoly-type
rents may accrue to business model stakeholders between the introduction of an innovation
and its diffusion

Entrepreneurial rents may accrue to all stakeholders in the business model

To predict the overall effect of novelty-centered value propositions on the performance of

the focal firm, we must also consider their effect on the firm’s ability to appropriate the
value that its business model generates. This ability depends on factors as
• The switching costs of other business model stakeholders
• The focal firm’s ability to control information
• The ability of other stakeholders to take unified action in relation to the focal
firm
• The replacement costs of other stakeholders
On average, an increase in business model novelty will not decrease the focal
entrepreneurial firm’s bargaining power relative to other business model stakeholders

10 Practice Questions Chapter 8

Co-creation of value within a focal firm's business model refers to:

a) Customers becoming involved in the development, production, and delivery of products
and services
b) Suppliers integrating into a firm's R&D and production activities
c) Both customers and suppliers collaborating to create value
d) Value creation solely by the focal firm

Which of the following best describes a value proposition?

a) An objective measure of value created by a firm for stakeholders
b) A subjective hypothesis about the value a firm creates for stakeholders
c) A measure of tangible benefits provided by a firm to stakeholders
d) A measure of intangible benefits provided by a firm to stakeholders

The customer's share in value capture is calculated as:

a) Customer's willingness-to-pay minus the price paid
b) Price paid minus the cost paid to the supplier
c) Value captured by the customer minus the supplier's opportunity cost
d) Customer's willingness-to-buy minus the price paid

Which of the following is NOT one of the value-based strategies?

a) Increasing the willingness-to-buy of customers
b) Lowering the opportunity cost of suppliers
c) Increasing the willingness-to-pay of customers for competitors' products
d) Increasing the opportunity costs to suppliers of working with other firms

Design themes in a business model refer to:

a) The dominant value creation drivers in the activity system
b) The unique characteristics of virtual markets
c) The ways in which customers engage in repeated transactions
d) The cost reduction strategies implemented by the focal firm

Lock-In in a business model refers to:

a) The power to keep stakeholders as participants in the business model
b) The power to attract new customers to the business model
c) The ability to lower the opportunity cost for suppliers
d) The ability to increase customer loyalty through rewards programs

Complementarities in a business model refer to:

a) The bundling of activities within a system to provide more value
b) The reduction of transaction costs through efficiency-centered design
c) The introduction of new products or services in the market
d) The adoption of new activities and ways of linking them
Efficiency-centered design in a business model aims at:
a) Increasing customer loyalty through rewards programs
b) Lowering the opportunity cost of suppliers
c) Achieving greater efficiency and reducing transaction costs
d) Offering bundles of complementary products and services

The value creation of a business model influences the focal firm's value appropriation by:
a) Codetermining the overall total value created
b) Increasing the firm's bargaining power relative to other stakeholders
c) Allowing for the accrual of entrepreneurial rents to stakeholders
d) Controlling the information flow between the focal firm and stakeholders

The effect of novelty-centered value propositions on the performance of the focal firm
depends on:
a) The switching costs of other business model stakeholders
b) The focal firm's ability to control information
c) The replacement costs of other stakeholders
d) All of the above

Answers:

c) Both customers and suppliers collaborating to create value

b) A subjective hypothesis about the value a firm creates for stakeholders
a) Customer's willingness-to-pay minus the price paid
c) Increasing the willingness-to-pay of customers for competitors' products
a) The dominant value creation drivers in the activity system
a) The power to keep stakeholders as participants in the business model
a) The bundling of activities within a system to provide more value
c) Achieving greater efficiency and reducing transaction costs
a) Codetermining the overall total value created
d) All of the above

Chapter 9

Business model analysis refers to the set of practices and tools that enable managers to:
• Define precisely how their current business model works
• Evaluate the current business model’s strengths, weaknesses, and impact on
firm performance
• Design, implement, and evaluate innovative new business models
• Redesign existing business models

Tools for articulating and understanding business models ↴

Tool 1 – Story of “how it works”: Write a one-paragraph story about how a business model
works. In your story, explain the main activities that are conducted, who carries them out,
and the order in which they are carried out. Also explain the logic of the new business
model, why it is appropriate, and why it makes sense. What is the main source of value
creation? What are the value propositions to customers and partners, and are they strong
enough? How and why will you eventually make money?

Tool 2 – Business model elaboration: Describe the what, how, who, and why of the
business model
• What are the key activities of the business model?
• What is being sold: a product? a service? a bundle of
product(s) and service(s)? To which customer segment(s)
exactly?
• What activities are required to generate and deliver that
offering to the customer? which ones are key?
• What resources and skills are required to enable those
activities?
• How is the customer experience created and delivered by the model?
• Adopt a systems perspective and describe the sequencing of
activities
• What are the key links between activities? E.g. through which
channels are customers reached?
• What dynamic feedback loops are included in the model that
allow for learning about, and reacting to, customer
preferences?
• Who are the key stakeholders in the new model
• Which parties (including customers) perform which activities?
• Which activities are performed in-house?
• Why does the business model enable value creation and capture?
• What is the main logic on which the business model turns?
• Are the value propositions to customers and other key
stakeholders consistent with this logic? are they strong
enough?
• Do the value logic and the associated value propositions
differentiate the focal firm from the competition?
• (In the case of a for-profit firm) How much value is captured by
the focal firm? is it enough to make a decent profit?

Tool 3 – Activity map: visualizes the business through boxes (what), arrows between the
boxes (how), different colors of boxes (who), and additional text if necessary (why)
• Tools for framing the design effort
• Goals and needs of customers
• Identify a compelling problem
• A powerful problem statement is one that
• Is centered on key business model stakeholders, particularly
customers, not the focal firm
• Considers customers as human beings, with all their goals,
needs, and desires
• Represents and important and meaningful issue for the
customers
 • Is ambitious, yet feasible
• The problem statement needs to be improved, refined, and
sometimes changed altogether in the early bm design stages. This
process is called problem framing, which involves seeing the problem
from a different angle and asking different questions
• Questionnaires
• Questions need to be tailored to the respective interviewee
• Good questions go below the surface and encourage interviewees to
express themselves as human beings. This is best accomplished using
open-ended questions
• The central purpose of asking questions at an early stage in the bm
innovation process is to achieve a better understanding of the
problem, rather than to find a solution

Tool 4 – Problem statement:

1. What is the problem that the innovation team should solve, according to the
mandate from the project sponsor?
2. What is the problem that should be solved, according to the innovation team’s own
interpretation, after careful deliberation and discussion of its mandate
3. If there are any discrepancies between 1 and 2, how can they be reconciled?
Formulate a consolidated initial problem statement
4. Get feedback from third parties on this statement: how could it be further refined

Tool 5 – Business model questionnaire:

• Define who should be interviewed, when, and by whom
• Given the current problem statement, formulate a range of open-ended
questions that could be asked to probe more deeply into it
• Prepare different versions for different stakeholders

Tool 6 – Business model templates:

• Using visuals, videos, or stories, present examples of firms that have
innovated their business models along the key dimensions

Tool 7 – Environmental PEST analysis:

• For each of the main external factors political, economic, social, and
technological, write down a comprehensive list of the elements that shape
the industry and firm

Tool 8 – Resource and capability scanning:

1. Assess the capability gap. Evaluate the extent to which the focal firm’s resources and
capabilities can be redeployed in alternative uses in the envisioned business model,
to determine the type of capabilities that the focal firm would need to access
through partnering with other firms
 2. Ecosystem capability scan: scan the ecosystem of the focal firm to identify potential
partners whose capabilities can be embedded into the envisioned business model

Tools for designing and implementing business model innovations ↴

Tool 9 – Brainstorming:
• Establish a set of brainstorming rules, and appoint a facilitator to
monitor and guide group behavior during the brainstorming session
• Set a goal of creating the highest possible number of new business
model ideas for the focal firm within the given time period

Tool 10 – Storyboard:
• Draw a series of comic book-style frames to explain the essence of
the new business model story
• Give each frame a title and develop an accompanying narrative that
explains what is happening in thee frame

Tool 11 – Test Assumption Matrix (TAM):

• Develop a TAM in the form of a table that highlights the critical
assumptions behind the new business model, and the ways through
which they can be tested at milestones using low-cost experiments

Tool 12 – Business model canvas:

• Develop an actionable plan that maps the holistic idea for a business
model innovation onto the key components of the BMC
characterizing the organization that will be built to enact the new
model

Tools for evaluating business models ↴

Tool 13 – Value driver matrix:

• Construct a matrix where the what, how, why, and who dimensions
of the business model constitute the rows, and the novelty, lock-in,
complementarities, and efficiency value drivers form the columns
• Fill in the cells of the matrix with an assessment of how much the
respective business model dimension leverages a particular value
driver

10 Practice Questions Chapter 9

Business model analysis enables managers to:

a) Define competitors' business models
b) Evaluate the firm's marketing strategies
c) Assess the impact of industry trends on firm performance
d) Define, evaluate, and design innovative business models
Tool 1, the "Story of how it works," aims to:
a) Assess the strengths and weaknesses of the current business model
b) Design a new business model based on customer preferences
c) Evaluate the financial feasibility of the business model
d) Explain the logic, value creation, and value propositions of a business model

Tool 3, the Activity Map, visualizes the business model through:

a) Graphs and charts representing revenue streams
b) Boxes, arrows, colors, and text representing key elements of the model
c) Tables displaying financial projections and costs
d) Diagrams illustrating the customer journey and touchpoints

Tool 7, the Environmental PEST analysis, focuses on understanding:

a) The political, economic, social, and technological factors shaping the industry
b) The competitors' business models and strategies
c) The internal strengths and weaknesses of the firm
d) The customer preferences and behavior patterns

Tool 9, Brainstorming, is used to:

a) Evaluate the financial viability of business model ideas
b) Assess the scalability of existing business models
c) Generate a wide range of new business model ideas
d) Analyze the market potential of different customer segments

Tool 11, the Test Assumption Matrix (TAM), helps to:

a) Evaluate the profitability of the existing business model
b) Identify critical assumptions underlying the new business model
c) Create a visual representation of the business model components
d) Assess the market share of the focal firm compared to competitors

Tool 13, the Value Driver Matrix, assesses how the business model leverages:
a) Novelty, lock-in, complementarities, and efficiency value drivers
b) Customer satisfaction, brand loyalty, and market share
c) Product quality, pricing strategies, and distribution channels
d) Market demand, revenue growth, and profit margins

Tool 5, the Business Model Questionnaire, is used to:

a) Conduct customer surveys to gather feedback on the existing model
b) Identify the key stakeholders involved in the business model
c) Analyze the competitive landscape and market trends
d) Formulate open-ended questions to probe deeper into the problem statement

Tool 12, the Business Model Canvas, helps to:

a) Visualize the ecosystem of the focal firm's business model
b) Evaluate the financial performance of the existing business model
c) Develop an actionable plan for implementing a new business model
d) Analyze the external political, economic, social, and technological factors
Business model analysis involves evaluating the current business model's:
a) Impact on firm performance and profitability
b) Ability to attract and retain customers
c) Alignment with the firm's marketing and advertising strategies
d) Strengths, weaknesses, and areas for improvement

Answers:

d) Define, evaluate, and design innovative business models

d) Explain the logic, value creation, and value propositions of a business model
b) Boxes, arrows, colors, and text representing key elements of the model
a) The political, economic, social, and technological factors shaping the industry
c) Generate a wide range of new business model ideas
b) Identify critical assumptions underlying the new business model
a) Novelty, lock-in, complementarities, and efficiency value drivers
d) Formulate open-ended questions to probe deeper into the problem statement
c) Develop an actionable plan for implementing a new business model
d) Strengths, weaknesses, and areas for improvement

Chapter 11

Since new ventures have had a short history, the inertial focus that could derail business
model innovation implementation in these firms is typically much weaker than in
established firms

Founders and employees working in new ventures are used to frequent changes

Active internal resistance to change in new ventures is less pronounced than in established
firms

Start-up risks generally cluster around 5 types:

• Demand-side risks
• Supply-side risks
• Competition risks
• Capital market risks
• Environmental risks

Radically new BM innovations can increase all of these risks

A particular risk that needs to be highlighted for new ventures implementing BMI is their
potential dependence on third parties

New ventures face the sharks dilemma, under which circumstances do they choose
partners with high potential for abuse of market power or misappropriation over less risky
partners
In new ventures, there is less separation of ownership and control, a prime driver for
established firms to adopt governance practices such as disciplined board monitoring

The agency problem that calls for monitoring executives with misaligned financial incentives
is typically less pronounced in new ventures than in established firms, since the financial
interests of CEOs and shareholders are more aligned

With respect to leadership, there are often challenges that relate to the composition and
size of the founding team. Common trouble spots include a lack of clear definition of roles
and responsibilities, which leads to conflicts among founders; a lack of mission-critical
competencies among the co-founders; role confusion when co-founders feel betrayed or
lost as the venture scales; and poor communication by founders that results in frustration
and inefficiencies

Entrepreneurial ventures are often resource-constrained and operate under high

uncertainty. This implies that venture boards have fewer reliable and meaningful financial
metrics at hand

It is common for members of the board of directors of a new venture to have significant
financial stakes in the business. They also often possess knowledge of the relevant
industry. For this reason, they may interpret their task more as helping the management
team create value, rather than monitoring them and ensuring proper venture governance.
One negative side effect of this might be that directors get ‘too cozy’ with the management
team

Governance problems can exacerbate leadership problems and vice versa

The probability a BMI will be successfully implemented in a new venture may be inversely
related to the number and variety of BM stakeholders involved in its design

In order to effectively address barriers to BMI implementation in new firms, a thorough

analysis must first be conducted to identify the relevant issues

Producing a business plan can be viewed as an important way of managing the risk
inherent in a new business venture, because doing so increases the chances of venture
survival significantly
• Business planning facilitates venture development and organizing
• Business planning refers to the process of thinking through a new venture
with an innovative business model in a thorough and systematic fashion. This
process may be more important than its actual outcome because it promotes
a holistic mindset that is an important precursor to BMI
• To be effective, business planning shouldn’t be restrained to armchair
theorizing at a purely conceptual level
Liability of newness: new ventures exhibit high mortality rates in the earliest stages of
their life cycle
• It can be caused by a lack of experience with internal organizational issues
such as new roles and incentives, which can cause worry, conflict, and
inefficiency among organization members who do not trust the new system
• New ventures rely on social relations among strangers characterized by low
trust

A new activity system exacerbates the lack of experience of business model stakeholders
that operate within the new system

Founders can establish legitimacy and credibility with stakeholders via symbolic
management
• Symbolic management actions are actions that are deployed in a business
setting and involve symbols
• A symbol is something that stands for or suggests something else
•

4 types of symbolic action strategies that entrepreneurial managers in both new ventures
and large business can use tor create the right impression and establish trust with
stakeholders:
• Personal credibility
• Professional organization
• Organizational achievement
• Stakeholder relationship quality

4 main revenue model types

• Paid Subscription
• Transaction
• Advertising
• Freemium

For better governance, new ventures should:

• Establish a board of directors
• Mitigate potential conflicts between owners
• Adapt measures aimed at establishing good corporate governance sooner
rather than later

10 Practice Questions Chapter 11

In new ventures, compared to established firms, the inertial focus that could derail business
model innovation implementation is typically:
a) Stronger
b) Weaker
c) Similar
d) Nonexistent
Which of the following risks are NOT among the types that new ventures generally face?
a) Demand-side risks
b) Supply-side risks
c) Financial risks
d) Environmental risks

The agency problem, which calls for monitoring executives with misaligned financial
incentives, is typically:
a) More pronounced in new ventures than in established firms
b) Less pronounced in new ventures than in established firms
c) Equally pronounced in new ventures and established firms
d) Irrelevant in the context of new ventures

Leadership challenges in new ventures can arise due to:

a) Clear definition of roles and responsibilities among founders
b) Excessive resources and lack of uncertainty
c) Strong communication by founders leading to efficiency
d) Lack of mission-critical competencies among co-founders

Producing a business plan can be viewed as important for managing risk in a new business
venture because it:
a) Increases the chances of venture survival significantly
b) Reduces the need for entrepreneurial decision-making
c) Guarantees access to funding from investors
d) Simplifies the implementation of the business model

Symbolic management in new ventures can help establish:

a) Financial stability
b) Intellectual property rights
c) Trust and legitimacy with stakeholders
d) Market dominance over competitors

The four main revenue model types include all of the following EXCEPT:
a) Paid Subscription
b) Transaction
c) Advertising
d) Licensing

To improve governance, new ventures should:

a) Avoid establishing a board of directors
b) Encourage conflicts between owners to spur innovation
c) Delay implementing good corporate governance measures
d) Establish measures for good corporate governance sooner rather than later

The liability of newness refers to:

a) High mortality rates in the earliest stages of a venture's life cycle
b) Lack of access to capital for new ventures
c) The inability to attract experienced employees in new ventures
d) The resistance to change among stakeholders in established firms

When it comes to business planning for new ventures, it is important that:

a) The outcome of the plan is more important than the planning process itself
b) Armchair theorizing should be the primary focus of business planning
c) Thorough and systematic thinking about the venture is conducted
d) Business planning is only necessary for ventures seeking external funding

Answers:

b) Weaker
c) Financial risks
b) Less pronounced in new ventures than in established firms
d) Lack of mission-critical competencies among co-founders
a) Increases the chances of venture survival significantly
c) Trust and legitimacy with stakeholders
d) Licensing
d) Establish measures for good corporate governance sooner rather than later
a) High mortality rates in the earliest stages of a venture's life cycle
c) Thorough and systematic thinking about the venture is conducted