Summary Chapter 4

Developing an Effetive Business Model

Business model is a firm’s plan or recipe for how it creates.delivers, and captures value for its stakeholders.

General Categories of Business Models

1.   Standard Business Models

è Depict existing plans or recepies firms can use to determine how they will create, deliver, and capture value for their stakeholders.

è The disadvantage of the business models is “churn”. Churn refers to the number of subscribers that a subscribtion-based business loses each month.

2.   Disruptive Business Model

è 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 an important niche within an industry.

è 2 Types of disruptive business models:
- New market disruption : a market that previously wasn’t served.
- Low-end market disruption : possible when the firms in an industry continue to improve products or services to the point where they are actually better that a sizeable portion of their clientele needs or desires.

This “performance oversupply” creates a vacuum that provides an opportunity for simple, typically low-cost business models to exist.

The Barringer/Ireland Business Model Template

The components:

1.      Core Strategy

è Describes how the firm plans to compete relative to its competitors.

è The Primary elements of core strategy are:
- Business mission, Basis of differentiation, target market, and product/market scope.

a.       Business Mission

o   Describes why it exists and what its business model is supposed to accomplish.

o   If carefully written and used properly, it can articulate a business’s overarching priorities and act as its financial and moral compass.

o   A well written missing statement is something that business model continually refer back to as it makes important decisions in other elements of its business model.

o   At a 50,000 foot level, a mission statement indicates how a firm intends to create value for stakeholders.

o   There are several rules of thumb for writing mission statements, A business mission statement should:
- Define it’s “reason for being”
- Describe what makes the company different
- Be risky and challenging but achievable
- Use a tone that represents the company’s culture and values
- Convey passion and stick in the mind of the reader
- Be honest and not claim to be something that the company “isn’t”

b.      Basis of Differentiation

o   A Business clearly articulate the points that differentiate its product or service from competitors.

o   A company’s basis of differentiation is what causes consumers to pick one company’s products over another’s. It’s what solves a problem or satisfied a customer need.

c.       Target Market

o   A place whit in a larger market segment that represents a narrowed group of customers with similar interests.

d.      Product/Market Scope

o   Defines the products and markets on which it will concentrate.

2.      Resources

è The inputs a firm uses to produce, sell, distribute, and service a product or service.

è At a basic level, a firm must have a sufficient amount of resources to enable its business work.

è Resources are developed and accumulated over a period of time.

a.       Core Competencies

o   A specific factor or capability that supports a firm’s business model and sets it apart from its rivals. 

o   Can take on various forms, such as technical know-how, an efficient process, a trusting relationship with customers, expertise in product design, and so forth.

o   It may also include factors such as passion for a business idea and a high level of employee morale.

o   A firm’s core competencies largely determine what it can do.

o   Consistent with the information provided above, a core competency is compelling if it not only supports a firm’s initiatives, but is also difficult to imitate and substitute.

b.      Key Assets

o   The assets that a firm owns that enable its business model to work.

o   The assets can be physical, financial, intellectual, or human.

ü  Physical assets include physical space, equipment, vehicles, and distribution networks.

ü  Intellectual assets include resources such as patents, trademarks, copyright, and trade secrets, along with a company’s brand and its reputation.

ü  Financial assets include cash, lines of credit, and commitments from investors.

ü  Human assets include a company’s founder or founders, it’s key employees, and its advisors.

3.      Financials

è Describes how it earns money-thus, it is extremely important.

a.       Revenue Streams

o   Describe the ways in which it makes money.

o   Some business have a single revenue stream, while others have several.

o   Some business make money via one time customer payments, while others receive recurring revenue by selling a subscription service.

o   Some business are very creative in the ways in which they make money.

o   The most common revenue streams:

b.      Cost Structure

o   Describe the most important costs incurred to support its business model.

o   Generally, the goal in a firm’s business model template is threefold:

o   Identify whether the business is a cost-driven or value driven business

§  Cost driven business focus on minimizing costs wherever possible.

§  Value driven business focus on offering a high quality product (or experience) and personalized service.

o   Identify the nature of the business’s costs

o   Identify the business’s major cost categories.

o   Most Business have a mainly fixed-cost or variable-cost structure

§  Fixed costs
à Remain the same despite the volume of goods or services provided.

§  Variable costs
à Vary proportionally with the volume of goods or services produces.

c.       Financing/Funding

o   There are 3 categories of costs to consider:

§  Capital costs includes real estate, buildings, equipment, vehicles, furniture, and similar capital purchases.

§  One time expenses such as legal expenses to launch the business, website design, procurement of initial inventory, and similar one time expenses and fees.

§  Provisions for ramp up expenses which they lose money until they are fully up to speed and reach profitability.

4.      Operations

è Both integral to a firm’s overall business model and represent the day to day heartbeat of a firm.

ü  Product ( or service) Production

à Focuses on how a firm’s products and/or service are produced.

ü  Channels
à Describe how it delivers its product or service to its customers.
à Business sell direct, through intermediaries, or through a combination of both.

§  Sell direct = through a storefront and/or online.

§  Through intermediaries = distributors and wholesalers.

ü  Key Partners
à Partners to perform key roles.
à Supplier ( or vendor ) = a company that provides parts or services to another company.

§  The advantage of participating in partnerships:
à Gaining access to a particular resource
à Risk and cost sharing
à Speed to market
à Learning

§  The disadvantage of participating in partnerships:
à Loss of proprietary information
à Management complexities
à Partial loss of decision autonomy