Unit 11 Developing Successful Business Models PDF

ENTREPRENEURSHIP: BUS 403 UNIT 4: DEVELOPING SUCCESSFUL BUSINESS MODELS  Developing Successful Unit 11 Business Models  Topics Components of a Business Model Business Model Innovation Value Chains Business Concept Blind Spot Core Competency ...

ENTREPRENEURSHIP: BUS 403 UNIT 4: DEVELOPING SUCCESSFUL BUSINESS MODELS  Developing Successful Unit 11 Business Models  Topics Components of a Business Model Business Model Innovation Value Chains Business Concept Blind Spot Core Competency  Business Models  Business Model A business model is a firm’s plan for how it creates, delivers, and captures value for its stakeholders.  The proper time to develop a business model is following the feasibility analysis stage and prior to fleshing out the operational details of the company. A firm’s business model is integral to its ability to succeed both in the short and long term.  General Categories of Business Models  Standard Business Models  The first category is standard business models.  Standard business models depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value.  There are a number of standard or common business models, which are illustrated on the next two slides.  General Categories of Business Models Standard 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 Standard Business Models Business Model Representative Companies Razor and Blades Business Model Game Consoles and Games, Printers and Ink Cartridges Subscription Business Model Birchbox, Netflix Traditional Retailer Business Model Amazon, Whole Foods Markets  General Categories of Business Models  Disruptive Business Models  The second category is disruptive business models.  Disruptive business models are rare; they do not fit the profile of a standard business model.  Theyare impactful enough that they disrupt or change the way business is conducted in an industry or an important niche within an industry.  General Categories of Business Models Four 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 Salesforce.com software to the cloud, allowed users to access the software and their data from anywhere there was an Internet connection)  General Categories of Business Models Four Disruptive Business Models Business Model Company or Companies That Introduced It Cloud-based Service to Connect Riders and Uber, Lyft People Willing to Provide Rides (Provided riders with an app that connects them with the owners of private cars)  Business Model Innovation  Critical to sustained competitiveness  Business model innovation is the art of enhancing advantage and value creation by making simultaneous— and mutually supportive—changes both to an organization's value proposition to customers and to its underlying operating model. Business Model Innovation  Value-Chains  The idea of the value chain is based on the process view of organizations,  the idea of seeing a manufacturing (or service) organization as a system, made up of subsystems each with inputs, transformation processes and outputs.  Inputs, transformation processes, and outputs involve the acquisition and consumption of resources – money, labour, materials, equipment, buildings, land, administration and management. How value chain activities are carried out determines costs and affects profits.  Michael Porter’s Value Chain  Primary activities Framework  All five primary activities are essential in adding value and creating a competitive advantage and they are: 1. Inbound logistics: arranging the inbound movement of materials, parts, and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores 2. Operations: concerned with managing the process that converts inputs (in the forms of raw materials, labor, and energy) into outputs (in the form of goods and/or services). 3. Outbound logistics: is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user 4. Marketing and sales: selling products and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.  Michael Porter’s Value Chain  Primary activities Framework 5. Service: includes all the activities required to keep the product working effectively for the buyer after it is sold and delivered.  Companies can harness a competitive advantage at any one of the five activities in the value chain.  For example, by creating outbound logistics that are highly efficient or by reducing a company's shipping costs, it allows to either realize more profits or pass the savings to the consumer by way of lower prices  Industry Value-Chain  An industry value-chain is a physical representation of the various processes involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chain).  It is based on the notion of value-added at each stage of production– the summation of each production stage value-added yields the total value.  Consider the value-chain in the bakery industry and the serial processes that are involved – planting of wheat, milling and of flour, shipping and transport to stores, and bakeries…and then the different stages of baking process  Bakery foods value-chain involves products and services and we have aa network of value chains  Value-Chains  The appropriate level for constructing a value chain is the business unit, not division or corporate level.  Products pass through a chain of activities in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities.  The activity of a diamond cutter can illustrate the difference between cost and the value chain. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond.  Business concept blind spot  Business concept blind spot is an overly narrow focus that prevents a firm from seeing an opportunity that might fit its business model  Three blind spots. 1. The first deals with how we pick new ideas to invest in.  VC (venture capital) industry subscribes to a "one size fits all" approach, --- solutions to some of our most pressing problems don't get funded.  The incentive for quick, exponential returns, and the need to make funding decisions quickly, often forces venture capitalists to rely on rules of thumb and pattern recognition too heavily, and to deploy funds to particular types of companies that feel safe and familiar. "Flipping companies", as Baird refers to it, isn't the surest way to meaningful innovation. Some of the great innovations never get commercialized -- idea that entrepreneurship is a meritocracy is a myth -- in the real world, money flows to the ideas that are the most convenient to find or the most familiar, not necessarily those that are the best.  Business concept blind spot  The second blind spot relates to where we invest in new ideas.  It is no secret that venture capital is highly concentration in a few cities—both in the U.S. and globally.  Because startups and venture capitalist are so reliant on networks to build companies and find investment opportunities, getting plugged-in can be life or death for young startups.  What if you don't live in one of these places or have a network to get introduced to leading investors? These leads investors ignore investment opportunities outside of a small number of regions.  This insularity also makes them unable to grasp the potential of many broad-reaching, high-impact innovations --- the problems they solve are unfamiliar to them or are otherwise not pressing issues in wealthy knowledge hub  Lifestyle and convenience apps for well-heeled professionals in San Francisco are more likely to get funded (familiar) than would a startup that wants to provide debt solutions for people without a lot of money (unfamiliar).   Business concept blind spot  Finally, the third blind spot is concerned with why we invest in new ideas.  Corporations and investors too often take "two-pocket" approach to business—with a profit motive on one side, and giving back (through corporate philanthropy or other social activities) on the other.  Typically, the first is the clear priority of the business, with the latter only done minimally. More importantly, these two strategies are seen as being mutually exclusive, and are tackled by separate parts of the company.  Pierre Omidyar, a founder of eBay was quoted as saying: "Giving back implies, at one point, that you were taking. We’re dissociating what we do from what we value, and it’s becoming very difficult to improve the world as a result."  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.  The Barringer/Ireland Business Model Template is shown in the next slide. Barringer/Ireland Business Model Template  Core Strategy  Core Strategy  The first component of the business model is core strategy. A core strategy describes how the firm plans to compete relative to its competitors.  The primary elements of core strategy are:  Business Mission  Basis of Differentiation  Target Market  Product/Market Scope  Core Strategy  Business Mission A business’s mission or mission statement describes why it exists and what its business model is supposed to accomplish.  Ifcarefully written and used properly, a mission statement can articulate a business’s overarching priorities and act as its financial and moral compass. A well-written mission statement is something that a business can continually refer back to as it makes important decisions in other elements of its business model.  Core Strategy  Basis of Differentiation  It’simportant that a business clearly articulate the points that differentiate its product or service from competitors. A company’s basis of differentiation is what causes consumers to pick one company’s products over another’s.  It is what solves a problem or satisfies a customer need.  Itis best to limit a company’s basis of differentiation to two to three key points.  Make sure that your points of differentiation refer to benefits rather than features.  Core Strategy  Target Market  The identification of the target market in which the firm will compete is extremely important. A target market is a segment within a larger market that represents a narrow group of customers with similar interests. A firm’s target market should be made explicit in the business model template.  Core Strategy  Product/Market Scope A company’s product/market scope defines the products and markets on which it will concentrate.  Most firms start with a narrow (or limited) product/market scope and pursue adjacent product and market opportunities as the company grows and becomes more financially secure.  Incompleting the business model template, a company should be very clear about its initial product/market scope and project 3-5 years in the future in terms of anticipated expansion.  Resources  Core Competencies A specific factor or capability that supports a firm’s business model and sets it apart from rivals. A core competency 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.  Most start-ups will list two to three core competencies in their business model template.  Resources  Resources  The second component of a business model is resources.  Resources refer to the inputs a firm uses to produce, sell, distribute, and service a product or service. A firm’s most important resources, both tangible and intangible, must be both 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  Key Assets  Key assets are the 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.  Intellectualassets include resources such as patents, trademarks, copyrights, and trade secrets, along with a company’s brand and its reputation.  Financialassets include cash, lines of credit, and commitments from investors.  Human assets include a company’s founder or founders, its key employees, and its advisors.  Financials  Financials  The third component of a firm’s business model focuses on its financials.  Thisis the only section of a firm’s business model that describes how it earns money—thus, it is extremely important.  Formost businesses, the manner in which it makes money is one of the most fundamental aspects of its business model.  Financials  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 bottle barbeque sauce for a barbeque restaurant), and apparel products with the name of the restaurant on them.  Financials  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 a business’s costs.  Identify the business’s major cost categories.  Financials 4 of 5  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-timeexpenses, such as building a Web site and training initial employees.  Provisionsfor ramp-up expenses (most businesses incur costs before they earn revenues).  Financials  Financing/Funding (continued)  Some entrepreneurs are able to draw from personal resources to fund their business. In other cases, the business may be simple enough that it is funded from its own profits from day one.  In many cases, however, an initial infusion 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.  Financials  Financing/Funding (continued)  Some entrepreneurs are able to draw from personal resources to fund their business. In other cases, the business may be simple enough that it is funded from its own profits from day one.  In many cases, however, an initial infusion 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  Operations  Thefinal quadrant in a firm’s business model focuses on operations.  Operationsare both integral to a firm’s overall business model and represent the day-to-day heartbeat of a firm.  Operations  Product (or Service) Production  This section focuses on how a firm’s products and/or services are produced.  Forexample, 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.  Ifa firm is producing a service rather than a physical product, a brief description of how the service will be produced should be provided.  Operations  Supply-chain Channels A company’s supply-chain channels describe how it delivers its product or service to its customers.  Businesses either sell direct, through intermediaries (such as distributors and wholesalers), or via a combination of both.  Some firms employ a 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  Thefinal 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.  Thetable on the next slide identifies the most common types of business partnerships. Operations  Business Model Canvas  The business model canvas template was originally introduced by Alexander Osterwalder in his 2004 thesis, “The Business Model Ontology – A Proposition in a Design Science Approach”.  Since then, the business model canvas template has been taught at business schools and iterated upon to fit more niche businesses.  The business model canvas is a strategic planning tool used by managers to illustrate and develop their business model.  Clearly identifies the key elements that make up a business.  Simplifies a business plan into a condensed form.  Acts like an executive summary for the business plan. Business Model Canvas  Business Model Canvas Elements: 1. Value Propositions  The different products/service bundles which the company intends to deliver to its customers 2. Customer Segments  The different customer groups which the company intends to serve 3. Key Activities  The main activities which the company needs to carry out in the creation and delivery of its value proposition 4. Key Partners  Partners (strategic alliances) which the company can use to support the creation/delivery of its value proposition 5. Channels  The different ways in which the company intends to deliver its value proposition to its customer segments 6. Revenue Streams  Identifies the various ways which the company can earn income form its assets and operations.  Business Model Canvas 7. Cost Structure  Identifies the main items and processes which contributes to overhead and operational cost 8. Key Resources:  The resources that are necessary to create value for the customer 9. Customer Relationships  Specifies the type of relationship that needs to be created with customers to delight and retain them.