EntrepManagement_04_Handout_1.pdf

BM2104 CONDUCTING A FEASIBILITY ANALYSIS AND DESIGNING A BUSINESS MODEL Idea Assessment (Cornwall & Scarborough, 2016) An idea assessment is a process of examining a need in...

BM2104 CONDUCTING A FEASIBILITY ANALYSIS AND DESIGNING A BUSINESS MODEL Idea Assessment (Cornwall & Scarborough, 2016) An idea assessment is a process of examining a need in the market, developing a solution for that need, and determining the entrepreneur’s ability to turn the idea into a business successfully. The best business ideas start with a group of customers with a common problem or need. Successful entrepreneurs learn to apply the creative processes to find solutions for these customers. The idea assessment process helps an entrepreneur more efficiently and effectively examine multiple ideas to identify the solution with the most potential. Examining numerous business ideas ensures that the entrepreneur does not lock in on a single idea and overlooks others with an even greater chance of success. Successful entrepreneurs understand that the process of going from ideas to the launch of a new business venture is like a funnel. When the entrepreneur observes a need in the market, the creative process generates many business ideas that might address this need. Each step in the new business planning process (as shown in Figure 1) narrows down the number of ideas until the entrepreneur is ready to launch a business that he or she has carefully researched and tested. An idea assessment helps the entrepreneur efficiently evaluate the numerous ideas that come out of the creative process before committing the time and effort to craft a business plan, design a business model, or even conduct a feasibility analysis. One (1) effective tool to help assess ideas is the idea sketch pad (as shown in Figure 2). Figure 1. The new business planning process Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 149. Entrepreneurs too often jump ahead and begin modeling or planning their business ideas. They get excited about the potential they imagine if they launch a business based on the idea. However, most ideas do not become successful businesses. Alex Bruton, the developer of the idea sketch pad, says it is human nature to misjudge how unlikely it is for a new business idea to become a successful business. Rather than act on an impulse, successful entrepreneurs are disciplined in evaluating each new idea. Because it takes so many ideas to develop a viable business concept, entrepreneurs must become adept at quickly sorting through all of them. 04 Handout 1 *Property of STI  [email protected] Page 1 of 12  BM2104 Figure 2. Idea sketch pad Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 150. The idea sketch pad helps an entrepreneur assess ideas in a relatively short period. When using the sketch pad, the entrepreneur asks a series of key questions addressing five (5) key parameters: 1. Customers. Start with a group of people who have a clear need that is not being addressed. This may be a need that no business is currently addressing, or it may be a need that no business is fully or adequately meeting for these customers. The entrepreneur assesses the customers by answering basic questions about the potential users of the product or service and the potential buyers if they are different than the users. For instance, for sugary cereals, children are the users, and their parents are the buyers. Specifically, who would be the users of the offering? How would they use the offering? How many potential customers are there? 2. Offering. Describe the idea for a product or service to offer the customers. Are you offering a product, a service, an experience, or a combination of one (1) or more of these? What are its key features? Describe it in detail and sketch out an image of it, if possible. 3. Value proposition. Explain why the product or service will be important to the customers. Why would the offering be valuable to the user and/or buyer? How does it address the need these customers currently have that is not being met? 4. Core competencies. Does the offering include any technologies or unique features that will help differentiate it from competitors? Is it based on intellectual property? 5. People. Identify the key personnel on the team who will launch the business. Who are the founding entrepreneurs of this venture? Do they have the skills and knowledge needed to turn the idea into a start-up venture successfully? Can they attract key team members who will fill in gaps in knowledge, skills, and experience? Feasibility Analysis (Cornwall & Scarborough, 2016) A feasibility analysis consists of four (4) interrelated components: an industry and market feasibility analysis, a product or service feasibility analysis, a financial feasibility analysis, and an entrepreneur feasibility analysis (see Figure 3). Feasibility analysis is an opportunity to take a hard look at an idea to 04 Handout 1 *Property of STI  [email protected] Page 2 of 12  BM2104 know whether it needs minor or major pivots, or if warranted, to be completely abandoned to move on to another idea. Figure 3. Elements of a feasibility analysis Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 151. When evaluating the feasibility of a business idea, an analysis of the industry and targeted market segments serves as the starting point for the remaining three (3) components of a feasibility analysis. The focus in this phase is two (2)-fold: (1) To determine how attractive an industry is overall as a “home” for a new business and (2) to evaluate possible niches a small business can occupy profitably. When examining an industry, an entrepreneur should examine both the macro-environment that can impact many industries and the specific competitive environment of the industry of interest (see Figure 4). Industry and Market Feasibility (Cornwall & Scarborough, 2016) Most opportunities for new businesses within an industry are due to changes taking place in that industry. Foundational macro forces shape industries and the markets they serve. Changes in any of these macro forces can dramatically change the competitive nature of the industry and fundamentally change the needs and want of its target market. Entrepreneurs must be vigilant when monitoring macro forces. Changes in macro forces may have created the initial opportunity the entrepreneur pursued when launching the business, and change will likely continue. If the entrepreneur does not adapt the business to meet the changes these macro forces create in the industry and market, even the most innovative new business may become outdated and left behind in the competitive landscape. Six (6) foundational macro forces create change in industries and the markets they serve: 1. Socio-cultural. Social and cultural change can lead to dramatic changes that can create whole new industries and fundamentally transform existing industries. For example, in the 1970s and 1980s, women began entering the workforce at much higher rates than had been the case previously. Not only did more women enter the workforce, but they also had career aspirations to compete for jobs that once had been dominated by male workers. This cultural change led to the birth of the daycare industry. It also resulted in a new segment within the women’s fashion industry for women’s business attire. It led to rapid growth in the restaurant industry as families began eating in restaurants much more frequently than previous generations and to a growth period for the auto industry. The percentage of families with two (2) cars doubled from 1960 to 2011. 2. Technological. Technological breakthroughs lead to the development of new products and entirely new industries. For example, the Internet is a technology that has had a profound impact on many industries. Before the Internet age, a few large companies dominated the music industry. The Internet led to many new businesses within the music industry, including Spotify and Apple’s iTunes, which changed how customers buy and listen to music. The Internet also changed how people 04 Handout 1 *Property of STI  [email protected] Page 3 of 12  BM2104 consume information. As the news became available online, there was a dramatic decrease in the number of people reading print newspapers. As result, advertising revenues have plummeted for print newspapers, while online newspapers have experienced steady growth in advertising. Figure 4. Environmental forces and new ventures Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 152. 3. Demographic. Changing demographics creates opportunities for entrepreneurs. For example, as Generation Y (those born during the 1980s to early 1990s) reaches adulthood, businesses will begin to pay attention to the next generation, Generation Z. Although Generation Y is optimistic and idealistic, those who are part of Generation Z (those born between the mid-1990s to about 2013) are much more realistic. School violence and the Great Recession (which began in 2008) have shaped their lives. Generation Z is more realistic in how they view the world. They intend to be careful with their money because they have watched their parents’ generation struggle with prolonged unemployment and economic uncertainty. Those in Generation Z will seek products and services that offer value. In a survey of members of Generation Z conducted by the Intelligence Group, 57 percent said they would rather save money than spend it. 4. Economic. Although many companies struggle during economic downturns, some businesses can grow. For example, firms in the e-learning industry thrived during the Great Recession. Web-based learning provides customers with opportunities to improve their education and skills at an affordable price. Given the highly competitive job market during a recession, additional knowledge and skills offer job seekers a competitive advantage when applying for a new position. However, those who were unemployed or afraid of becoming unemployed were unwilling to pay the growing cost of tuition for traditional educational programs. Companies that provide high-quality Web- based e-learning at a fraction of the cost of traditional university-based education filled this gap in the market. 5. Political and legal. The enactment of new legislation creates opportunities for entrepreneurs. For example, when the COVID-19 pandemic emerged in 2020, many businesses were forced to shift from traditional brick-and-mortar stores into online product/service delivery due to increasing government mandates and restrictions. Because of this new trend, savvy entrepreneurs are creating new companies that help online businesses to track online sales and provide logistical support services. 6. Global. Global trends create opportunities for even the smallest of companies. More open global markets allow businesses to seek customers and suppliers from all corners of the world. 04 Handout 1 *Property of STI  [email protected] Page 4 of 12  BM2104 Product or Service Feasibility Analysis (Cornwall & Scarborough, 2016) A product or service feasibility analysis determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce the product or provide the service. This portion of the feasibility analysis addresses the question, “Are customers willing to purchase our goods and services?” Entrepreneurs need feedback from potential customers to answer this question successfully. Primary research involves collecting data firsthand and analyzing it; secondary research involves gathering data that has already been compiled and is available, often at a reasonable cost or sometimes even free. In both types of research, gathering quantitative and qualitative information is important to draw accurate conclusions about a product’s or service’s market potential. The following are the primary research tools: Customer Surveys and Questionnaires. Keep them short. Word the questions carefully to avoid bias results, and use a simple ranking system (e.g., a 1-to-5 scale, with 1 representing “definitely would not buy,” and 5 representing “definitely would buy”). Test the survey for problems on a small number of people before putting it to use. Web surveys are inexpensive, easy to conduct, and provide feedback fast. Do not only survey people you know or those who are convenient to reach. Survey people who represent the target market of the business. Focus Groups. A focus group involves enlisting a small number of potential customers (usually eight to 12) to give feedback on specific issues about a product or service (or the business idea itself). Listen carefully for what focus group members like and dislike about the product or service as they tell exactly what is on their minds. The founders of one (1) small snack food company that produced apple chips conducted several focus groups to gauge customers’ acceptance of the product and guide many key business decisions, ranging from its name to its packaging. Once again, consider creating virtual focus groups on the Web. One (1) small bicycle retailer conducts 10 online focus groups each year at virtually no cost and gains valuable marketing information from them. Feedback from online customers is fast, convenient, and real-time. Prototypes. An effective way to gauge the viability of a product is to build a prototype of it. A prototype is an original, functional model of a new product that entrepreneurs can put into the hands of potential customers so that they can see it, test it, and use it. Prototypes usually point out potential problems in a product’s design, allowing inventors to fix them even before putting the prototype into customers’ hands. The feedback customers give entrepreneurs based on prototypes often leads to design improvements and new features, some of which the entrepreneurs might never have discovered on their own. Makers of computer software frequently put prototypes of new products into customers’ hands as they develop new products or improve existing ones. Known as beta tests, these trials result in an iterative design process in which software designers collect user feedback and then incorporate their ideas into the product for the next round of tests. Three- dimensional printing creates a less expensive way for entrepreneurs to develop a basic prototype of a product based on drawings. Although the output of a three-dimensional printer is not a fully functional product, it provides a method of creating a model to test and use to source manufacturing of parts. In-home Trials. One (1) technique that reveals some of the most insightful information into how customers use a product or service is also the most challenging to coordinate: in-home trials. An in- home trial involves sending researchers into customers’ homes to observe them as they use the company’s product or service. However, in-home trials can be expensive to conduct and, therefore, may not be affordable for the budgets of most entrepreneurs. “Windshield” Research. A good source of information is to observe customers interacting with existing businesses within an industry. Windshield research involves driving around and observing customers interacting with similar kinds of businesses and learning what customers like and don’t 04 Handout 1 *Property of STI  [email protected] Page 5 of 12  BM2104 like about those businesses. For example, before one (1) potential investor was willing to commit funding for a new coffee shop, he required that the entrepreneur get traffic counts at local competitors’ outlets. He observed heavy demand and often long lines, which helped support the need for a new coffee shop. The following are the secondary research tools: Industry Databases. Several online business databases are available through university libraries, such as Encyclopedia of Emerging Industries, Encyclopedia of Global Industries, Encyclopedia of Products & Industries—Manufacturing, IBISWorld, and Market Share Reporter. These databases offer a wide variety of information on specific industries, including statistical analyses, geographic reports, trend analyses, and profiles. Demographic Data. To learn more about the demographic characteristics of customers in general, use the Philippine Statistics Authority (PSA) website, which provides detailed breakdowns of the population in the country. PSA is the government agency mandated to conduct the census in the Philippines. The census aims to provide government executives, policymakers, and planners with population and housing data to base their social and economic development plans, policies, and programs (PSA, 2020). Forecasts. The National Economic Development Authority (NEDA) provides projections on economic growth and development in the Philippines. The Bangko Sentral ng Pilipinas (BSP) provides forecasts on interest rates. Market Research. This includes data compilations and previous studies on related or similar business undertakings. Articles. Magazine and journal articles pertinent to the proposed business are great sources of information. The Internet. Entrepreneurs can benefit from the vast amount of market research information available on the Internet. This is an efficient resource with up-to-date information, and much of it is free. Entrepreneurs must use caution, however, to ensure the credibility of online sources. Financial Feasibility Analysis (Cornwall & Scarborough, 2016) The four (4) major elements to be included in a financial feasibility analysis have the initial capital requirement, estimated earnings, time out of cash, and resulting return on investment. 1. Capital Requirements. Some businesses require large amounts of capital, but others do not. Typically, service businesses require less capital to launch than do manufacturing or retail companies. Start-up companies often need capital to purchase equipment, buildings, technology, and other tangible assets and hire and train employees, promote their products and services, and establish a presence in the market. A good feasibility analysis estimates the amount of start-up capital an entrepreneur will need to get the business up and running. 2. Estimated Earnings. An entrepreneur should forecast the earning potential of the proposed business. Industry trade associations and publications offer guidelines on preparing sales and earnings estimates for specific types of companies. Entrepreneurs can estimate the financial results they and their investors can expect from the business venture if the start-up is executed according to plan. 3. Time Out of Cash. A common cause of business failure is running out of cash before the business breaks even and can support itself through the cash flow from operations. According to a study by U.S. Bank, four (4) out of five (5) small business failures can be attributed to “starting with too little money.” During the planning stage, the entrepreneur should estimate the total cash it will take to sustain the business until it achieves break-even cash flow. This estimate should be based on a less- than-optimistic scenario because there are almost always unexpected costs and delays in the start- 04 Handout 1 *Property of STI  [email protected] Page 6 of 12  BM2104 up and growth of a new business. To calculate the number of months until the business runs out of cash, an operating company divides the amount of available cash remaining by the negative cash flowing from the business each month. The result is the number of months the business can survive at its current rate of negative cash flow. Ideally, the company will grow quickly enough to avoid reaching the point of no more cash. 4. Return on Investment (ROI). The final aspect of the financial feasibility analysis combines the estimated earnings and the capital requirements to determine the rate of return the venture is expected to produce. One simple measure is the rate of return on the capital invested, which is calculated by dividing the estimated earnings the business yields by the amount of capital invested in the business. This aspect of financial feasibility is generally of most concern to investors. Although financial estimates at the feasibility analysis stage typically are rough, they are an important part of the entrepreneur’s ultimate “go” or “no go” decision about the business ventures. A venture must produce an attractive rate of return relative to the level of risk it requires. This risk-return trade-off means that the higher the level of risk a prospective business involves, the higher the rate of return it must provide to the entrepreneur and investors. Why should an entrepreneur take on all of the risks of starting and running a business that produces a mere three (3) or four (4) percent rate of return when he or she could earn that much in a risk-free investment at a bank or other financial institution? Although entrepreneurs should pay more attention to this calculation, many do not because they tend to get wrapped up in the emotion and excitement of their business ideas. Entrepreneur Feasibility (Cornwall & Scarborough, 2016) Many new businesses require that an entrepreneur have a certain set of knowledge, experiences, and skills to have any chance of being successful. This is called entrepreneurial readiness. Some of these can be simple skills. For example, starting a landscaping business requires knowing how to operate a lawnmower and other equipment. Being successful in a landscaping business also depends on some level of knowledge about plants and grasses. Other new businesses may require a higher level of knowledge and skills. For example, starting an accounting firm requires a high level of expertise and experience in the laws and practices of accounting. Entrepreneurs can gain the knowledge and skills they need from previous jobs, formal education, or interests or hobbies. They can also acquire knowledge as part of what they work on during the planning process. Entrepreneurial readiness also involves issues such as temperament, work ethic, and so forth. Performing an entrepreneurial self-assessment can help evaluate entrepreneurial readiness (see Table 1). Considerations Indicators What gets you excited, gives you energy, and motivates you to excel? What do you like to do with your time? What drains energy from you? (in work and personal relationships) How do you measure success in your personal life? (family, friends and relationships; Personal personal interests and hobbies; and contributions to community and society) Aspirations What do you consider success in your business and career? (short-term and long-term) & Priorities What are your specific goals for your personal life? What are your goals for your business and career? (income and lifestyle; wealth; free time; recognition and fame; and impact on community) What do you want to be doing? (in one year, five years, 10 years, and retirement) List the core personal values you intend to bring to your business (e.g., treating people fairly, giving something back to the community). Core Values Where does each of these core values come from (religious faith, family, etc.)? Why is each of them important to you? 04 Handout 1 *Property of STI  [email protected] Page 7 of 12  BM2104 Considerations Indicators What are the major reasons you want to start a business? How many hours are you willing and able to put into your new venture? How would you describe your tolerance for uncertainty and risk? Do you easily trust other people working with you on a common activity? Why or why not? How much financial risk are you willing to take with your new venture (personal assets, personal debt, etc.)? Assume you decide not to start your business. A short time later, you see that someone has Personal started the same business and is doing well. How would you feel? Why? Entrepreneurial What are the non-financial risks for you in starting a new business? Readiness How do you react to failure? Give examples. How do you react in times of personal stress? How do you deal with stress in your life? How much income do you need to support your current lifestyle? How long could you survive without a paycheck? How much money do you have available to start your business? Which of your assets would you be willing to borrow against or sell to start your business? Whose support (non-financial) is important for you to have before starting your Table 1. Entrepreneurial self-assessment Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 165. Another way to ensure the necessary knowledge and skills are in place is through building a team. For example, an aspiring entrepreneur may have an idea for a new app for smartphones but may not have any programming or design skills. He or she would be best served by exploring the possibility of adding people to the team with that skill set. If more than one entrepreneur is starting the business, all of them should complete an assessment and use this as a launching point to examine their collective entrepreneurial feasibility. Beyond the entrepreneur’s readiness to start a business, the second aspect of entrepreneur feasibility is to assess whether the business can meet the financial and non-financial needs of the entrepreneur and the team. Will the business be able to generate enough profit to support everyone’s income needs? If it is successful, will it also meet the wealth goals of the founding team? Just because a business is profitable does not mean that it is profitable enough to support the entrepreneur and his or her team. This can vary from entrepreneur to entrepreneur. A 22-year-old single entrepreneur fresh out of college has very different financial needs than a 42-year-old married entrepreneur who has a mortgage, car payments, and tuition for private schools for his or her children. But making money is not the only thing that matters for most people. Does business fit with the goals and aspirations the entrepreneur has outside of work? A business that demands extensive travel may not fit with an entrepreneur who has a goal of being highly involved with his or her family. A restaurant, which often demands that the entrepreneur be involved six (6) or seven (7) days a week, 52 weeks a year, may not be a good business model for an entrepreneur who wants to travel and take extended vacations. Developing and Testing a Business Model (Cornwall & Scarborough, 2016) In their groundbreaking study of how successful entrepreneurs develop business models, Osterwalder and Pigneur identified the common elements that successful entrepreneurs and investors use when developing and evaluating a business model. They found that most entrepreneurs use a visual process to develop their business ideas, such as diagraming their business on a whiteboard. They don’t just start writing the text of a business plan. Rather, they map out the key components required to make their businesses successful. A business model adds more detail to the evaluation of a new business begun during the feasibility analysis by graphically depicting the “moving parts” of the business and ensuring that they are all working together. 04 Handout 1 *Property of STI  [email protected] Page 8 of 12  BM2104 When building a business model, the entrepreneur addresses a series of key questions that will explain how a business will become successful. What value does the business offer customers? Who is my target market? What do they expect of me as my customers? How do I get information to them, and how do they want to get the product? What are the key activities to make this all come together, and what will they cost? What resources do I need to make this happen, including money? Who are key partners I will need to attract to be successful? In their study, Osterwalder and Pigneur found a pattern of how entrepreneurs use a visual representation of their business model to answer these questions. They used these findings to develop a Business Model Canvas that provides entrepreneurs with a dynamic framework to guide them through the process of developing, testing, and refining their business models (see Figure 5). Figure 5. The business model canvas Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 166. The canvas is comprised of nine (9) elements: 1. Customer segments. A good business model always starts with the customer. The entrepreneur’s first step is to identify a segment of customers who have a clearly defined need. In the previous steps outlined in this chapter, the entrepreneur begins to define the market for the new business. For most entrepreneurs, the initial market is defined much too broadly. The entrepreneur uses demographic, geographic, socioeconomic, and other characteristics to define the target market. Narrowing the target market enables a small company to focus its limited resources on serving the needs of a specific group of customers rather than attempting to satisfy the desires of the mass market. Creating a successful business depends on an entrepreneur’s ability to attract real customers who are willing and able to spend real money to buy its products or services. Perhaps the worst marketing error an entrepreneur can commit is failing to define a target market and trying to make the business “everything to everybody.” Small companies are usually much more successful, focusing on a specific market niche or niches to excel at meeting customers’ special needs or wants. Who, specifically, has the needs the new business will be addressing with its products and/or services? It may be a market niche. It may be a mass market. Or it may be a segmented market based on age, gender, geography, or socioeconomic grouping. 04 Handout 1 *Property of STI  [email protected] Page 9 of 12  BM2104 2. Value proposition. A compelling value proposition is at the heart of every successful business. The value proposition is the collection of products and/or services the business will offer to meet the customers' needs. It is all the things that will set the business apart from its competitors, such as pricing, quality, features, product availability, and other features. Most value propositions for new businesses come from fundamental macro trends within the economy, demographics, technology, or society and culture discussed earlier in the chapter. Trends lead to changes within industries. These trends are first uncovered in the industry and market feasibility analysis. A fundamental role of being an entrepreneur is to find solutions for the problems and needs customers have that result from the change that follows disruptive trends such as these. It could be something about the product itself, such as its price and value, features, performance, durability, or design, or it might be something emanating from the company's personnel, including their expertise, responsiveness, or reliability. 3. Customer relationships. Not every business provides the same type and same level of customer service. This is what defines the customer relationship in the business model. For example, several effective business models provide meals to consumers. Customers may choose to buy food from a vending machine, a fast-food restaurant, a fast-casual sit-down restaurant, or an exclusive fine dining establishment. Each of these business models has a very different approach to define the relationship with customers. The vending business offers quick, convenient, and impersonal service. At the other extreme, the fine dining restaurant works closely and personally with customers to ensure they get exactly what they want. Each approach is effective and appropriate for its particular target market. When developing this segment of the business model, the entrepreneur must answer several questions. How do customers want to interact with the business? Do they want intensive personal service, or would they rather have limited engagement or even automated interaction? There is no one best approach to customer relationship for all businesses, but they're usually the best approach for each business model. 4. Channels. The business model canvas refers to both communication channels (promotion) and distribution channels (product placement). Communication channels define how the customers seek out information about this type of product. Where do potential customers go to when they want to get information about products and services? It could be Web sites, social networks, blogs, advertisements, experts, and so forth. Again, there is no one best way to communicate for all businesses, but one or more will be most effective with the specific target market for a given business model. The distribution channel defines the most effective way to get products to the customers for this type of business. For some business models, it may be best to use in-home sales through Web sites such as Amazon because the target market may prefer to order online from the comfort of their living rooms. The customer may want to see the merchandise, touch it, and interact with it in an exciting new retail location for other business models. The entrepreneur must determine where the customer wants to purchase and then determine the most effective way to get it to the customer at that location. 5. Key activities. What important things must the entrepreneur do to ensure a successful launch and sustain the business's growth? The business model aims to build a basic checklist of what needs to be done to open the business and what activities are necessary to ensure its long-term success. The business plan development will then take this list and expand on it in much greater detail. 6. Key resources. What are the human, capital, and intellectual resources needed for the business to be successful? Again, this will serve as an initial checklist to ensure that the entrepreneur has identified all key resources necessary to support a successful launch and to sustain the business as it grows. The business plan provides the opportunity to explain these in much greater detail and develop all necessary cost estimates for the financial forecasts. 04 Handout 1 *Property of STI  [email protected] Page 10 of 12  BM2104 7. Key partners. This business model segment includes key suppliers, key outsourcing partners, investors, industry partners, advisers, and all other external businesses or entities that are critical to making the business model work. Entrepreneurs cannot expect to become successful all by themselves. They must build a network of relationships when launching and growing their businesses. 8. Revenue streams. How will the value proposition generate revenue? Will it be a one-time sale, ongoing fees, advertising, or some other sources of cash into the business? The entrepreneur should answer these questions using the information discovered in the business model's value proposition, customer segments, customer relationship, and channel components (the right side of the business model canvas). The revenue streams information serves as the framework for the more detailed revenue forecasts developed for the business plan. 9. Cost structure. What are the fixed and variable costs that are necessary to make the business model work? The plan's key activities, resources, and partners components (the left side of the business model canvas) identify the basic types of costs and estimate their scope. Like the revenue streams, the cost structure of the business model becomes the framework for developing more detailed costs that the entrepreneur will incorporate into the financial forecasts of the business plan. Developing a business model is a four (4)-phase process: Phase 1: Develop the Business Model Canvas. The first phase is to create an initial business model canvas, as outlined previously. It is best to do this on a whiteboard, on the wall using Post-it Notes, or free business model software such as Business Model Fiddle (www.bmfiddle.com). As the entrepreneur goes through the next three (3) phases, the business model will change. At this point in the process, much of the information in the business model is only a series of hypotheses to be tested. The entrepreneur will update the business model as he or she learns more about the customers and the resources it will take to launch and grow the business. The business model canvas allows all of the team members involved in the start-up to work from a common framework. The team documents all of the business model hypotheses that require further investigation and keeps track of changes in the model that result from testing the hypotheses. The entrepreneurial team also estimates the total market size and the specific target market size that would be feasible to attract to the new business when it launches. Phase 2: Test the Value Proposition with Customers. The second phase in designing the business model is to test the problem that the team thinks the business solves through its core value proposition. This is best done with primary research data. That means the entrepreneurial team must “get out of the office” and test the model with real customers. By engaging potential customers early in the development of a new business and listening to what they have to say, the team has a much better chance of developing a business model that will attract customers. By engaging with real customers, the entrepreneurial team asks the following questions: a. Do we understand the customer problem the business model is trying to address? b. Do these customers care enough about this problem to spend their hard-earned money on our product? c. Do these customers care enough about our product to help us by telling others through word- of-mouth? Phase 3: Test the Product with a Prototype or Minimal Viable Product. The third phase is to test the solution to the problem in the market. One technique to test the solution offered by the business model involves business prototyping, in which entrepreneurs test their business models on a small scale before committing significant resources to launch a business that might not work. Business prototyping recognizes that every business idea is a hypothesis that must be tested before an entrepreneur takes it to full scale. If the test supports the hypothesis and its accompanying 04 Handout 1 *Property of STI  [email protected] Page 11 of 12  BM2104 assumptions, the entrepreneur begins building a business plan. If the prototype flops, the entrepreneur scraps the business idea with minimal losses and turns to the next idea. The Internet is a valuable business prototyping tool because it gives entrepreneurs easy and inexpensive access to real-life potential customers. Entrepreneurs can test their ideas by selling their products on established sites such as eBay or setting up their Web sites to gauge customers’ responses. A process that can guide early testing versions of a product or service is known as a lean start-up, which is defined as a process of rapidly developing simple prototypes to test key assumptions by engaging real customers. Phase 4: Pivot Business Model Until Ready to Expand. The fourth phase of designing a business model is to make changes and adjustments, called pivots, based on what the entrepreneur learns from engaging the market about the problem and the solution that the new business intends to pursue. Some pivots may be subtle adjustments to the business model. In contrast, others may be fundamental changes to key parts of the model, including the value proposition, markets served, or ideal revenue streams. There are three (3) major types of pivots: 1. Product pivot. The features that make up a product may not match what the customer wants or needs. Sometimes the entrepreneur adds features that are not important to the customer. Although customers may accept these features as part of the product, they are not willing to pay extra for them. This creates a product that is not focused on the market need: It costs more than it should due to the extra features. 2. Customer pivot. Although a product might solve a real market problem or need, the initial business model sometimes targets the wrong customer segment or even the wrong market. For example, PayPal targeted the handheld device market, including the Palm Pilot, for its electronic payment system. However, the founders of PayPal soon realized by listening to customer feedback that there was a much larger market for its product. Businesses were beginning to engage in commerce on their Web sites. PayPal pivoted its business model and, as a result, rapidly grew to become a $1.6 billion or 80-billion-peso company facilitating Internet commerce. 3. Revenue model pivot. There are many ways in which the revenue model may pivot. One of the most basic revenue decisions is using a high margin/low volume model or a low margin/high volume model. For example, Best Buy began as a single location stereo equipment store called the Sound of Music back in the 1960s. Like all of its competitors, the revenue model was high margin/low volume. The owners would mark up inventory two to three times what the product cost them to purchase. As a result, the store would turn its inventory over about once a year. After a tornado destroyed the building but left the inventory undamaged, the Sound of Music owners rented a large tent and ran a drastic sale. The demand was so overwhelming that when they reopened, they changed their revenue model to low margin/high volume and renamed the business Best Buy within a short time. The low prices created so much demand that the stores would sell their entire inventory about once a month rather than once a year. Other revenue model pivots change the type of payment received. The model may change from a single payment to recurring revenue or shift from hourly billing to charging a fixed price per service. Social entrepreneurs can pivot from a revenue model based on a nonprofit that raises money through grants and donations to a social enterprise that generates revenues from a product or service. References: Cornwall, J. & Scarborough, N. (2016). Essentials of entrepreneurship and small business management (8th ed.). Pearson Education Limited. Philippine Statistics Authority (PSA). (2020). PSA enjoins the public to support the conduct of the 2020 census of population and housing (CPH). https://psa.gov.ph/content/psa-enjoins-public-support-conduct-2020-census-population-and-housing-cph-0 04 Handout 1 *Property of STI  [email protected] Page 12 of 12