Start-up: building a business model

Sarasvathy (2001) came to five main conclusions about how successful entrepreneurs approach
decision-making in their uncertain, rapidly changing environment:

1. Flexible Goal Setting: Entrepreneurs evolve goals based on personal strengths and resources,
reacting creatively to contingencies. They initiate action with available resources, learning
through practical experience, without waiting for perfect opportunities.

2. Affordable Loss Approach: Entrepreneurs prioritize quick and economical market entry,
assessing demand through an 'affordable loss' perspective. They determine the maximum
acceptable loss rather than focusing solely on potential gains, allowing them to make
decisions swiftly.

3. Preference for Practical Experience: Entrepreneurs avoid extensive formal research, relying
on their ability to obtain real-time information to adapt to changing circumstances. They
believe in their capability to recognize, respond to, and reshape opportunities as they develop,
embracing uncertainty and flexibility over rigid planning.

4. Strategic Partnerships: Entrepreneurs engage extensively with stakeholders like customers,

suppliers, and advisors, recognizing the value of building relationships. Partnerships provide
crucial resources and knowledge, enabling entrepreneurs to leverage external expertise and
shape the future of their businesses.

5. Confidence and Differentiation: Entrepreneurs, driven by self-confidence and innovative

thinking, are less concerned about competitors. They often view themselves as pioneers or
disruptors, creating new markets or offering unique products, giving them a distinct
competitive advantage.

New venture creation framework (Burns, 2014)

Market segments and value proposition

At the core of a business model is the identification of different groupings of customers with simi-lar
characteristics – called market segments – and the motivations each segment has for buying your
product or service – called the benefits they are seeking. Pulling these benefits together for each
segment is called your value proposition. Before you develop this, you need to understand the
structure of the market and industry you are entering and the value propositions they are currently
offering customers

Core value propositions:

- Low cost/price.
- High differentiation.
- Customer focus.

Marketing strategy

Describes how you will deliver your value proposition to each of the customer segments you have
identified.
The tool for delivering this is called the marketing mix– price, promotion/communication, service,
distribution channels, branding etc.
A good marketing strategy helps you develop competitive advantage against other companies in your
market.
This section needs to cover your core strategy as well as your strategy for the launch and the
subsequent growth of the business.

Operations plan

Highlights the practical things you need to do to launch a new venture.

These range from legal to operating issues, including partnership opportunities.
It should identify those key activities you need to undertake to ensure success.

Risk and strategic options

Launching a new venture involves taking risks – and the business model should tease out the major
risks you face and how they might be mitigated or avoided entirely.
It should identify the critical success factors that underpin the operations of the business and the
different ways of doing things should circumstances change or be different to those anticipated–
called strategic options.
These are valuable because circumstances can, and do, change.

Resources available and resources needed

Defines the resources you bring to the business – human, social, intellectual land financial – and the
resources you need.
A major component of this is your ability to pull together and lead a management team.

Financial plan

Developing a viable business model is essential, involving financial forecasts, cash flow analysis, and
identification of required external finance.
Marketing, operations, and financial plans are crucial to persuade customers and ensure repeat
business.
The process allows for structured exploration of innovative alternatives, enabling adaptability and
testing against established models.
The approach emphasizes understanding linkages and implications of different market offerings,
focusing on realistic revenue, pricing, sales, and cost assumptions.
Experimentation helps identify the most viable model before considering a formal business plan.
Key challenge lies in innovative model development and effective implementation. Three generic
models (low price/low cost, high differentiation, customer focus) and niche models (highly
differentiated products/services offered in small volumes at a high price) are discussed, highlighting
the importance of diverse and adaptable business models for success.

Lean start-up

Ries (2011) popularised this idea.

It involves launching a business with limited resources by minimizing lead time and initial
investment.

Instead of launching a perfect product, businesses start with a "minimum viable" version and refine it
based on customer feedback through a process called "validated learning."

This iterative approach tailors the product to customer needs, saving time and money.
^ The key is maintaining close customer relationships and gathering feedback.

An example is the strategy used by Zappos founder Nick Swinmurn, who validated his online shoe
retail idea by posting pictures of shoes from local stores online and selling directly to customers,
minimizing costs and risks.

The lean start-up concept, initially designed for high-tech businesses like Google, has gained
widespread popularity.

It involves parallel product development and market testing, limiting financial exposure and
embracing an incremental decision-making approach.

Small-scale market entry and trials, facilitated by the internet, provide valuable market information
before a full product launch.

The timing of the launch is crucial; a "minimum viable product" allows start-ups to gather customer
feedback efficiently.

However, this approach might not work for all products; software can be iteratively improved, but for
high-investment innovations like the iPhone, the product must be substantially right from the start.

International start-ups

Many small and medium-sized enterprises (SMEs) lack capital and unknowingly employ a "lean start-
up" approach – most SMEs primarily serve local markets, especially service businesses.

However, an increasing number of businesses are now selling internationally from the outset,
facilitated by the internet – this global approach, aided by economies of scale, can enhance
profitability, especially when targeting niche markets – despite digital advancements, establishing
physical presence in foreign countries still presents barriers for businesses delivering services or
products to customers.

Most physical start-ups that are born global do so because they either see unmet demand and a market
opportunity or can derive some significant form of competitive advantage from being international.

^ Entrepreneurs can capitalise on international market imperfections by linking resources from around
the world – Oviatt and McDougall (1994) identified 3 groups:

1. New international market makers – moved goods from one country to another where there
was higher demand.
 2. Geographically focused start-ups – focus on using foreign resources like raw materials,
people or financing to service the needs of other countries more cheaply.
3. Global start-ups – who perceive themselves as global businesses from inception and derive
some form of significant competitive advantage from doing so.

High-technology start-ups often operate in niche markets due to the rapid pace of technological
advancements and the importance of first-mover advantage (Aggarwal, 1999).

The degree of environmental dynamism in an industry is linked to internationalization, and start-up

investments often necessitate achieving economies of scale despite offering niche products (Anderson
et al, 2004).

A review of literature and a study of 12 high-tech international start-ups revealed that various factors
influence internationalization decisions (Johnson, 2004). While market dynamism is a factor, the main
reasons for internationalization are:
- The international vision of the founders.
- Desire of the founders to be international market leaders.
- Identification of specific international market opportunities that needed to be exploited
quickly.
- Possession of specific international contacts, networks and sales leads.

To be successful, international start-ups must have both local and international knowledge and make
extensive use of international business networks or contacts (Johnson, op. cit.; Oviatt and McDougall,
op. cit.).

Zhou et al. (2007) argued that home-based social networks play a mediating role in the relationship
between inward and outward internationalization, allowing firms to go international more rapidly and
profitably. They do this by providing opportunities for:
- Obtaining advice and experiential learning.
- Knowledge of and information about foreign market opportunities.
- Gaining referral trust and solidarity – also often leading to a partnership, alliance or joint
ventures to reduce the risk in exploiting an opportunity.

Some start-ups just follow the stage model of internationalisation – start locally and grow by
expanding their geographic and market base more gradually.

Identifying your market segments

Defining your value proposition

The core competencies of a business are the resources or capabilities it has. They can be combined
with strategic assets of a business to create sustainable competitive advantage. The more unique these
competences are, the more difficult they are to copy and the more successful the start-up is likely to
be.

Tailoring your marketing mix

Marketing strategy is made up of elements of the marketing mix as they relate to the customer
segments they are targeted at. Strategy is just a series of related tasks that, taken together, have
coherence and give direction. The marketing strategy delivers the value proposition to these target
market segments.

Linking features and benefit with marketing mix

Channels of distribution
You can sell directly to customers or through distribution channels. If you sell through channels, you
might gain wider distribution, but you lose profit and may lose control over communication to
customers

‘Supply-push’ is when you create incentives to intermediaries in your distribution channels to sell
your product. ‘Demand-pull’ is when you create incentives directly with end-use customers who then
‘pull’ the product through the distribution channels

Understanding customer and consumer benefits

Generic business models

Niche business models