Lecture # 8

Entrepreneurship

DEPARTMENT OF ENGINEERING MANAGEMENT

NUST COLLEGE OF E&ME
Business Model
 What is a Business Model?

Model
A model is a plan or diagram that’s used to make or
describe something.
Business Model
A firm’s business model is its plan or diagram for how
it competes, uses its resources, structures its
relationships, interfaces with customers, and creates
value to sustain itself on the basis of the profits it
generates.
The term “business model” is used to include all the
activities that define how a firm competes in the
marketplace.
Business Model…

• A business model is a company's core strategy for profitably

doing business.
• Models generally include information like products or services
the business plans to sell, target markets, and any anticipated
expenses.
• There are dozens of types of business models including
retailers, manufacturers, fee-for-service, or freemium
providers.
• The two levers of a business model are pricing and costs.
• When evaluating a business model as an investor, consider
whether the product being offer matches a true need in the
market.
Engr.Afshan Naseem
 Dell’s Business Model

It is important to understand that a firm’s business

model takes it beyond its own boundaries. Almost
all firms partner with others to make their business
models work.

In Dell’s case, it needs the cooperation of its

suppliers, shippers, customers and many others to
make its business model possible.
 Dell’s Business Model
Dell’s Approach to Selling PCs versus Traditional Manufacturers
 Business Models
•Timing of Business Model Development
• The development of a firm’s business model follows the
feasibility analysis stage of launching a new venture but
comes before writing a business plan.

• If a firm has conducted a successful feasibility analysis

and knows that it has a product or service with potential,
the business model stage addresses how to surround it
with a core strategy, a partnership network, a customer
interface, distinctive resources, and an approach to
creating value that represents a viable business.
 Importance of a Business Model
Having a clearly articulated business model is important
because it does the following:
•Serves as an ongoing extension of feasibility analysis. A
business model continually asks the question, “Does this
business make sense?”
• Focuses attention on how all the elements of a business fit
together and constitute a working whole.
• Describes why the network of participants needed to make a
business idea viable are willing to work together.
• Articulates a company’s core logic to all stakeholders,
including the firm’s employees.
 Diversity of Business Models

• There is no standard business model for an industry

or for a target market within an industry.
• However, over time, the most successful business
models in an industry predominate.
• There are always opportunities for business model
innovation.
 How Business Models Emerge

•The Value Chain

• The value chain is the string of activities that moves a
product from the raw material stage, through
manufacturing and distribution, and ultimately to the end
user.
• By studying a product’s or service’s value chain, an
organization can identify ways to create additional value
and assess whether it has the means to do so.
• Value chain analysis is also helpful in identifying
opportunities for new businesses and in understanding
how business models emerge.
How Business Models Emerge
The Value Chain
 How Business Models Emerge
• The Value Chain (continued)

• Entrepreneurs look at the value chain of a

product or a service to pinpoint where the value
chain can be made more effective or to spot
where additional “value” can be added.
How Business Models Emerge
Firms Founded to Enhance the Value Chain of an
Existing Product or Service
How Business Models Emerge
How Business Models Emerge
Firms Founded to Enhance the Value Chain of an
Existing Product or Service
 Potential Fatal Flaws in Business Models

•Fatal Flaws

• Two fatal flaws can make a business model invalid

from the beginning:

• A complete misread of the customer

• Completely unstable economics
Components of a Business Model
Four Components of a Business Model
 Core Strategy
•Core Strategy
• The first component of a business model is the
core strategy, which describes how a firm
competes relative to its competitors.
•Primary Elements of Core Strategy
• Business mission
• Product/market scope
• Basis for differentiation
 Core Strategy
Primary Elements of Core Strategy
A firm’s mission, or mission statement, describes
why it exists and what its business model is
Business supposed to accomplish.
Mission

For example, NUST’s Mission statement is as

follows: To develop NUST as a comprehensive,
research-led university with a focus on Technology,
Innovation, Entrepreneurship and Community
Service.
Product/Market
A company’s product/market scope defines the
Scope products and markets on which it will
concentrate. The choice of products has an
important impact on a firm’s business model.
 Core Strategy
Primary Elements of Core Strategy
It is important that a new venture
differentiate itself from its competitors
in some way that is important to its
Basis of
customers.
Differentiation
If a new firm’s products or services
aren’t different from those of its
competitors, why should anyone try
them?
 Strategic Resources
•Strategic Resources
• A firm is not able to implement a strategy without
resources, so the resources a firm affect its business model
substantially.

• For a new venture, its strategic resources may initially

be limited to the competencies of its founders, the
opportunity they have identified, and the unique way
they plan to serve their market.

• The two most important strategic resources are:

• A firm’s core competencies
• Strategic assets
 Strategic Resources
Primary Elements of Strategic Resources

A core competency is a resource or capability that

Core serves as a source of a firm’s competitive
Competencies advantage over its rivals. Examples are Sony’s
competence in miniaturization, Dell’s
competence in supply chain management, and
3M’s competence in managing innovation.

Strategic assets are anything rare and valuable

Strategic Assets that a firm owns. They include plant and
equipment, location, brands, patents, customer
data, a highly qualified staff, and distinctive
partnerships.
 Strategic Resources
Importance of Strategic Resources
New ventures ultimately try to combine their core
competencies and strategic assets to create a
sustainable competitive advantage.
This factor is one that investors pay close attention
when evaluating a business.
A sustainable competitive advantage is achieved
by implementing a value-creating strategy that is
unique and not easy to duplicate.
This type of advantage is achievable when a firm
has strategic resources and the ability to use them.
 Partnership Network
Partnership Network
A firm’s partnership network is the third component
of a business model. New ventures, in particular,
typically do not have the resources to perform key
roles.
In most cases, a business does not want to do
everything itself because the majority of tasks needed
to build a product or deliver a service are not core to a
company’s competitive advantage.
A firm’s partnership network includes:
Suppliers
Other partners
 Partnership Network
Primary Elements of Partnership Network
A supplier is a company that provides parts or
services to another company. Intel is Dell’s
Suppliers suppler for computer chips, for example. Firms
are developing more collaborative relationships
with their suppliers, and finding ways to
motivate them to perform at higher levels.

Along with suppliers, firms partner with other

companies to make their business models work.
Other Key An entrepreneur’s ability to launch a firm that
Relationships
achieves a sustainable competitive advantage
may hinge as much on the skills of the partners
that are involved as the skills within the firm
itself. The most common types of partnerships
are shown on the next slide.
 Partnership Network
The Most Common Types of Business Partnerships
 Customer Interface

• Customer Interface
• The way a firm interacts with its customer hinges on how it
chooses to compete.
• For example, Amazon.com sells books over the Internet while
Barnes & Noble sells through its traditional bookstores and
online.
• Dell sells strictly online while HP sells through retail stores.

• The three elements of a company’s customer interface are:

• Target customer
• Fulfillment and support
• Pricing model
 Customer Interface
Primary Elements of Customer Interface
A firm’s target market is the limited group of
individuals or businesses that it goes after or tries
to appeal to. The target market a firm selects
Target Market
affects everything it does, from the strategic
assets it acquires to the partnerships it forges to
its promotional campaigns.

Fulfillment and Fulfillment and support describes the way a

Support firm’s product or service “goes to market” or how
it reaches it customers. It also refers to the
channels a company uses and what level of
customer support it provides. All these issues
impact the shape and nature of a company’s
business model.
 Customer Interface

Primary Elements of Customer Interface

The third element of a company’s

Pricing customer interface is its pricing
Structure
structure. Pricing models vary,
depending on a firm’s target market
and its pricing philosophy.
 Recap: The Importance of Business Models

•Business Models
• It is very useful for a new venture to look at itself in a
holistic manner and understand that it must construct an
effective “business model” to be successful.
• Everyone that does business with a firm, from its
customers to its partners, does so on a voluntary basis. As
a result, a firm must motivate its customers and its
partners to play along.
• Close attention to each of the primary elements of a firm’s
business model is essential for a new venture’s success.
Discussion