Entrepreneurship: Successfully Launching New Ventures

Sixth Edition

Chapter 4
Developing an
Effective
Business Model

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Learning Objectives
4.1 Describe business models and discuss their importance.
4.2 Identify and describe the two general types of business models—standard and
disruptive.
4.3 Explain the components of the Barringer/Ireland Business Model Template that
entrepreneurs can use to develop a business model for their firm.

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 Business Models
– A business model is a firm’s plan or recipe 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.

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 General Categories of Business Models
There are two general categories of business models :-

• Standard Business Models

– used commonly by existing firms as well as by those launching an entrepreneurial venture.
– 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

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General Categories of Business Models
• Standard Business Models
Business Model Representative Companies

Advertising Business Model Google, Facebook

Auction Business Model eBay, uBid

Bricks and Clicks Business Model Apple, Barnes & Noble

Franchise Business Model 24 Hour Fitness, Panera Bread

Freemium Business Model Dropbox, Evernote

Low-Cost Business Model Southwest Airlines, Warby Parker

Manufacturer/Retailer Business Model Apple, Fitbit, Tesla Motors

Peer-to-Peer Business Model Airbnb, Uber

Game Consoles and Games, Printers and Ink
Razor and Blades Business Model
Cartridges
Subscription Business Model Birchbox, Blue Apron, Netflix

Traditional Retailer Business Model Whole Foods Markets, Zappos

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General Categories of Business Models

• Second category - Disruptive Business Models

– Disruptive business models, which are rare, are ones that do not fit the profile of
a standard business model.

– They are impactful enough that they disrupt or change the way business is
conducted in an industry or an important niche within an industry.
– The next slides depict four business models that were disruptive when they were
introduced.

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 General Categories of Business Models
• Disruptive Business Models
Company or Companies That
Business Model
Introduced It

Direct-to-Consumer Computer Sales (which allowed consumers to

Dell
customize their computers)

Online Text Ads on Search Engines (allowed advertisers to place ads for
Yahoo, Google
products that searchers were already searching for)

Software as a Service (SaaS) (By moving software to the cloud, allowed

users to access the software and their data from anywhere there was an Salesforce.com
Internet connection)

Cloud-based Service to Connect Riders and People Willing to Provide

Rides (Provided riders with an app that connects them with the owners of Uber, Lyft
private cars)

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Barringer/Ireland Business Model Template (1 of 2)
• 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.

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Barringer/Ireland Business Model Template (2 of 2)
Figure 4.2 Barringer/Ireland Business Model Template

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1. 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

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Core Strategy
• Business Mission
– A business’s mission or mission statement describes why it exists and
what its business model is supposed to accomplish.

– 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.

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 Core Strategy
• There are several rules of thumb for writing mission statements. A business’ mission statement
should describe

 Define its “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”

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Petronas Mission

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 Core Strategy
• Basis of Differentiation
– It’s important 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.
– It is 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.

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Core Strategy
• Target Market

– A target market is a place within a larger market segment that represents a narrow group of
customers with similar interests.

– A firm’s target market should be made explicit in the business model template.
– The founders of Birchbox, wrote the following about their company’s target market:

“From the start, we’ve always said that our target market isn’t a specific demographic, but instead a
psychographic—we believe that Birchbox appeals to women of all ages and backgrounds as long as they
are excited to try new things and learn through discovery.”

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Core Strategy (5 of 5)
• 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.

– In completing 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.

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2. Resources
– The second component of a business model is resources.
– Resources are the inputs a firm uses to produce, sell, distribute, and service a product or
service.
– Resources are developed and accumulated over a period of time
– 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.

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 Resources
• Core Competencies
– A core competency is 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

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 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.
 Intellectual assets include resources such as patents, trademarks, copyrights, and
trade secrets, along with a company’s brand and its reputation.
 Financial assets include cash, lines of credit, and commitments from investors.
 Human assets include a company’s founder or founders, its key employees, and its
advisors.

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 Financials
– The third component of a firm’s business model focuses on its financials.
– This is the only section of a firm’s business model that describes how it earns money—thus, it is
extremely important.
– For most businesses, the manner in which it makes money is one of the most fundamental aspects
of its business model.

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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 bottled barbeque sauce for a barbeque restaurant),
and apparel products with the name of the restaurant on them.

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Most Common Revenue Streams

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 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 the business’s costs.
 Identify the business’s major cost categories.

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 Cost Structure
• It’s important to identify the nature of a business’ costs. Most businesses have a mainly fixed-
cost or variable-cost structure.
• Fixed costs are costs that remain the same despite the volume of goods or services
provided.
• Variable costs vary proportionally with the volume of goods or services produced.

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Financials
• Financing/Funding
– Many business models rely on a certain amount of financing or funding to bring
their business model to life.

– There are three categories of costs to consider:

 Capital costs.
 One-time expenses, such as building a Web site and training initial employees.
 Provisions for ramp-up expenses (most businesses incur costs before they
earn revenues).

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 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 .

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4. Operations
– The final quadrant in a firm’s business model focuses on operations.
– Operations are both integral to a firm’s overall business model and represent
the day-to-day heartbeat of a firm.
– The primary elements of operations are: product (or service) production,
channels, and key partners.

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Operations
• Product (or Service) Production
– This section focuses on how a firm’s products and/or services are
produced.

– For example, 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.

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Operations
• Channels
– A company’s 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.

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Operations
• Key Partners
– The final 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.

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Operations
Table 4.4 The Most Common Types of Business Partnerships
Partnership Form Description
Joint venture An entity created by two or more firms pooling a portion of their
resources to create a separate, jointly-owned organization
Network A hub-and-wheel configuration with a local firm at the hub
organizing the interdependencies of a complex array of firms
Consortia A group of organizations with similar needs that band together to
create a new entity to address those needs
Strategic alliance An arrangement between two or more firms that establishes an
exchange relationship but has no joint ownership involved
Trade associations Organizations (typically nonprofit) that are formed by firms in the
same industry to collect and disseminate trade information, offer
legal and technical advice, furnish industry-related training, and
provide a platform for collective lobbying

Source: B. Barringer and J. S. Harrison, “Walking a Tightrope: Creating Value Through

Interorganizational Relationships,” Journal of Management 26, no. 3 (2000): 367–403.
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The Business Modeling Process (1 of 5)
Figure 4.9 The Business Modeling Process

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The Business Modeling Process (2 of 5)

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The Business Model Canvas (BMC)
Initially proposed in 2005 by Alexander Osterwalde

Source: Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers by Osterwalder,
Alexander; Pigneur, Yves Reproduced with permission of Wiley in the format Book via Copyright ClearanceCenter.

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 Videos

• Alexander Osterwalder: The Business Model Canvas

• Alexander Osterwalder: The Business Model Canvas - YouTube

• The Business Model Canvas - 9 Steps to Creating a Successful

Business Model - Startup Tips
• The Business Model Canvas - 9 Steps to Creating a Successful Busin
ess Model - Startup Tips - YouTube

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 BMC
• Customer Segments.
– Identify a segment of customers who have a clearly defined need.
Small companies usually are much more successful focusing on a
specific market niche or niches where they can excel at meeting
customers’ special needs or wants.

• 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 needs of the
customers. It is best to identify and focus on one or two benefits
that will make the new business stand out to customers and
motivate them to purchase from the new business.

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 BMC
• Customer Relationships.

– What level of customer service is expected by your customers?

The entrepreneur needs to know how customers want to interact
with the business, if customers want intensive personal service or
prefer limited engagement or even an automated interaction.

• Channels.

– In the business model canvas, channels refer to both

communication channels (promotion) and distribution channels
(product placement).

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 BMC

• Key Activities.

– The goal is 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.

• Key Resources.

– The entrepreneur must identify the human, capital, and intellectual

resources needed to the business to be successful.

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 BMC
• Key Partners.

– Examples include key suppliers, key outsourcing partners, investors,

industry partners, advisers, and all other external businesses or entities
that are critical to make the business model work.

• Revenue Streams.

– The entrepreneur must determine how the value proposition will generate
revenue. The answer might be one-time sale, ongoing fees, advertising,
or some other sources of cash into the business.

• Cost Structure.

– The entrepreneur must identify the fixed and variable costs necessary to
make the business model work.

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The Business Modeling Process (3 of 5)

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Test the Value Proposition
• To test the problem that the entrepreneur thinks is being solved by the business
through its core value proposition using primary research data

• The entrepreneurial team needs to test the model with real customers to determine
the answers to these questions:

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Test the Value Proposition
• Ask customers:
– Do we really understand the customer problem the business model is
trying to address?

– Do these customers care enough about this problem to spend their

hard-earned money on our product?

– Do these customers care enough about our product to help us by

telling others through word-of-mouth?

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The Business Modeling Process (4 of 5)

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Business Prototyping (1 of 2)
• To test your solution to the problem in the market
• Entrepreneurs test their business models on a small scale before
committing serious resources to launch a business that might not work.
– For example, one can sell their products on established Internet sites such as eBay or by
setting up their own Web sites to gauge customers’ response.

• Recognizes that a business idea is a hypothesis that needs to be tested

before taking it full scale.

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Business Prototyping (2 of 2)
• Test early versions of a product or service using a lean start-up: a process
of rapidly developing simple prototypes to test key assumptions by
engaging real customers
• Begin the lean start-up process using a minimal viable product: the
simplest version of a product or service with which an entrepreneur can
create a sustainable business

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The Business Modeling Process (5 of 5)

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Pivots
• To make changes and adjustments in the business - Pivots
• The process of making changes and adjustments in the business model on the basis of the
feedback a company receives from customers.
• There are three major types of pivots:
– Product pivot – changes to the product to enable it to better meet the needs and wants of
the customer.
– Customer pivot – changes in the target customer description.
– Revenue model pivot – changes in the way the firm generates revenue.

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Conclusion
• The best business ideas start with a common problem or need.
• The ideas assessment process helps an entrepreneur more efficiently and effectively
examine multiple ideas to identify the solution with the most potential.
• A feasibility analysis helps the entrepreneur determine whether an idea can be
transformed into a viable business.
• Developing a business model helps the entrepreneur better understand all that will be
required to launch and build a business.
• Once the entrepreneur completes the idea assessment, feasibility study, and business
model, he or she is ready to develop the business plan.

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Copyright

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