Muhammad Shafiqforshaf@gmail.comhttp://www.slideshare.net/forshaf

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Entrepreneurship and small businessDeveloping an Effective Business Model

Lecture-11

References:• Entrepreneurship by Bruce R. Barringer• Entrepreneurship by Hisrich

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This lecturer gives a basic knowledge about the business model and explains why it’s important for a new venture to develop a

business model early in its life.

What is a Business Model?

A business model describes that how an organization creates, delivers, and captures value.

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.

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It’s 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. An example is Apple and in particular the Apple App Store. As of

May 2015, more than 500,000 apps were available through the Apple App Store, created by over 50,000 developers. It’s a win-win situation for both Apple and the developers.

When partners abandon a company the opposite can happen to its business model and future prospects. For example, the newspaper industry is suffering from the shift in

readership from print to online, which has caused a number of the industry’s advertisers and partners to shift their advertising dollars to digital news providers and aggregators.

Business Models There is no standard business model, no hard-and-fast

rules that dictate how a firm in a particular industry should compete.

In fact, it’s dangerous for the entrepreneur launching a new venture to assume that the venture can be successful by simply copying the business model of another firm—even if that other firm is the industry leader. This is true for two reasons.

o First, it is difficult to precisely understand all of the components of another firm’s business model.

o Second, a firm’s business model is inherently dependent on the collection of resources it controls and the capabilities it possesses.

o However, over time, the most successful business models in an industry predominate.

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To achieve long-term success though, all business models need to be modified across time. The reason for this is that competitors can eventually learn how to duplicate the benefits a particular firm is able to create through its business model. In the late 2000s, for example, financial returns

suggested that competitors such as Hewlett-Packard had learned how to successfully duplicate the benefits of Dell Inc.’s “build-to-order” (BTO) business model.

Business Models

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business model innovation

A business model innovation, refers to a business model that revolutionizes how a product is produced, sold, or supported after the sale.

Dell’s Business ModelDell’s Approach to Selling PCs versus Traditional Manufacturers

Business Models

A firm’s business model is developed after the feasibility analysis stage of launching a new venture.

o The business model stage addresses; how to surround it with a core strategy, a partnership model, a customer interface, distinctive resources, and an approach to creating value that represents a viable

business.

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How Business Models Emerge

The Value Chain A value chain is a set of activities that a firm operating in a

specific industry performs in order to deliver a valuable product or service for the market.

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.

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How Business Models Emerge

The Value Chain 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.

This type of analysis may focus on: A single primary activity such as marketing and

sales. The interface between one stage of the value chain

and another, such as the interface between operations and outgoing logistics.

One of the support activities, such as human resource management.

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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 Mission statement. Product/market scope. Basis for differentiation.

Core Strategy

Primary Elements of Core Strategy

Mission Statement

Product/Market Scope

A company’s product/market scope defines the products and markets on which it will

concentrate.

A firm’s mission, or mission statement, describes why it exists and what its business

model is suppose to accomplish.

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Core Strategy

Primary Elements of Core Strategy

Basis of Differentiation

It is important that a new venture differentiate itself from its competitors in

some way that is important to its customers. 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 has affects 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

Core Competencies

Strategic Assets

A core competency is a resource or capability that serves as a source of a firm’s competitive advantage.

Examples include Sony’s competence in miniaturization and Dell’s competence in supply

chain management.

Strategic assets are anything rare and valuable 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 imitate.

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 key relationships.

Partnership Network

Primary Elements of Partnership Network

Suppliers

Other Key Relationships

A supplier is a company that provides parts or services to another company. Intel is Dell’s

primary suppler for computer chips, for example.

Firms partner with other companies to make their business models work. An entrepreneur’s ability

to launch a firm that achieves a competitive advantage may hinge as much on the skills of the

partners as on the skills within the firm itself.

The Most Common Types of Business Partnerships

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The Open Handset Alliance (OHA) is a consortium of 84 firms to develop open standards for mobile devices. The OHA was established on 5 November 2007, led by Google. OHA members are contractually forbidden from producing devices that are based on incompatible forks of Android.

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.

The three elements of a company’s customer interface are: Target customer. Fulfillment and support. Pricing model.

Customer Interface

Primary Elements of Customer Interface

Target Market

Fulfillment and Support

A firm’s target market is the limited group of individuals or businesses that it goes after or tries to

appeal to.

Fulfillment and support describes the way a firm’s product or service reaches it customers. It also refers

to the channels a company uses and what level of customer support it provides.

Customer Interface

Primary Elements of Customer Interface

Pricing Structure

The third element of a company’s customer interface is its pricing structure. Pricing models vary, depending on a firm’s target market and its

pricing philosophy.

Walk into a trendy Soho boutique in New York City and you might see high-fashion T-shirts selling for $250. Go into an H&M clothing store and you can see a version of the same style for $25.

Hennes & Mauritz (H&M) is a Swedish multinational retail-clothing company, known for its fast-fashion clothing for men, women, teenagers and children.

H&M exists in 57 countries with over 3,500 stores and as of 2015 employed around 132,000 people. The first store was opened on the high street of Västerås, Sweden in 1947.

"Our business concept is to give the customer unbeatable value by offering fashion and quality at the best price,"

It is ranked the second largest global clothing retailer, just behind Spain-based Inditex (parent company of ZARA), and leads over third largest global clothing retailer, United States based GAP Inc.

The reason H&M has reached this point while so many other stores—is that the company has a clear mission and the creative marketing strategies and concrete plans with which to carry it out. H&M is able to put products out quickly and inexpensively by: having few middlemen, owning no factories and buying

large volumes having a great knowledge of which goods should be bought

from which markets having efficient distribution systems being cost-conscious at every stage

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.

Disintermediation Business Model Disintermediation is the

removal of intermediaries in a supply chain, or "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate, companies may now deal with customers directly. One important factor is a drop in the cost of servicing customers directly.

Types of Business Model

Dell’s Business Model

• Almost all firms partner with others to make their business models work.• In Dell’s case, it needs the cooperation of its suppliers, customers, and many others to make its business model possible.

Bricks and Mortar Business Model Bricks and mortar: “Traditional”

organizations that have physical operations and locations and don’t provide their services exclusively through the Internet.

Bricks and Clicks Business Model Bricks and clicks: Organizations that have hybrid operations. Also known as click and mortar

Pure play: Firms with no stores, providing their services exclusively through the Internet.

Pure Play Business Model

Bait and Hook Model The bait and hook business model

(also called razor and blades business model) is founded on the premise that a company can stimulate consumer excitement and interest by giving away freebies, or offering a basic product or service at a very low price (the bait), and then taking profit on recurrent sales of refills or associated products or services (the hook).

Subscription Business Model The subscription business model is

a business model where a customer must pay a subscription price to have access to the product/service. The model was pioneered bymagazines and newspapers, but is now used by many businesses and websites.

Freemium is a pricing strategy by which a product or service is provided free of charge, but money (premium) is charged for advanced features or functionality.

Franchising is the practice of selling the right to use a firm's successful business model.

the franchise is an alternative to building "chain stores" to distribute goods that avoids the investments and liability of a chain..

A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues.

Franchising

The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement.

Brokerage Business Model The brokerage business model is used by companies

that act as third parties or "middle men" between the seller and the purchaser of the product. This model is actively used in the real estate business, stock market trading and business-to-business trading like mergers and acquisitions.

Manufacturer/Merchant Model This is one of the oldest and most common business models

in existence. In this model, a manufacturer simply sells the goods he creates directly to consumers or sells them to a merchant who then offers them to consumers for a slightly higher price, thereby collecting a profit.

Category Killer A product, service, brand, or company etc.,

that dominates a merchandise or service category and has almost no competition.these have such a distinct sustainable competitive advantage through their business model that competing firms find it almost impossible to operate profitably in that industry (or in the same local area).

Business Model InnovationWhen the game gets tough, change the game.

Business model innovation (BMI) refers to a business's attempt to reinvent itself in order to obtain a competitive edge and stimulate company growth. 

Business Model Innovation

Netflix is an example of a business model

innovator.

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