Entre Quiz 2

Business model

A firm's plan or recipe for how it creates, delivers, and captures value for its stakeholders

When is the proper time to develop a business model?

Following the feasibility analysis stage and prior to fleshing out the operational details of the company

Two general categories of business models

Standard business models and disruptive business models

Standard business models

Existing plans or recipes firms can use to determine how they will create, deliver, and capture value

Disruptive business models

Rare models that do not fit the profile of a standard model; impactful enough to change the way business is conducted in an industry or important niche

Advertising business model: representative companies

Google, Facebook

Auction business model: representative companies

eBay, uBid.com

Bricks and clicks business model: representative companies

Apple, Barnes & Noble

Franchise business model: representative companies

Panera Bread, 24-Hour Fitness

Freemium business model: representative companies

Dropbox, Pandora

Low-cost business model: representative companies

Southwest Airlines, Walmart

Manufacturer/retailer business model: representative companies

Fitbit, Tesla Motors

Peer-to-peer business model: representative companies

Airbnb, Uber

Razor and blades business model: representative examples

Game consoles and games; printers and ink cartridges

Subscription business model: representative companies

Birchbox, Netflix

Traditional retailer (e-commerce) business model: representative companies

Amazon, Whole Foods Markets

Distributor business model: representative companies

Fastenal, MRC Global

Direct-to-consumer computer sales (disruptive model)

Introduced by Dell; let consumers customize their computers

Online text ads on search engines (disruptive model)

Introduced by Yahoo and Google; let advertisers place ads for products searchers were already searching for

Software as a Service (SaaS) (disruptive model)

Introduced by Salesforce.com; moved software to the cloud so users can access software and data anywhere with an Internet connection

Cloud-based service connecting riders and ride providers (disruptive model)

Introduced by Uber and Lyft; an app connects riders with owners of private cars

Four components of the Barringer/Ireland Business Model Template

Core strategy, resources, financials, and operations

Core strategy

Describes how the firm plans to compete relative to its competitors

Four primary elements of core strategy

Business mission, basis of differentiation, target market, and product/market scope

Business mission (mission statement)

Describes why a business exists and what its business model is supposed to accomplish; acts as its financial and moral compass

Basis of differentiation

What causes consumers to pick one company's products over another's; solves a problem or satisfies a customer need

How many points of differentiation should a firm have, and what should they refer to?

Two to three key points; they should refer to benefits rather than features

Target market

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

Product/market scope

Defines the products and markets on which a company will concentrate; start narrow, then project 3-5 years ahead for expected expansion

Resources

The inputs a firm uses to produce, sell, distribute, and service a product or service

What must a firm's most important resources be to support long-term competitiveness?

Both difficult to imitate and hard to find a substitute for

Resource-based view (RBV)

Firms rely on tangible and intangible resources that must be heterogeneous and immobile; with VRIO attributes they become VRIO resources that provide sustained competitive advantage

Core competency

A specific factor or capability that supports a firm's business model and sets it apart from rivals (e.g., technical know-how, efficient process, customer trust, product design expertise)

How many core competencies do most start-ups list?

Two to three

Key assets

Assets a firm owns that enable its business model to work; can be physical, financial, intellectual, or human

Physical assets

Physical space, equipment, vehicles, and distribution networks

Intellectual assets

Patents, trademarks, copyrights, trade secrets, plus the company's brand and reputation

Financial assets

Cash, lines of credit, and commitments from investors

Human assets

The founder or founders, key employees, and advisors

Financials component of the business model

The only section that describes how the firm earns money

Revenue streams

The ways in which a firm makes money; some firms have one, others have several

Cost structure

The most important costs incurred to support the business model

Three goals of the cost structure box

(1) Identify whether the business is cost-driven or value-driven; (2) identify the nature of its costs; (3) identify its major cost categories

Financing/funding: three categories of costs to consider

Capital costs; one-time expenses (e.g., building a Web site, training initial employees); provisions for ramp-up expenses

Ramp-up expenses

Costs a business incurs before it earns revenues

How precise must funding estimates be at the business model stage?

An approximation is sufficient; the template should show how much is needed and where it will likely come from

Operations component of the business model

The day-to-day heartbeat of a firm

Product (or service) production options for a physical product

Manufactured in-house, by a contract manufacturer, or via an outsource provider

Channels

How a company delivers its product or service to customers: direct, through intermediaries (distributors, wholesalers), or both

Downside of using a sales force

It is an expensive strategy, though necessary in some instances

Key partners

Other firms a start-up relies on to perform important roles because it lacks the resources or funding to do everything itself

Joint venture

An entity created by two or more firms pooling a portion of their resources to create a separate, jointly-owned organization

Network (partnership form)

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

Typically nonprofit organizations formed by firms in the same industry to collect and disseminate trade information, offer legal and technical advice, furnish training, and provide a platform for collective lobbying

Industry

A group of firms producing a similar product or service (e.g., music, Pilates and yoga studios, solar panel manufacturing)

Industry analysis

Business research that focuses on the potential of an industry

Why is industry analysis important?

It helps a firm determine whether the target market identified during feasibility analysis is favorable for a new firm

Three key questions to answer when studying an industry

(1) Is the industry accessible? (2) Does it contain markets ripe for innovation or underserved? (3) Are there positions in the industry that avoid its negative attributes?

Firm-level factors

A firm's assets, products, culture, teamwork among employees, reputation, and other resources

Industry-level factors

Threat of new entrants, rivalry among existing firms, bargaining power of buyers, and related factors

How much of the variation in firm profitability is attributable to the industry?

Research finds roughly 8% to 30%

Two techniques to assess industry attractiveness

Studying environmental and business trends, and the five competitive forces model

Environmental trends

Economic trends, social trends, technological advances, and political and regulatory changes

Business trends

Other trends that affect an industry (e.g., rising or falling profit margins, accelerating or waning innovation, input costs going up or down)

What does PESTLE stand for?

Political, Economic, Social, Technological, Legal, Environmental

Five competitive forces model

A framework for understanding the structure of an industry; the forces determine industry profitability and the average rate of return for firms in it

The five forces

Threat of substitutes, threat of new entrants, rivalry among existing firms, bargaining power of suppliers, bargaining power of buyers

How do well-managed firms respond to the five forces?

They position the firm to avoid or diminish the forces in an attempt to beat the industry's average rate of return

Threat of substitutes

The price consumers will pay depends on available substitutes; close substitutes suppress industry profitability

Why is the pharmaceutical industry so profitable (five forces view)?

There are few, if any, substitutes for prescription medicines

Why do firms offer customers amenities (e.g., the coffee shop example)?

To reduce the likelihood customers will switch to a substitute, even if prices rise

Threat of new entrants

If an industry is highly profitable it attracts new entrants, which increases competition and lowers average profitability

Barrier to entry

A condition that creates a disincentive for a new firm to enter an industry

Barrier to entry: economies of scale

Industries with large economies of scale are hard to enter unless new firms accept a cost disadvantage

Barrier to entry: product differentiation

Industries with firms that have strong brands (e.g., soft drinks) are hard to break into without heavy advertising spending

Barrier to entry: capital requirements

The need to invest large amounts of money to gain entrance to an industry

Barrier to entry: cost advantages independent of size

Existing firms may have cost advantages unrelated to size (e.g., bought land when it was cheaper)

Barrier to entry: access to distribution channels

Distribution channels are hard to crack, especially in crowded markets like convenience stores

Barrier to entry: government and legal barriers

Some industries (e.g., banking, broadcasting) require a license from a public authority

Why do start-ups rely on nontraditional barriers to entry?

Expensive barriers like economies of scale are hard to execute because start-up money is tight

Nontraditional barrier: strength of management team

A world-class management team may give potential rivals pause in taking on the start-up

Nontraditional barrier: first-mover advantage

Pioneering an industry or concept creates name recognition that can act as a barrier

Nontraditional barrier: passion of management team and employees

Motivation from a unique start-up culture plus anticipated financial reward cannot be replicated by larger firms

Nontraditional barrier: unique business model

A unique model plus a network of relationships that makes it work creates a barrier

Nontraditional barrier: Internet domain name

A "spot-on" domain name gives a start-up a leg up in e-commerce

Nontraditional barrier: inventing a new approach to an industry

A new approach executed in exemplary fashion creates a barrier for imitators

Rivalry among existing firms

In most industries, the major determinant of industry profitability is the level of competition among existing firms

Rivalry factor: number and balance of competitors

The more competitors there are, the more likely one will cut its price to gain customers

Rivalry factor: degree of difference between products

How much products differ from one another affects industry rivalry

Rivalry factor: growth rate of an industry

Competition is stronger in slow-growth industries than in fast-growth industries

Rivalry factor: level of fixed costs

Firms with high fixed costs must sell a higher volume to break even than firms with low fixed costs

Bargaining power of suppliers

Suppliers can suppress industry profitability by raising prices or reducing the quality of components

Supplier power factor: supplier concentration

When a few suppliers provide a critical product to many buyers, the supplier has the advantage

Supplier power factor: switching costs

Fixed costs buyers face when changing suppliers; high switching costs make buyers less likely to switch

Supplier power factor: attractiveness of substitutes

Supplier power rises if there are no attractive substitutes for what the supplier offers

Supplier power factor: threat of forward integration

Supplier power rises if the supplier could credibly enter the buyer's industry

Bargaining power of buyers

Buyers can suppress industry profitability by demanding price concessions or increased quality

Why do automakers have strong buyer power?

A handful of large companies buy from thousands of suppliers, letting them demand price reductions