Entrepreneurship: Developing an Effective Business Model

Business Models

• Definition: A firm’s plan for creating, delivering, and capturing value for its stakeholders.

• Timing: Develop after feasibility analysis, prior to finalizing operational details.

• Importance: Integral for short and long-term success.

General Categories of Business Models

Standard Business Models

• Definition: Systems or frameworks existing firms can use to determine how they will create, deliver and capture value.

• Examples include:

  • Advertising: e.g., Google, Facebook

  • Auction: e.g., eBay

  • Bricks and Clicks: e.g., Apple, Barnes & Noble

  • Franchise: e.g., Panera Bread

  • Freemium: e.g., Dropbox

  • Low-Cost: e.g., Southwest Airlines

  • Manufacturer/Retailer: e.g., Tesla

  • Peer-to-Peer: e.g., Airbnb, Uber

  • Razor and blades: e.g., Game consoles and Games, Printers and Ink Cartridges

  • Subscription: e.g. Netflix, Spotify

  • Traditional retailer: e.g., Amazon, Whole foods markets

Disruptive Business Models

• Definition: Models that change the industry landscape; rare (do not fit the profile of standard) and impactful (disrupt or change the way that business is conducted).

• Examples include:

  • Direct-to-Consumer Sales: e.g., Dell

  • Online Text Ads: e.g., Google search ads

  • Software as a Service (SaaS): e.g., Salesforce.com

  • Ride Sharing Platforms: e.g., Uber, Lyft

Barringer/Ireland Business Model Template

• Not everyone agrees on components of a business model, but many common attributes exist

• The visual framework can be different to notice interrelationships and individual parts

Components of the Template:

1. Core Strategy: How the firm plans to compete relative to its competitors. Its primary elements include:

   • Business Mission: Purpose and objectives.

     • Why the company exists and what its business model should accomplish

     • Carefully written and used to articulate a business’s overarching priorities and its financial and moral compass

   • Basis of differentiation: Basis of differentiation within competitors by solving a problem or satisfying customers need. Points include benefits rather than features.

   • Target Market: Identification of a narrow group of consumers with similar interests.

   • Product/market scope: Products and markets to concentrate on, usually starts narrow and then broadens with time. During the initial business model template there should be clarity on the scope and projection for the next 3-5 years.

2. Core Ideology

   • Importance: Must be authentic (can not be shared) - meaningful and inspirational to only people inside, does not need to be exciting to any bystanders

     • Authenticity, discipline and consistency - if an element is not in the core ideology it can change

     • Core Purpose: Why the company exists. Primary goal is to ‘guide and inspire’ and should not change through time and circumstances.

     • Core Values: Timeless guiding principles with intrinsic value

     • Envisioned future: 10-30 year (long-term) audacious goal to create concreteness, involves a time yet unrealized and unreasonable confidence and commitment.

       • BHAG: Big Hairy Audacious Goal (tangible, energizing, highly focused)—huge challenge beyond current capabilities and environment which required extraordinary effort and perhaps a little luck.

       • Vivid Description: Imagery(vibrant, engaging and specific)of achieving the BHAG to make it tangible. Needs to awake passion, emotion and conviction.

   • Core purpose vs. BHAG

     • core ideology (discovery process) vs. envisioned future (creative process)

     • An envisioned future has no right answer but gets the juices flowing and spurs forward momentum

     • Allows a creation of the future rather than a prediction (1% vision and 99% alignment)

3. Resources

   • Inputs a firm uses to produce, sell, distribute and service a product or service

   • A firms important resources (tangible or intangible) should be hard to find or find substitutes for which is necessary to limit long term competition.

   • Core competencies: factor or capability that supports a business model and sets a firm apart from its rivals. Most start ups will list 2-3 core competencies in the business model.

   • Key assets: Assets a firm owns that enables the 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 and trade secrets along with brand and reputation

     • Financial assets: include cash, lines of credit, and commitments from from investors

     • Human assets: include a company’s founder/s, its key employees and its advisors

4. Financials (how a business earns money)

   • Revenue Streams: Some sources have one and some have several.

     • Types: Single revenue stream (e.g., restaurants) vs multiple streams.

   • Cost Structure: Important costs supporting the business model.

     • Goals: Identify cost-driven vs value-driven.

     • Threefold: Identify whether the company is cost-driven or value-driven business, identify the nature of the business costs and identify the business major cost categories.

   • Financing/Funding: Importance of financing for executing the business model. Exact amounts are not needed, approximation is sufficient.

     • Types of Costs:

       • Capital Costs: Long-term investments.

       • One-time expenses: e.g. website design

       • Ramp-Up Expenses: Initial costs to start operations.

     • Some entrepreneurs are able to draw from their own resources to fund the business or may use profits from day one, but some initial funding is needed and should be reflected in the business model.

5. Operations (day to day heartbeat of the firm)

   • Product/Service Production: Description of production methods impacts overall model.

   • Channels: Pathways for delivering the product/service to customers (direct vs intermediaries).

   • Key Partners: Start-ups often rely on partners for essential functions.

     • Types of Partnerships include:

       • Joint Ventures: Jointly owned organizations.

       • Strategic Alliances: Non-joint exchange relationships.

       • Networks: Array of interdependent firms.
         Conclusion
         Understanding business models, their categories, and the Barringer/Ireland template is crucial for entrepreneurs aiming to conceive, build, and sustain a competitive advantage in their respective industries.