Developing an Effective Business Model
BlocPower: Executing on a New and Innovative Business Model
Historic Partnership (November 2021): BlocPower, a climate tech company, partnered with the city of Ithaca, New York, to electrify and decarbonize its entire building stock.
This was the first large-scale, city-wide electrification initiative in the United States.
A major step towards Ithaca's goal of becoming carbon-neutral by $2030$.
Founders' Background and Vision:
Founders: Donnel Baird and Keith Kinch.
Grew up in low- to moderate-income neighborhoods in New York City, experiencing poor heating conditions (stoves with open windows for fumes) and lack of jobs.
Baird, influenced by his childhood, majored in history, literature, and African American/Black studies at Duke, focusing on racial-ethnic inequality and business's role in bridging this gap.
Spent years as a community organizer, campaigned for Barack Obama, and advised the Obama Administration on green buildings and jobs.
While pursuing an MBA at Columbia, Baird was frustrated by the slow progress in converting old buildings from heating oil to electricity, recognizing the benefits: healthier, more energy-efficient, and better for the environment.
BlocPower's Launch: Baird launched in $2014$, Kinch joined in $2015$.
Vision: To make buildings in poorer urban areas more energy-efficient and healthier, and to create local jobs.
Methods: Removing oil boilers and replacing them with all-electric heat pumps, replacing windows, installing building insulation, replacing water heaters, or installing solar panels.
Challenges Faced by BlocPower's Plan:
Financing: Difficulty for low- to moderate-income residents to secure financing for upgrades.
Trust: Gaining community trust after past unfulfilled promises.
Identification of Needs: Determining the most impactful improvements and selecting buildings most in need.
BlocPower's Novel Business Model to Address Challenges:
Understanding Retrofit Needs:
Developed software to study building construction using data (e.g., building age, boiler age/condition, tax arrears) to create a virtual twin.
This facilitates identifying necessary upgrades.
Financing Solutions:
Initially supported by grants and a Department of Energy contract.
After many rejections, Mitch Kapor (Kapor Capital) and Andreessen Horowitz invested.
Goldman Sachs and Microsoft provided $50 million and $30 million in debt instruments, respectively.
Client Offering: Uses this funding to offer clients zero-money-down lease agreements for upgrades.
Helps clients access government and utility energy upgrade incentives.
Establishing Trusting Relationships:
Engages with community leaders (pastors, rabbis, imams) first to build rapport.
Local Job Creation:
Uses local contractors for upgrades.
Has a training program for local residents who then provide much of the labor.
BlocPower's Revenue Streams:
Project Management Fee: Charged for building upgrades.
Lease Agreements: Revenue from client lease payments.
Software Sales: Sells its proprietary software to local governments and utilities.
Impact and Expansion:
Prior to Ithaca: Viability demonstrated in New York City with over $250$ single-family homes, $800$ multifamily apartment buildings, and over $100$ small businesses and houses of worship retrofitted.
Ithaca Projections: Estimates a $40\%$ reduction in Ithaca's annual $400,000$ tons of CO$_2$ emissions and the creation of $400$ new green economy jobs (construction, tech, management).
Expansion: Projects underway in Philadelphia, Baltimore, Oakland, Menlo Park, and other locations.
Introduction to Business Models
Definition: A firm's plan or recipe for how it creates, delivers, and captures value for its stakeholders.
Foundational to Success: Essential for a firm's short-term and long-term success, especially for firms introducing new products.
Example (Dropbox): Uses a "freemium" model, offering free storage and selling premium accounts with more capacity. The belief is that free access leads to more paid users, rather than charging all users monthly based on usage.
Digitization's Influence: Entrepreneurs developing business models today should consider how "the process of creating a digital representation of a product or a process" influences their plan, particularly in financial sectors (insurance, banking).
Proper Timing for Business Model Development
Sequence: After the initial validation of the business idea and before detailing operational specifics.
Parallels textbook chapters: Chapter $1$ (entrepreneurship decision), Chapters $2-3$ (initial business idea validation), Chapter $4$ (business model), Chapters $5-15$ (implementing the business model).
Figure 4.1: Illustrates the sequence: Initial validation of the business idea $\rightarrow$ Preparation of the business model $\rightarrow$ Fleshing out the operational details of the company.
Barringer/Ireland Business Model Template
Overview: A template for developing a business model, consisting of $4$ categories and $12$ items.
Designed for visual display (e.g., $8\text{½} \times 11$-inch paper or whiteboard).
Helps entrepreneurs think through and display business model elements.
Collaborative Development: Should not be completed in isolation; founders should "get out of the building" and talk to potential customers.
Business Models and Their Importance
Core Aspects: A business model represents the core aspects of a business and describes how they fit together and support each other.
Example (BlocPower):
Target Market: Owners of buildings needing energy-efficient upgrades.
Basis for Differentiation: Expertise in retrofitting (aided by proprietary software).
Key Assets: Client financing and strong community relationships.
These elements are mutually supportive and difficult for competitors to copy. BlocPower's increasing value creation in communities makes it harder for others to compete effectively.
Savvy Entrepreneurial Firm: Headspace
Company: Headspace, a mobile app providing meditation and mindfulness lessons.
Founding: Founded in $2006$ by Andy Puddicombe (former marketing executive and Buddhist monk).
Mission: Improving the health and happiness of the world.
Reach: Over $68$ million users in $190$ countries as of late $2021$.
App Features: Easy-to-use, daily exercises in categories like "Start your day," "Your afternoon lift," and "At night." Extensive library (Guide to Sleep, Parents and Kids, Mindful Eating, Unlocking Creativity, Student Essentials).
Cost: After a free trial, it costs 69.99$ per year.
Narrator: Andy Puddicombe's calm, soothing voice narrates many lessons.
Headspace's Approach to Value:
Creates Value:
Teaches meditation and mindfulness, helping people form life-changing habits for mental health, leading to healthier, happier lives.
Evidence: Content reduces stress by $14\%$ in $10$ days; improves focus, helps relaxation, and sleep.
B$2$B Program (Headspace for Work): Employees using the app report $32\%$ less stress after $30$ days, $14\%$ less burnout after $4$ sessions, and $14\%$ greater focus after $4$ weeks.
Delivers Value:
Provides an easy-to-use and affordable platform.
Content based on science-proven methods and principles.
Helps users navigate daily life or address specific issues (sleep, stress, anxiety).
Offers tools like a white noise creator (up to $8$ hours) to aid sleep.
Headspace for Work: Offers all resources to employees, benefiting both employees (less stress, burnout, more focus) and employers (lower turnover, fewer sick days, improved morale).
Captures Value:
Revenue Streams:
Subscription service (69.99$/year).
Business-to-Business (B$2$B) programs (Headspace for Work).
Headspace Health (FDA-approved wellness program, latest initiative combining mindfulness into digital medicine).
Generates profits through its operations (as a private company, specific earnings are not public).
Captures intangible value by helping millions improve their lives.
Business Model Attractiveness:
Word-of-mouth demand increases with more users and businesses.
Difficult for competitors to imitate due to strong brand and vast resource library.
General Categories of Business Models
Two General Categories: Standard and disruptive business models.
No Perfect Model: The "best" business model is tailored to a firm's unique characteristics and is revised with changing conditions.
Each standard model has inherent strengths and weaknesses.
Standard Business Models
Description: Depict existing plans or recipes for firms to create, deliver, and capture value.
Commonly used by existing firms and new entrepreneurial ventures.
Many have a long history, often originating offline (e.g., mail-order model by Sears $\rightarrow$ Amazon online; auction model $\rightarrow$ eBay online).
Innovation: Successful startups often adopt a standard model and build on it meaningfully (e.g., BarkBox adopted the subscription model and expanded with new products).
Common Standard Business Models (Table 4.1):
Advertising Business Model: Provides advertisers access to targeted customer niches (e.g., Google, Facebook, Pinterest).
Auction Business Model: Provides a platform for individuals and businesses to sell items via auction (e.g., eBay, DealDash).
Bricks and Clicks Business Model: Integrates both offline and online presences (e.g., Apple, Allbirds, J. Crew).
Franchise Business Model: A franchisor licenses its trademark and business methods to franchisees (e.g., $24$ Hour Fitness, Card My Yard, iLoveKickboxing).
Freemium Business Model: Offers a basic service for free, earns money by selling a premium version (e.g., Dropbox, Canva, Slack).
Low-Cost Business Model: Relies on driving down costs and servicing many customers (e.g., Southwest Airlines, Warby Parker, Costco).
Manufacturer/Retailer Business Model: A manufacturer produces and sells its product (online, offline, or both) (e.g., Apple, Fitbit, Tesla Motors).
Peer-to-Peer Business Model: Acts as a matchmaker between individuals offering and wanting a service (e.g., Airbnb, Uber, Twisted Road).
Razor and Blades Business Model: Sells a primary good (razor) at a discount, with dependent goods (blades) selling at higher margins (e.g., game consoles/games, printers/ink cartridges, razor handles/blades).
Subscription Business Model: Customer pays a monthly, quarterly, or yearly fee for access to a product or service (e.g., BarkBox, Blue Apron, Netflix, Headspace).
Traditional Retailer Business Model: Sells products made by others directly to consumers at a markup; sales can be online or offline (e.g., Amazon, Whole Foods Markets, Zappos).
Strengths and Weaknesses of Standard Models:
Subscription Model Example:
Strength: Recurring revenue (e.g., BarkBox with $2.3$ million subscribers at 23$-35$/month, yielding a minimum of 57.5$ million in monthly revenue).
Weakness: "Churn" – the number of subscribers lost each month.
If BarkBox loses $5 \%$ monthly, it needs $115,000$ new subscribers to break even.
This drives companies to offer high-level customer service to retain subscribers and reduce replacement costs.
Beyond Boundaries: Business models often involve external parties.
Twisted Road: Connects motorcycle owners offering rentals with renters, providing incentives (income for owners, safeguards for motorcycles; affordable rentals and selection for renters).
Apple App Store: Relies on tens of thousands of developers to create $1.76$ million apps and $460,000$ games (as of March $2023$). Developers get a platform, Apple shares revenue – a win-win allowing model expansion and strengthening.
Pitfalls for Startups:
Spreading Too Thin: Creating a business model that overextends the company.
Inadequately Thought-Through Core Elements: Failing to carefully plan core business operations.
What Went Wrong? Munchery’s Shifting Business Model Fails to Deliver
Founding: Tri Tran, Van Tran, and Conrad Chu founded Munchery in $2010$.
Initial Idea: Hired gourmet chefs to cook unique meals for delivery in the San Francisco area, requiring customers only to microwave them. Also allowed customer ratings.
Expansion ($2015$): Branched into mail meal-kit business, competing with Blue Apron and Hello Fresh.
Differentiation: More convenient (microwave-ready), $100\%$ natural ingredients from local sources.
Growth: Raised 124.5$ million, peaked at a 300$ million valuation, expanded to New York, Los Angeles, and Seattle.
Failure ($2019$): Ultimately failed for several reasons:
Spread Too Thin: Pascal Rigo (Chief Customer Experience Officer) observed that startups are usually good at food or delivery, rarely both.
Geographic Constraints: Microwave-and-serve model required short delivery distances to ensure quality. Building expensive kitchens in multiple cities (NY, LA, Seattle) was unsustainable, leading to closures by early $2018$.
Competition: Food delivery services like DoorDash and GrubHub gained traction, offering quality food from a variety of restaurants, making Munchery's single-kitchen offering less competitive.
Customer Churn: Experienced substantial churn, and aggressive discount plans to acquire new customers failed.
Decline: Laid off $30\%$ of its workforce in $2018$, shut down NY, LA, Seattle operations, and focused on San Francisco. Failed to find an acquirer and ceased operations in $2019$ due to a non-viable business model and exhausted options.
Disruptive Business Models
Description: Rarely used; they don't fit standard profiles and significantly alter how businesses operate within an industry or niche.
Examples of Companies: Dell, Google, www.Salesforce.com, Uber (Table 4.2), Alibaba, Amazon, Apple.
Types of Disruptive Business Models:
New Market Disruption: Addresses a previously unserved market.
Example (Google Ads):
Before Ads, online advertising was cost-prohibitive for small businesses (e.g., Yahoo required a 5,000$ banner ad creation and a minimum 10,000$ ad buy).
Google Ads allows advertisers to buy keywords, triggering text-based ads next to search results, paid on a pay-per-click basis.
Cost: As little as 1$ per day (depending on keyword popularity).
Impact: Opened online advertising to large numbers of small businesses, creating a new market.
Low-End Market Disruption: Occurs when existing firms over-improve products, exceeding a sizable portion of customers' needs or desires (performance oversupply).
This creates an opportunity for simpler, typically low-cost business models.
Example (Southwest Airlines):
Disruption: Point-to-point, low-cost, no-frills model vs. higher-end legacy carriers (United, American).
Value Proposition: Attracts customers wanting a safe, comfortable ride at a lower cost, trading off amenities.
Other Firms: Ryanair and Norwegian (Europe), Indigo (India), Azul Brazilian Airlines (Brazil).
Function: Offers a simpler, cheaper, or more convenient way to perform an everyday task.
Value Proposition: Must have strong appeal in terms of amenities vs. price.
Example (Uber):
Founding: $2009$ startup connecting riders with private car owners.
Compelling Features: Order via text/app, track car location, in-app payment (no cash exchange), strict quality standards for cars/drivers.
Impact: A cheaper and more convenient way to get a ride; tapped into general dissatisfaction with the taxi industry (which generally scores low on customer satisfaction).
Response: Taxi industry is upgrading service (cleaner vehicles, friendlier drivers).
Appeals to technologically savvy people who prefer app-based ordering over hailing a cab.
The Barringer/Ireland Business Model Template
Purpose: A visual framework (similar to the Business Model Canvas but more comprehensive) to describe, project, revise, and pivot a business model.
Structure: Consists of $4$ major categories and $12$ individual parts.
Entrepreneurs configure these parts to create a viable and exciting business.
Benefit: Allows entrepreneurs to step back and see how all parts of a prospective business model fit together.
Appendix 4.1: Contains an expanded version for detailed recording and revision of ideas.
4.3.1 Core Strategy
Definition: Describes how the firm plans to compete relative to its competitors.
Elements of Core Strategy:
Business Mission:
Definition: Describes why the business exists and what it hopes to achieve with its business model.
Importance: Articulates overarching priorities, acts as a financial and moral compass, an anchor for decisions.
First to Complete: The initial box to fill in the template.
Value Creation: Broadly indicates how a firm creates value for stakeholders.
Example (Diligent Robotics): Mission: "To make technical advances towards robots and humans working together side by side, with an emphasis on human-centric design." This guides decisions, e.g., rejecting assembly-line robotics as outside their mission.
Rules of Thumb for Mission Statements:
Define its "reason for being."
Describe what makes the company different.
Be risky and challenging but achievable.
Use a tone representing company culture and values.
Convey passion and be memorable.
Be honest and authentic.
Basis of Differentiation:
Definition: The points that make a business and its product stand apart from competitors (akin to a company's value proposition).
Purpose: Why consumers choose one company's products over another's; solves a problem or satisfies a need.
Role of Technology: Increasingly used by entrepreneurial ventures for differentiation.
Template Guidelines: Limit description to $2$-$3$ points; ensure value is easy to see and understand.
Example (ZUCA - backpack on rollers):
Differentiation:
Relieves back pain by putting backpacks on rollers.
Sturdy enough for a child or adult to sit on.
These points are memorable and easily grasped by customers.
Benefits vs. Features: Focus on benefits (what a product can do) rather than features (technical merits).
ZUCA Features: Pulled like a suitcase, sturdy aluminum frame, six colors.
ZUCA Benefits (better approach): Relieves back pain, sturdy for sitting, balances functionality and "cool" for kids/adults. This tells customers how their lives will be enhanced.
Target Market:
Definition: A segment within a larger market representing a narrower group of customers with similar interests.
Importance: New businesses typically start by serving an emerging or underserved niche, rather than broad markets.
Needs to be explicit on the template.
Examples:
BarkBox: Dog owners willing to spend 23$-35$/month pampering their dog.
Twisted Roads: Motorcycle owners and enthusiasts.
Allbirds: Environmentally conscious consumers, $20$s and $30$s, wanting stylish and functional shoes.
Casper: Millennials ($27$ to $42$ years old) open to trying new things.
Impact on Business Model: The selected target market affects every other element, from key assets and core competencies to financing and partnerships (e.g., targeting millennials requires competencies in understanding their media, priorities, shopping habits).
Product/Market Scope:
Definition: Defines a company's products and the markets on which it will concentrate sales.
Typical Path: Most firms start narrow and expand into adjacent product and market opportunities as they grow and become financially secure.
New firms lack resources for multiple products/markets simultaneously.
Template Guidelines: Be clear about initial scope and project $3$-$5$ years of anticipated expansion (bullet-point format).
Example (JIGGY Puzzles):
Initial Scope ($2019$): Sold upscale puzzles online, featuring art from emerging female artists.
Reasons for Expansion: Puzzles are seasonal (more sales in winter); customer requests for retail availability.
Broadened Scope:
Puzzles sold online (original).
Added frames for puzzles.
Sells puzzles in special "collections" for events/seasons.
Established a subscription-based "Puzzle Club" for curated, exclusive puzzles.
Sells via retail stores (Anthropologie, Nordstrom) chosen for brand fit.
Forms partnerships with corporations, nonprofits, celebrities for custom puzzles (e.g., product launches).
Consistency: JIGGY's expansion followed the pattern of starting narrow and pursuing adjacent opportunities.
Interconnectedness: Product/market scope influences other model elements.
4.3.2 Resources
Definition: The inputs a firm uses to produce, sell, distribute, and service its product.
Requirement: Sufficient resources for the business model to function.
Example: Patent (key asset) for differentiation, expertise (core competency) for target market needs.
Key Resources: Most important tangible and intangible resources must be difficult to imitate and substitute.
Tangible Example (Uber): Network of $3.9$ million active drivers – tremendous effort to copy, no practical substitute for ride volume.
Intangible Example (Zappos): Reputation for customer service – consistently positive customer view, difficult to imitate or substitute.
Development Over Time: Resources accumulate over time.
Template Guidelines: Describe current resources, keep aspirational resources in mind (e.g., Uber listing "$100$ drivers (with goal of $4$ million)").
Elements of Resources:
Core Competencies:
Definition: A specific factor or capability that supports a firm's business model and differentiates it from rivals.
Forms: Technical know-how, efficient processes, trusting customer relationships, product design expertise, passion for business idea, high employee morale.
Determinant: Largely determines what a firm can do (e.g., many physical product firms outsource manufacturing if it's not a core competency, focusing on design/marketing).
Competitive Requirement: Businesses must excel at certain things that support all elements of their business model.
Example (Allbirds): Core competency in product design – simple design, natural/sustainable materials, comfortable, attractive. Without this, their business model would fail.
Template Guidelines: List $2$-$3$ core competencies. They should support initiatives and be difficult for competitors to imitate or substitute.
Example (BlocPower's three core competencies):
Understanding best practices for energy-efficient retrofits and identifying buildings most in need.
Ability to raise substantial funding for client financing (no money down).
Ability to establish trusting relationships with clients and communities.
Key Assets:
Definition: The assets a firm owns that enable its business model to work.
Types:
Physical Assets: Space, equipment, vehicles, distribution networks.
Intellectual Assets: Patents, trademarks, copyrights, trade secrets, brand, reputation.
Financial Assets: Cash, lines of credit, investor commitments.
Human Assets: Founders, key employees, advisors.
Prioritization: Firms prioritize and accumulate different assets.
All companies need financial assets.
Retailers (Trader Joe's, Amazon): Heavy reliance on physical assets (stores, warehouses, distribution).
Airbnb: Almost exclusively intellectual assets (app, brand, relationships with customers/owners/communities) – doesn't own rooms.
Zynga: Heavily relies on human assets (creative and technically proficient game producers/programmers).
Dependency: Key assets needed are dependent on other business model details.
Template Guidelines: List $3$-$4$ key assets that support the overall business model.
4.3.3 Financials
Definition: The only section describing how a firm earns money, making it extremely important. Often a fundamental aspect around which the business model is built.
Elements of Financials:
Revenue Streams:
Definition: The ways a firm makes money. Applies to both for-profit and non-profit organizations.
Quantity: Some businesses have a single revenue stream, others have several.
Example: Most restaurants have one (meal sales); some have multiple (restaurant, catering, product sales like BBQ sauce).
Nature: One-time customer payments vs. recurring subscription revenue.
Creativity: Online games often offer a free basic game, generating revenue from a small percentage of users purchasing premium products (e.g., shortcuts, digital weapons).
Common Revenue Streams (Table 4.3):
Advertising, Commissions (e.g., Etsy, eBay), Download fee, Licensing, Matchmaking (e.g., Airbnb, Uber, TaskRabbit), Product sale, Renting/leasing, Service sale, Subscription service (e.g., Netflix, BarkBox).
Leveraging Value: Businesses often leverage value creation through multiple revenue streams.
Example (BarkBox): Monthly subscriptions + product sales.
Example (Lululemon - four revenue streams): Online sales, retail stores, wholesale (to fitness/wellness centers), Lululemon Studio (49$/month for unlimited virtual workouts/trainers).
Impact: Number and nature of revenue streams directly impact other business model elements.
All businesses need at least one revenue stream.
Additional streams: Can add or subtract value depending on business nature and other elements.
Example: Bike shop (bike sales, accessories, repairs, race sponsorships) vs. smartphone app (one-time download, upgrades) potentially avoiding advertising to preserve user experience.
Template Guidelines: Identify revenue streams with high clarity, ideally using a bullet-point format.
Cost Structure:
Definition: Describes the most important costs incurred to support the business model (e.g., differentiation, core competencies, key assets, partnerships).
Threefold Goal:
Determine if cost-driven or value-driven.
Identify nature of costs (fixed/variable).
Identify major cost categories.
Cost-Driven vs. Value-Driven:
Cost-Driven: Focus on minimizing costs (e.g., Warby Parker selling 95$ prescription glasses by designing in-house, manufacturing domestically/overseas, and engaging customers directly to eliminate wholesale markups).
Value-Driven: Focus on high-quality products/experience and personalized service (e.g., Optometrists selling 400$-800+$ glasses, providing wide selection, personalized fitting, free adjustments/repairs).
Nature of Costs (Fixed vs. Variable):
Fixed Costs: Costs that remain constant regardless of production volume.
Variable Costs: Costs that vary proportionally with production volume.
Importance: Affects other business model elements.
Example (Smartphone Apps): Large fixed costs (coding, development), small variable costs (incremental cost per app sale). Requires substantial upfront funding, less downstream.
Example (Sub Sandwich Shop): Low fixed costs (leased facility), high variable costs (labor, ingredients). May need smaller upfront investment but requires line of credit for ongoing operations.
Firms with substantial fixed costs (e.g., airlines) often have major investments in key assets.
Service companies (e.g., Blue Apron) may have few key assets but strong core competencies and partnership networks.
Major Cost Categories:
At business model stage: No need for budget/pro-forma projections, but a sense of major categories is required.
Example (Facebook): Data center costs, marketing and sales, research and development, general and administrative.
Helps understand where major costs will be incurred.
Financing/Funding:
Requirement: Many business models need financing/funding to be implemented.
Most businesses incur costs before generating revenue (e.g., Monarch Tractor needed 81$ million for design, manufacturing, inventory, customer acquisition, delivery).
Absent capital, many models are untenable.
Sources: Personal resources, immediate profits (for simple businesses), or initial infusion of funding.
Template Guidelines: Indicate approximate funding needed and most likely source.
Approximation is sufficient; no exact projections needed.
Three Categories of Costs for Funding:
Capital Costs: Real estate, buildings, equipment, vehicles, furniture, fixtures. Varies (high for restaurants/retail, low/none for service businesses).
One-Time Expenses: Legal expenses for launch, website design, initial inventory procurement, other fees.
Provisions for Ramp-Up Expenses: Cash set aside for the period a business loses money until it reaches profitability (e.g., new fitness center needing several months to meet membership goals).
4.3.4 Operations
Definition: Integral to the overall business model and represent the day-to-day heartbeat of a firm.
Elements of Operations:
Product (or Service) Production:
Focus: How a firm produces its products or services.
Physical Products:
Options: Manufacture in-house or use a contract manufacturer/outsource provider.
In-house: Requires core competencies in manufacturing, procurement of production-related key assets, substantial upfront investment.
Contract Manufacturer/Outsource Provider: A critical aspect is locating a suitable and willing provider (not trivial for startups).
Template Guidelines: "A contract manufacturer will handle manufacturing" is insufficient. Record general location (especially if outside home market) and type of arrangement.
Service Provision:
Template Guidelines: Note how the service will be produced briefly but substantively.
Example (www.Rover.com): "www.Rover.com will connect dog owners and dog sitters via a website. The firm screens dog sitters to ensure a quality experience for dog owners. Rover provides customer support on a $24/7$ basis to troubleshoot any problems that occur as well as pet insurance that covers any medical bills that a dog incurs while in the care of a www.Rover.com sitter." This provides significant information not elsewhere.
Channels:
Definition: Describes how a firm delivers its product to customers.
Methods: Direct sales, through intermediaries, or a combination.
Direct: Storefront, online (e.g., Warby Parker via website and company-owned stores).
Intermediaries: Distributors, wholesalers (e.g., Sweet Nothings via website and grocery stores using distributors/wholesalers).
Strictly Intermediaries: Some manufacturers sell only through large online retailers like Zappos/Amazon.
Services: Hotels sell directly (websites, phone) and through intermediaries (travel agents, tour operators, airlines, e.g., Travelocity, Expedia).
Impact on Business Model: Channel selection affects other aspects.
Warby Parker (simple strategy): Direct sales to capture $100\%$ margins, crucial for its low price point.
GoPro (complex strategy): Website, online outlets (Amazon, BestBuy), retail stores (hundreds), uses wholesalers/distributors for wide dissemination. Value-driven cost allows margin sharing.
Sales Force: Employed when necessary for complex products requiring demonstration (e.g., new medical equipment).
Key Partners:
Purpose: Startups often lack resources to perform all tasks in their business model, so they partner with others.
Avoids doing tasks outside core competencies or expertise.
Suppliers/Vendors: First partnerships for many businesses, providing parts or services.
Historically arm's-length; now more cooperative.
Supply Chain Management: Coordination of information, money, and material flow; efficiency improves business model effectiveness.
Other Partnerships (Table 4.4):
Joint Venture: Two or more firms pool resources to create a separate, jointly-owned entity.
Network: Hub-and-wheel configuration with a local firm at the hub organizing interdependencies.
Consortia: Group of organizations with similar needs forming a new entity to address them.
Strategic Alliance: Exchange relationship between firms without joint ownership.
Trade Associations: Nonprofit organizations formed by industry firms to share info, offer advice, provide training, lobby.
Advantages of Partnerships: Access to resources, risk/cost sharing, speed to market, learning.
Example (BlocPower): Historic partnership with Ithaca to decarbonize/electrify all buildings.
Disadvantages: Loss of proprietary information, management complexities, partial loss of decision autonomy.
Template Guidelines: Identify primary supplier partnerships and other key partnerships. Startups typically begin with a small number, increasing over time.
Partnering for Success: Upwork and Guru (Freelancers):
Freelancer Definition: Independent contractor skilled in a specific area (e.g., software development, website design).
Reasons to Hire:
Fill Expertise Gaps: (e.g., social media strategy).
Cost-Effective: Hired "as-needed," generally cheaper than part-time employees. Easier to disengage if a project doesn't work out.
Platforms (Upwork, Guru): Web-based services allowing freelancers to list profiles (expertise, past client feedback, job success rate) and clients to browse.
Example: Rinkesh C. ($25$/hour) on Upwork, $65+$ projects, $99\%$ success rate, positive client feedback.
Common Skills: Web design, WordPress, Shopify, graphic design, social media marketing, email marketing, marketing research.
Evolution: Relationships can become more like partnerships over time.
Platform Revenue: Take a percentage of freelancer fees (Upwork: Sliding fee based on earnings - $20\%$ up to 500$, $10\%$ up to 10,000$, $5\%$ for 10,000+$). Clients also pay a $3$-$5\%$ transaction fee.
Protections: Built-in safeguards to prevent freelancers from taking money without completing work.
Expansion: Platforms are growing fields and providers.
Chapter Summary
Business Models and Their Importance (LO 4.1)
A business model outlines how a firm creates, delivers, and captures value.
It addresses core business aspects and how they interconnect for success.
Quality of a business model and its execution influences short- and long-term performance.
Effective models feature mutually supportive parts and are difficult for competitors to imitate.
Unique differentiation and value creation are key for competitive success.
General Categories of Business Models (LO 4.2)
No Inherently Superior Model: The best model allows a firm to clearly articulate and execute its value creation plan.
Two Categories:
Standard Business Models: Existing plans for value creation (e.g., advertising, subscription). Startups adapt these models uniquely.
Disruptive Business Models (Rare): Fundamentally change industry practices.
New Market Disruption: Addresses unserved markets (e.g., Google Ads for small businesses).
Low-End Market Disruption: Emerges when existing products over-satisfy customer needs, creating an opportunity for simpler, often lower-cost alternatives (e.g., Southwest Airlines, Uber).
The Barringer/Ireland Business Model Template (LO 4.3)
Comprehensive Tool: Features $4$ major categories and $12$ parts (Figure 4.2) to describe, project, revise, and pivot a business model.
Categories:
Core Strategy: How the firm competes. Includes mission, basis of differentiation, target market, and product/market scope.
Resources: Inputs for product sale, distribution, service. Includes core competencies (distinctive capabilities) and key assets (owned assets).
Financials: How the firm earns money. Includes revenue streams, cost structure (fixed/variable costs), and funding/financing.
Operations: Day-to-day workings. Includes product production methods, channels (delivery to customers), and key partners (collaborators).