AprimerinEntrepreneurship

Prof.Dr.UlrichKaiser Institutefor Strategy and BusinessEconomics Universityof Zurich

Springsemester 2008

Chapter6:DevelopinganEffectiveBusinessModel
TableofContents
I. BusinessModels A. WhatisaBusinessModel? B. TheimportanceofaBusinessModel C. HowBusinessModelsEmerge D. PotentialFatalFlawsofBusinessModels ComponentsofanEffectiveBusinessModel A. Corestrategy B Strategicresources B. C. Partnershipnetwork D. Customerinterface

II.

Universityof Zurich ISU InstituteforStrategyandBusinessEconomics UlrichKaiser

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I.BusinessModels
A.WhatisaBusinessModel?
1. Abusinessmodelisafirm firms splanordiagramforhowitcompetes,usesits resources,structuresitsrelationships,interfaceswithcustomers,and createsvaluetosustainitselfonthebasisoftheprofitsitearns. 2. Itsimportanttounderstandthatafirmsbusinessmodeltakesitbeyond itsownboundaries.Almostallfirmspartnerwithotherstomaketheir b i business models d l work. k 3. Thereisnostandardbusinessmodel,nohardandfastrulesthatdictate howfirmsinaparticularindustryshouldcompete. 4. Thetermbusinessmodelinnovationreferstoinitiativessuchasthat undertakenbyMichaelDellthatrevolutionizedhowproductsaresoldin anindustry.
Universityof Zurich ISU InstituteforStrategyandBusinessEconomics UlrichKaiser AprimerinEntrepreneurship Springsemester2008 3

I.BusinessModels
A.WhatisaBusinessModel?
5. Thedevelopmentofafirmsbusinessmodelfollowsthefeasibility analysis l stageof fl launching h anewventureb butcomesb before f the h completionofabusinessplan. a. Ifafirmhasconductedafeasibilityanalysisandknowsthatithasa productorservicewithpotential,thebusinessmodelstage addresseshowtosurrounditwithacorestrategy, gy,ap partnership p model,acustomerinterface,distinctiveresources,andanapproach tocreatingvaluethatrepresentsaviablebusinessmodel. b. Atthebusinessmodeldevelopmentstage,itisprematureforanew venturetoraisemoney,hirealotofemployees,establish partnerships orimplementamarketingplan partnerships, plan.Afirmneedstohavea businessmodelinplacebeforeitcanmakeadditionalsubstantive decisions.
Universityof Zurich ISU InstituteforStrategyandBusinessEconomics UlrichKaiser AprimerinEntrepreneurship Springsemester2008 4

I.BusinessModels
Digression:Dell
InDellscase,itneedsthecooperationofitssuppliers,shippers,customers, and dmanyothers h tomake k its i business b i model d lpossible. ibl

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I.BusinessModels
Digression:Dell

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I.BusinessModels
B.TheImportanceofaBusinessModel
1. Havingaclearlyarticulatedbusinessmodelisimportantbecauseitdoes thefollowing: Servesasanongoingextensionoffeasibilityanalysis; Focusesattentiononhowalltheelementsofabusinessfittogether g and constitute aworkingwhole; Describeswhythenetworkofparticipantsneededtomakeabusiness ideaviablewouldbewillingtoworktogether; Articulatesacompanyscorelogictoallstakeholders,includingthe firms employees.

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I.BusinessModels
B.TheImportanceofaBusinessModel
2. Onceafirmsbusinessmodelisclearlydetermined,theentrepreneur shoulddiagramitonpaper(totheextentpossible),examineit,andask thefollowingquestions: Doesmy ybusinessmodelmakesense? WillthebusinessesIneedaspartnersparticipate? IfIcangetpartnerstoparticipate,howmotivatedwilltheybe?AmI askingthemtoworkfororagainsttheirselfinterest? Howaboutmycustomers?Willitbeworththeirtimetodobusiness withmycompany? IfIdogetcustomers, customers howmotivatedwilltheybe? CanImotivatemypartnersandcustomersatasufficientscaletocover theoverheadofmybusinessandmakeaprofit? How H distinct di i will illmybusiness b i b be? ?IfI Imsuccessful, f l will illi itb beeasyf fora largercompetitortostepinandstealmyidea?
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I.BusinessModels
B.TheImportanceofaBusinessModel
Iftheanswertoeachofthesequestionsisntsatisfactory,thenthe businessmodelshouldberevisedorabandoned. Ultimately, y,abusinessmodelisviableonly yinsofarasthebuyer, y ,the seller,andthepartnersinvolvedseeitasanappropriatemethodof sellingaproductorservice.

Universityof Zurich ISU InstituteforStrategyandBusinessEconomics UlrichKaiser

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I.BusinessModels
C.HowBusinessModelsEmerge
1 Thevaluechainisamodelthatmanybusinessesandentrepreneursuse 1. toidentifyopportunitiestoenhancetheircompetitivestrategies. 2 The 2. Th value l chain h i also l explains l i how h business b i models d l emergeand ddevelop. d l a. Thevaluechainisthestringofactivitiesthatmovesaproductfrom therawmaterialstage,throughmanufacturinganddistribution,and ultimatelytotheenduser.

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I.BusinessModels
C.HowBusinessModelsEmerge
b. By b ystudying s udy gaproducts p oduc sor o services se ce svalue a uechain, c a ,an a organization o ga a o canidentifywaystocreateadditionalvalueandassesswhether ithasthemeanstodoso. c. Valuechainanalysisisalsohelpfulinidentifyingopportunities fornewbusinessesandinunderstandinghowbusinessmodels emerge. emerge d. Afirmcanbeformedtostrengthenthevaluechainfora product, d however, h only l if faviable bl business b model d lcanb be createdtosupportit.

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I.BusinessModels
C.HowBusinessModelsEmerge
Entrepreneurs ep e eu slook oo a atthe evalue a uechain c a of o aproduct p oduc or o aservice se ceto opinpoint p po wherethevaluechaincanbemademoreeffectiveortospotwhere additionalvaluecanbeadded. Thistypeofanalysismayfocuson (1) asingleprimaryactivityofthevaluechain(suchasmarketingand sales), sales) (2) theinterfacebetweenonestageofthevaluechainandanother(such astheinterfacebetweenoperationsandoutgoinglogistics),or ( ) oneof (3) fthe h supportactivities(such ( hashuman h resourcemanagement). )

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I.BusinessModels
C.HowBusinessModelsEmerge

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I.BusinessModels
D.PotentialFatalFlawsofBusinessModels
Twofatalflawscanrenderabusinessmodeluntenablefromthe beginning: a Acompletemisreadofcustomers a. customers. b. Utterly unsoundeconomics.

Pets.comsportedanunsound businessmodel,andfailed.

Universityof Zurich ISU InstituteforStrategyandBusinessEconomics UlrichKaiser

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Chapter6:DevelopinganEffectiveBusinessModel
TableofContents
I. BusinessModels A. WhatisaBusinessModel? B. TheimportanceofaBusinessModel C. HowBusinessModelsEmerge D. PotentialFatalFlawsofBusinessModels ComponentsofanEffectiveBusinessModel A. Corestrategy B Strategicresources B. C. Partnershipnetwork D. Customerinterface

II.

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II.Components p ofanEffectiveBusinessModel
A.CoreStrategy
1. The efirst s component co po e of o abusiness bus essmodel ode is sthe ecore co estrategy, s a egy,which c describeshowafirmcompetesrelativetoitscompetitors.Thefollowing aretheessentialcomponentsofafirmscorestrategy. a. MissionStatement.Afirmsmission,ormissionstatement,describes whyitexistsandwhatitsbusinessmodelissupposedtoaccomplish. b. Product/MarketScope.Acompanysproduct/marketscopedefines theproductsandmarketsonwhichitwillconcentrate.

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II.Components p ofanEffectiveBusinessModel
A.CoreStrategy
c BasisforDifferentiation. c. Differentiation Itisimportantthatanewventure differentiateitselffromitscompetitorsinsomewaythatis importanttoitscustomers.Ifanewfirmsproductsorservices arent tdiff different tfrom f those th of fit itscompetitors, tit why h should h ld anyonetrythem? i. Fromabroadperspective,firmstypicallychooseoneoftwo genericstrategies(costleadershipordifferentiation)to positionthemselvesinthemarketplace. ii. Firmsthathaveacostleadershipstrategystrivetohavethe lowestcostsintheindustry,relativetocompetitors competitorscosts, andtypicallyattractcustomersonthatbasis.

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II.Components p ofanEffectiveBusinessModel
A.CoreStrategy
iii. Incontrast,firmswithadifferentiationstrategycompeteon thebasisofprovidinguniqueordifferentproductsand typicallycompeteonthebasisofquality,service, timeliness orsomeotherimportantdimension timeliness, dimension.

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II.Components p ofanEffectiveBusinessModel
A.CoreStrategy

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II.Components p ofanEffectiveBusinessModel
A.CoreStrategy
PrimaryElementsofCoreStrategy
Afirmsmission,ormissionstatement,describeswhyitexists andwhatitsbusinessmodelissupposedtoaccomplish.For example,SouthwestAirlinesMissionStatementisasfollows: ThemissionofSouthwestAirlinesisdedicationtothehighest levelofcustomerservicedeliveredwithasenseofwarmth, friendliness,individualpride,andcompanyspirit. spirit.

Business Mission

Product/Market Scope

Acompanysproduct/marketscopedefinesthe productsandmarketsonwhichitwillconcentrate.The choiceofproductshasanimportantimpactonafirms businessmodel.

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II.Components p ofanEffectiveBusinessModel
A.CoreStrategy

Basisof Differentiation

Itisimportantthatanewventure differentiateitselffromitscompetitors p in somewaythatisimportanttoits customers.Ifanewfirmsproductsor servicesarentdifferentfromthoseofits competitors,whyshouldanyonetrythem? Firmsoftendifferentiatethemselvesonthe basisofacostleadershipstrategyora differentiationstrategy.

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II.Components p ofanEffectiveBusinessModel
B.StrategicResources
1. Afirmisnotabletoimplementastrategywithoutresources,sothe resourcesafirmhasaffectsitsbusinessmodelsubstantially.Thetwo mostimportantstrategicresourcesarediscussedbelow. a. CoreCompetency.Acorecompetencyisaresourceorcapability thatservesasasourceofafirmscompetitiveadvantageoverits rivals ExamplesofcorecompetenciesincludeSony rivals. Sonys scompetencein miniaturization,Dellscompetenceinsupplychainmanagement, and3Mscompetenceinmanaginginnovation. b. StrategicAssets.Strategicassetsareanythingrareandvaluablethat afirmowns.Theyincludeplantandequipment,location,brands, patents,customerdata,ahighlyqualifiedstaff,anddistinctive partnerships.
Universityof Zurich ISU InstituteforStrategyandBusinessEconomics UlrichKaiser AprimerinEntrepreneurship Springsemester2008 22

II.Components p ofanEffectiveBusinessModel
B.StrategicResources
2. Companiesultimatelytrytocombinetheircorecompetenciesand strategicassetstocreateasustainablecompetitiveadvantage.Thisfactor isonetowhichinvestorspaycloseattentionwhenevaluatingabusiness.

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II.Components p ofanEffectiveBusinessModel
B.StrategicResources
PrimaryElementsofStrategicResources

Core Competencies

Acorecompetency t is i aresourceorcapability bilit th that t servesasasourceofafirmscompetitiveadvantage overitsrivals.

Strategic Assets

Strategicassetsareanythingrareandvaluablethata firmowns.

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II.Components p ofanEffectiveBusinessModel
B.StrategicResources
ImportanceofStrategicResources Newventuresultimatelytrytocombinetheircorecompetenciesand strategicassetstocreateasustainablecompetitiveadvantage. Thisfactorisonethatinvestorspaycloseattentiontowhenevaluating abusiness. Asustainablecompetitiveadvantageisachievedbyimplementinga value l creating i strategythat h i isunique i and dnoteasytoi imitate. i Thistypeofadvantageisachievablewhenafirmhasstrategic resourcesandtheability ytousethem.

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II.Components p ofanEffectiveBusinessModel
C.PartnershipNetwork
1. Afirm firms snetworkofpartnershipsisthethirdcomponentofabusiness model.Newventures,inparticular,typicallydonothavetheresources toperformallthetasksrequiredtomaketheirbusinesseswork,sothey relyonpartnerstoperformkeyroles. roles a. Suppliers.Asupplier(oravendor)isacompanythatprovidesparts orservices i to t another th company.Almost Al tall llfirms fi have h suppliers li who h playavitalrolesinthefunctioningoftheirbusinessmodels.

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II.Components p ofanEffectiveBusinessModel
C.PartnershipNetwork
b. OtherKeyRelationships.Alongwithitssuppliers,firmspartner withothercompaniestomaketheirbusinessmodelswork. i. Therearerisksinvolvedinpartnerships,particularlyifa singlepartnershipisakeycomponentofafirmsbusiness model. ii. Manypartnershipsfallshortofmeetingtheexpectationsof theparticipantsforavarietyofreasons.

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II.Components p ofanEffectiveBusinessModel
C.PartnershipNetwork

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II.Components p ofanEffectiveBusinessModel
D.CustomerInterface
Customerinterface howafirminteractswithitscustomers isthefourth componentofabusinessmodel.Thetypeofcustomerinteraction dependsonhowafirmchoosestocompete.

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II.Components p ofanEffectiveBusinessModel
D.CustomerInterface
PrimaryElementsofCustomerInterface
Afirmstargetmarketisthelimitedgroupofindividualsor businessesthatitgoesafterortriestoappealto.Thetarget marketafirmselectsaffectseverything e er thingitdoes, does fromthe strategicassetsitacquirestothepartnershipsitforgestoits promotionalcampaigns.

Target g Market

Fulfillment F lfill tand d Support

Fulfillmentandsupportdescribesthewayafirmsproductor servicegoestomarketorhowitreachesitscustomers.Italso referstothechannelsacompanyusesandwhatlevelof customersupportitprovides.Alltheseissuesimpacttheshape andnatureofacompanys company sbusinessmodel model.

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II.Components p ofanEffectiveBusinessModel
PrimaryElementsofCustomerInterface

D.CustomerInterface

PricingStructure

Thethirdelementofacompanyscustomerinterface isitspricingstructure,atopicthatwillbediscussedin moredetail d t ilin i Chapter Ch t 11. 11 P Pricing i i models d l vary, dependingonafirmstargetmarketanditspricing philosophy.

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II.Components p ofanEffectiveBusinessModel
Recap:TheImportanceofBusinessModels BusinessModels Itisveryusefulforanewventuretolookatitselfinaholisticmanner andunderstandthatitmustconstructaneffectivebusinessmodel tobesuccessful. Everyonethatdoesbusinesswithafirm,fromitscustomerstoits partners,doessoonavoluntarybasis.Asaresult,afirmmust motivateitscustomersanditspartnerstoplayalong. along Closeattentiontoeachoftheprimaryelementsofafirmsbusiness modelisessentialforanewventuressuccess.

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