CHAPTER
NOTES
I. Business
Models
* Material following the opening feature on Amie Street.
1. A business model is a firm’s
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 earns.
2. 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.
3. There is no standard business
model, no hard-and-fast rules that dictate how
firms in a particular industry
should compete.
4. The term business model
innovation refers to initiatives such as that
undertaken by Michael Dell
that revolutionized how products are sold in an
industry.
5. The development of a firm’s
business model follows the feasibility analysis
stage of launching a new
venture but comes before the completion of a
business plan.
a. If a firm has conducted a feasibility
analysis and knows that it has a product
or service with potential,
the business model stage addresses how to
surround it with a core
strategy, a partnership model, a customer interface,
distinctive resources,
and a approach to creating value that represents a
viable business model.
b. At the business model development stage, it
is premature for a new venture
to raise money, hire a
lot of employees, establish partnerships, or
implement a marketing
plan. A firm needs to have a business
model in
place before it can make
additional substantive decisions.
A.
The Importance and Diversity of
Business Models
1.
Importance of Business Models
a.
Having a clearly articulate business model is
important because it
does the
following:
-
Serves as an ongoing extension
of feasibility analysis.
-
Focuses attention on how all
the elements of a business fit together and constitute a working whole.
-
Describes why the network of
participants needed to make a business idea viable would be willing to work
together.
-
Articulates a company’s core
logic to all stakeholders, including the firm’s employees
b.
Once a firm’s business model is clearly
determined, the entrepreneur
should diagram it on paper (to the extent
possible), examine it, and
ask the following questions:
-
Does my business model make
sense?
-
Will the businesses I need as
partners participate?
-
If I can get partners to participate,
how motivated will they be? Am I asking them work for or against their
self-interest?
-
How about my customers? Will it
be worth their time to do business with my company?
-
If I do get customers, how
motivated will they be?
-
Can I motivate my partners and
customers at a sufficient scale to cover the overhead of my business and make a
profit?
-
How distinct will my business
be? If I’m successful, will it be easy for a large competitor to step in and
steal my idea?
-
2.
Diversity of Business Models
a.
There is no standard business
model for an industry or for a target
market within an
industry. For example, there are five
distinct ways
that online
companies make money. These approaches,
shown in
Table 6.1, are
the core piece of their respective company’s business
models.
b.
There are always opportunities
for business model innovation. Think of
Netflix in movie rentals, Wikipedia in encyclopedias, and Curves
International in
fitness clubs.
II. How
Business Models Emerge
1.
The value chain is a model
developed by an academic researcher that many businesspeople as well as
entrepreneurs use to identify opportunities to enhance their competitive
strategies.
2.
The value chain is the string
of activities that move a product from the raw material stage, through manufacturing
and distribution, and ultimately to the end user.
3.
By studying a product or
service’s value chain, and organization can identify ways to create additional
value and assess whether it has the means to do so.
4.
Value chain analysis is also
helpful in identifying opportunities for new businesses and in understanding
how business models emerge.
5.
A firm can be formed to
strengthen the value chain for a product, however, only if a viable business
model can be created to support it.
III. Potential
Fatal Flows of Business Models
1.
Two fatal flaws can render a
business model untenable from the beginning.
a.
A complete misread of
customers.
b.
Utterly unsound economics.
IV. Components
of an Effective Business Model
A. Core Strategy
1. The first component of a business model is
the core strategy, which
describes how a firm
competes relative to its competitors.
The following
are the essential
components of a firm’s core strategy.
a.
Mission Statement. A firm’s mission, or mission statement,
describes
why it exists and
what its business model is supposed to accomplish
b. Product/Market Scope. A company’s product/market scope defines
the products and
markets on which it will concentrate.
c. Basis for 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?
i. From a broad perspective, firms typically
choose one of two generic
strategies
(cost leadership or differentiation) to position themselves
in the
marketplace.
ii. Firms that have a cost leadership strategy
strive to have the lowest
costs in the
industry, relative to competitors’ costs, and typically
attract
customers on that basis.
iii. In contrast, firms with a
differentiation strategy compete on the basis
of providing
unique or different products and typically compete on
the basis of
quality, service, timeliness, or some other important
dimension.
B. Strategic Resources
1. A firm is not able to implement a strategy
without resources, so the
resources a firm has
affects its business model substantially.
The two
most important strategic
resources are discussed below.
a. Core Competency. As defined in Chapter 3, a core competency is
a resource or
capability that serves as a source of a firm’s competitive
advantage over its
rivals. Examples of core competencies
include
Sony’s competence in
miniaturization, Dell’s competence in supply
chain management, and 3M’s competence
in managing innovation.
b. Strategic Assets. 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.
2. Companies ultimately try to combine their
core competencies and
strategic assets to
create a sustainable competitive advantage.
This
factor is one to which
investors pay close attention when evaluating
a business.
C. Partnership Network
1. A firm’s network of partnerships is the third
component of a business
model. New ventures, in particular, typically do not
have the resources
to perform all the tasks
required to make their businesses work, so they
rely on partners to
perform key roles.
a.
Suppliers. A supplier (or a vendor) is a company that
provides parts
or services to
another company. Almost all firms have
suppliers who
play a vital
roles in the functioning of their business models.
b. Other Key Relationships. Along with its
suppliers, firms partner with
other companies to
make their business models work.
i. There are risks involved in partnerships,
particularly if a single
partnership is a
key component of a firm’s business model.
ii. Many
partnerships fall short of meeting the expectations of the
participants for
a variety of reasons.
C.
Customer Interface
1. Customer interface – how a firm interacts
with its customers – is the fourth
component of a business model. The type of customer interaction depends
on how a firm chooses to compete.
a.
Target Market. A firm’s target
market is the limited group of
individuals or businesses that it
goes after or tries to appeal to.
i.
The target market a firm selects affects everything it does, from
the strategic assets it acquires
to the partnerships it forges to its
promotional campaigns.
b.
Fulfillment and Support. Fulfillment and support describes the way
a firm’s product
or service “goes to market” or how it reaches its
customers. It also refers to the channels a company uses
and what level
of customer
support it provides.
c.
Pricing Structure. A third element of a company customer
interface is
its pricing
structure. Pricing models vary,
depending on a firm’s target
market and its
pricing philosophy.
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