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Chapter 6

                       Developing an
                      Effective Business
                            Model
                         Bruce R. Barringer
                         R. Duane Ireland
                                              6-1
©2010 Prentice Hall
Chapter Objectives
                                1 of 2


1. Describe a business model.
2. Explain business model innovation.
3. Discuss the importance of having a clearly
   articulated business model.
4. Discuss the concept of the value chain.
5. Identify a business model’s two potential fatal
   flaws.



                                                     6-2
   ©2010 Prentice Hall
Chapter Objectives
                               2 of 2


6. Identify a business model’s four major components.
7. Explain the meaning of the term business concept
    blind spot.
8. Define the term core competency and describe its
    importance.
9. Explain the concept of supply chain management.
10. Explain the concept of fulfillment and support.



                                                   6-3
  ©2010 Prentice Hall
What is a Business Model?

• Model
  – A model is a plan or diagram that’s used to make or
    describe something.
• Business Model
  – A firm’s business model is its 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 generates.
  – The term “business model” is used to include all the
    activities that define how a firm competes in the
    marketplace.
                                                               6-4
  ©2010 Prentice Hall
Dell’s Business Model
                                    1 of 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.
• In Dell’s case, it needs the
  cooperation of its suppliers,
  customers, and many others to
  make its business model
  possible.
                                                   6-5
     ©2010 Prentice Hall
Dell’s Business Model
                                  2 of 2

Dell’s Approach to Selling PCs versus Traditional Manufacturers




                                                             6-6
   ©2010 Prentice Hall
The Importance of Business Models
    Having a clearly articulated business model is important
                 because it does the following:

• Serves as an ongoing extension of feasibility analysis. A business
  model continually asks the question, “Does this business make
  sense?”
• 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 are willing to work together.
• Articulates a company’s core logic to all stakeholders, including
  all employees.
                                                                6-7
   ©2010 Prentice Hall
Diversity of Business Models

                            • There is no standard business
                              model for an industry or for
                              a target market within an
Diversity or Variety in       industry.
                            • However, over time, the most
  Business Models             successful business models
                              in an industry predominate.
                            • There are always opportunities
                              for business model innovation.


                                                          6-8
   ©2010 Prentice Hall
Business Model Innovation



                             Netflix is an example of
                                a business model
                                    innovator.




                                                  6-9
©2010 Prentice Hall
How Business Models Emerge
                           1 of 3


• The Value Chain
  – The value chain is the string of activities that moves a
    product from the raw material stage, through
    manufacturing and distribution, and ultimately to the end
    user.
  – By studying a product’s or service’s value chain, an
    organization can identify ways to create additional value
    and assess whether it has the means to do so.
  – Value chain analysis is also helpful in identifying
    opportunities for new businesses and in understanding how
    business models emerge.
                                                          6-10
  ©2010 Prentice Hall
How Business Models Emerge
                             2 of 3

                      The Value Chain




                                        6-11
©2010 Prentice Hall
How Business Models Emerge
                                  3 of 3


• The Value Chain (continued)
  – Entrepreneurs look at the value chain of a product or a
    service to pinpoint where the value chain can be made
    more effective or to spot where additional “value” can be
    added.
  – This type of analysis may focus on:
        • A single primary activity such as marketing and sales.
        • The interface between one stage of the value chain and another,
          such as the interface between operations and outgoing logistics.
        • One of the support activities, such as human resource management.



                                                                        6-12
  ©2010 Prentice Hall
Potential Fatal Flaws in Business Models

• Fatal Flaws
  – Two fatal flaws can render a business model untenable
    from the beginning:
        • A complete misread of the customer.
        • Utterly unsound economics.




                                                Pets.com sported an unsound
                                                 business model, and failed.
                                                                           6-13
  ©2010 Prentice Hall
Components of a Business Model

        Four Components of a Business Model




                                              6-14
©2010 Prentice Hall
Core Strategy
                              1 of 3


• Core Strategy
   – The first component of a business model is the core
     strategy, which describes how a firm competes relative to
     its competitors.
• Primary Elements of Core Strategy
   – Mission statement.
   – Product/market scope.
   – Basis for differentiation.



                                                             6-15
  ©2010 Prentice Hall
Core Strategy
                                  2 of 3

                 Primary Elements of Core Strategy


                          A firm’s mission, or mission statement,
    Mission
                        describes why it exists and what its business
   Statement
                              model is suppose to accomplish.




Product/Market          A company’s product/market scope defines
    Scope                the products and markets on which it will
                                       concentrate.



                                                                        6-16
©2010 Prentice Hall
Core Strategy
                                   3 of 3

                 Primary Elements of Core Strategy



                             It is important that a new venture
                         differentiate itself from its competitors in
   Basis of            some way that is important to its customers.
Differentiation         If a new firm’s products or services aren’t
                       different from those of its competitors, why
                                  should anyone try them?




                                                                        6-17
©2010 Prentice Hall
Strategic Resources
                                    1 of 3


• Strategic Resources
   – A firm is not able to implement a strategy without
     resources, so the resources a firm has affects its business
     model substantially.
        • For a new venture, its strategic resources may initially be limited to
          the competencies of its founders, the opportunity they have
          identified, and the unique way they plan to serve their market.
   – The two most important strategic resources are:
        • A firm’s core competencies.
        • Strategic assets.



                                                                            6-18
  ©2010 Prentice Hall
Strategic Resources
                                      2 of 3

            Primary Elements of Strategic Resources

              A core competency is a resource or capability that
             serves as a source of a firm’s competitive advantage.
   Core            Examples include Sony’s competence in
Competencies   miniaturization and Dell’s competence in supply
                              chain management.


                      Strategic assets are anything rare and valuable that a
  Strategic              firm owns. They include plant and equipment,
   Assets              location, brands, patents, customer data, a highly
                           qualified staff, and distinctive partnerships.



                                                                               6-19
©2010 Prentice Hall
Strategic Resources
                               3 of 3


• Importance of Strategic Resources
   – New ventures ultimately try to combine their core
     competencies and strategic assets to create a sustainable
     competitive advantage.
   – This factor is one that investors pay close attention when
     evaluating a business.
   – A sustainable competitive advantage is achieved by
     implementing a value-creating strategy that is unique and
     not easy to imitate.
   – This type of advantage is achievable when a firm has
     strategic resources and the ability to use them.
                                                              6-20
  ©2010 Prentice Hall
Partnership Network
                                     1 of 3


• Partnership Network
  – A firm’s partnership network is the third component of a
    business model. New ventures, in particular, typically do
    not have the resources to perform key roles.
  – In most cases, a business does not want to do everything
    itself because the majority of tasks needed to build a
    product or deliver a service are not core to a company’s
    competitive advantage.
  – A firm’s partnership network includes:
        • Suppliers.
        • Other key relationships.

                                                            6-21
  ©2010 Prentice Hall
Partnership Network
                                     2 of 3

           Primary Elements of Partnership Network

                        A supplier is a company that provides parts or
 Suppliers               services to another company. Intel is Dell’s
                      primary suppler for computer chips, for example.



                      Firms partner with other companies to make their
                      business models work. An entrepreneur’s ability
 Other Key               to launch a firm that achieves a competitive
Relationships         advantage may hinge as much on the skills of the
                        partners as on the skills within the firm itself.


                                                                            6-22
©2010 Prentice Hall
Partnership Network
                              3 of 3

      The Most Common Types of Business Partnerships




                                                       6-23
©2010 Prentice Hall
Customer Interface
                                     1 of 3


• Customer Interface
  – The way a firm interacts with its customer hinges on how it
    chooses to compete.
        • For example, Amazon.com sells books over the Internet while
          Barnes & Noble sells through its traditional bookstores and online.
  – The three elements of a company’s customer interface are:
        • Target customer.
        • Fulfillment and support.
        • Pricing model.




                                                                          6-24
  ©2010 Prentice Hall
Customer Interface
                                       2 of 3

            Primary Elements of Customer Interface


   Target                A firm’s target market is the limited group of
   Market             individuals or businesses that it goes after or tries to
                                           appeal to.


                       Fulfillment and support describes the way a firm’s
Fulfillment           product or service reaches it customers. It also refers
and Support            to the channels a company uses and what level of
                                 customer support it provides.



                                                                                 6-25
©2010 Prentice Hall
Customer Interface
                                   3 of 3

            Primary Elements of Customer Interface




                        The third element of a company’s customer
    Pricing           interface is its pricing structure. Pricing models
   Structure          vary, depending on a firm’s target market and its
                                      pricing philosophy.




                                                                           6-26
©2010 Prentice Hall
Recap: The Importance of Business Models

• Business Models
  – It is very useful for a new venture to look at itself in a
    holistic manner and understand that it must construct an
    effective “business model” to be successful.
  – Everyone that does business with a firm, from its customers
    to its partners, does so on a voluntary basis. As a result, a
    firm must motivate its customers and its partners to play
    along.
  – Close attention to each of the primary elements of a firm’s
    business model is essential for a new venture’s success.


                                                              6-27
  ©2010 Prentice Hall
All rights reserved. No part of this publication may be reproduced,
  stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise,
 without the prior written permission of the publisher. Printed in the
                       United States of America.

       Copyright ©2010 Pearson Education, Inc.
              publishing as Prentice Hall

  ©2010 Prentice Hall

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Barringer e3 ppt_06

  • 1. Chapter 6 Developing an Effective Business Model Bruce R. Barringer R. Duane Ireland 6-1 ©2010 Prentice Hall
  • 2. Chapter Objectives 1 of 2 1. Describe a business model. 2. Explain business model innovation. 3. Discuss the importance of having a clearly articulated business model. 4. Discuss the concept of the value chain. 5. Identify a business model’s two potential fatal flaws. 6-2 ©2010 Prentice Hall
  • 3. Chapter Objectives 2 of 2 6. Identify a business model’s four major components. 7. Explain the meaning of the term business concept blind spot. 8. Define the term core competency and describe its importance. 9. Explain the concept of supply chain management. 10. Explain the concept of fulfillment and support. 6-3 ©2010 Prentice Hall
  • 4. What is a Business Model? • Model – A model is a plan or diagram that’s used to make or describe something. • Business Model – A firm’s business model is its 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 generates. – The term “business model” is used to include all the activities that define how a firm competes in the marketplace. 6-4 ©2010 Prentice Hall
  • 5. Dell’s Business Model 1 of 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. • In Dell’s case, it needs the cooperation of its suppliers, customers, and many others to make its business model possible. 6-5 ©2010 Prentice Hall
  • 6. Dell’s Business Model 2 of 2 Dell’s Approach to Selling PCs versus Traditional Manufacturers 6-6 ©2010 Prentice Hall
  • 7. The Importance of Business Models Having a clearly articulated business model is important because it does the following: • Serves as an ongoing extension of feasibility analysis. A business model continually asks the question, “Does this business make sense?” • 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 are willing to work together. • Articulates a company’s core logic to all stakeholders, including all employees. 6-7 ©2010 Prentice Hall
  • 8. Diversity of Business Models • There is no standard business model for an industry or for a target market within an Diversity or Variety in industry. • However, over time, the most Business Models successful business models in an industry predominate. • There are always opportunities for business model innovation. 6-8 ©2010 Prentice Hall
  • 9. Business Model Innovation Netflix is an example of a business model innovator. 6-9 ©2010 Prentice Hall
  • 10. How Business Models Emerge 1 of 3 • The Value Chain – The value chain is the string of activities that moves a product from the raw material stage, through manufacturing and distribution, and ultimately to the end user. – By studying a product’s or service’s value chain, an organization can identify ways to create additional value and assess whether it has the means to do so. – Value chain analysis is also helpful in identifying opportunities for new businesses and in understanding how business models emerge. 6-10 ©2010 Prentice Hall
  • 11. How Business Models Emerge 2 of 3 The Value Chain 6-11 ©2010 Prentice Hall
  • 12. How Business Models Emerge 3 of 3 • The Value Chain (continued) – Entrepreneurs look at the value chain of a product or a service to pinpoint where the value chain can be made more effective or to spot where additional “value” can be added. – This type of analysis may focus on: • A single primary activity such as marketing and sales. • The interface between one stage of the value chain and another, such as the interface between operations and outgoing logistics. • One of the support activities, such as human resource management. 6-12 ©2010 Prentice Hall
  • 13. Potential Fatal Flaws in Business Models • Fatal Flaws – Two fatal flaws can render a business model untenable from the beginning: • A complete misread of the customer. • Utterly unsound economics. Pets.com sported an unsound business model, and failed. 6-13 ©2010 Prentice Hall
  • 14. Components of a Business Model Four Components of a Business Model 6-14 ©2010 Prentice Hall
  • 15. Core Strategy 1 of 3 • Core Strategy – The first component of a business model is the core strategy, which describes how a firm competes relative to its competitors. • Primary Elements of Core Strategy – Mission statement. – Product/market scope. – Basis for differentiation. 6-15 ©2010 Prentice Hall
  • 16. Core Strategy 2 of 3 Primary Elements of Core Strategy A firm’s mission, or mission statement, Mission describes why it exists and what its business Statement model is suppose to accomplish. Product/Market A company’s product/market scope defines Scope the products and markets on which it will concentrate. 6-16 ©2010 Prentice Hall
  • 17. Core Strategy 3 of 3 Primary Elements of Core Strategy It is important that a new venture differentiate itself from its competitors in Basis of some way that is important to its customers. Differentiation If a new firm’s products or services aren’t different from those of its competitors, why should anyone try them? 6-17 ©2010 Prentice Hall
  • 18. Strategic Resources 1 of 3 • Strategic Resources – A firm is not able to implement a strategy without resources, so the resources a firm has affects its business model substantially. • For a new venture, its strategic resources may initially be limited to the competencies of its founders, the opportunity they have identified, and the unique way they plan to serve their market. – The two most important strategic resources are: • A firm’s core competencies. • Strategic assets. 6-18 ©2010 Prentice Hall
  • 19. Strategic Resources 2 of 3 Primary Elements of Strategic Resources A core competency is a resource or capability that serves as a source of a firm’s competitive advantage. Core Examples include Sony’s competence in Competencies miniaturization and Dell’s competence in supply chain management. Strategic assets are anything rare and valuable that a Strategic firm owns. They include plant and equipment, Assets location, brands, patents, customer data, a highly qualified staff, and distinctive partnerships. 6-19 ©2010 Prentice Hall
  • 20. Strategic Resources 3 of 3 • Importance of Strategic Resources – New ventures ultimately try to combine their core competencies and strategic assets to create a sustainable competitive advantage. – This factor is one that investors pay close attention when evaluating a business. – A sustainable competitive advantage is achieved by implementing a value-creating strategy that is unique and not easy to imitate. – This type of advantage is achievable when a firm has strategic resources and the ability to use them. 6-20 ©2010 Prentice Hall
  • 21. Partnership Network 1 of 3 • Partnership Network – A firm’s partnership network is the third component of a business model. New ventures, in particular, typically do not have the resources to perform key roles. – In most cases, a business does not want to do everything itself because the majority of tasks needed to build a product or deliver a service are not core to a company’s competitive advantage. – A firm’s partnership network includes: • Suppliers. • Other key relationships. 6-21 ©2010 Prentice Hall
  • 22. Partnership Network 2 of 3 Primary Elements of Partnership Network A supplier is a company that provides parts or Suppliers services to another company. Intel is Dell’s primary suppler for computer chips, for example. Firms partner with other companies to make their business models work. An entrepreneur’s ability Other Key to launch a firm that achieves a competitive Relationships advantage may hinge as much on the skills of the partners as on the skills within the firm itself. 6-22 ©2010 Prentice Hall
  • 23. Partnership Network 3 of 3 The Most Common Types of Business Partnerships 6-23 ©2010 Prentice Hall
  • 24. Customer Interface 1 of 3 • Customer Interface – The way a firm interacts with its customer hinges on how it chooses to compete. • For example, Amazon.com sells books over the Internet while Barnes & Noble sells through its traditional bookstores and online. – The three elements of a company’s customer interface are: • Target customer. • Fulfillment and support. • Pricing model. 6-24 ©2010 Prentice Hall
  • 25. Customer Interface 2 of 3 Primary Elements of Customer Interface Target A firm’s target market is the limited group of Market individuals or businesses that it goes after or tries to appeal to. Fulfillment and support describes the way a firm’s Fulfillment product or service reaches it customers. It also refers and Support to the channels a company uses and what level of customer support it provides. 6-25 ©2010 Prentice Hall
  • 26. Customer Interface 3 of 3 Primary Elements of Customer Interface The third element of a company’s customer Pricing interface is its pricing structure. Pricing models Structure vary, depending on a firm’s target market and its pricing philosophy. 6-26 ©2010 Prentice Hall
  • 27. Recap: The Importance of Business Models • Business Models – It is very useful for a new venture to look at itself in a holistic manner and understand that it must construct an effective “business model” to be successful. – Everyone that does business with a firm, from its customers to its partners, does so on a voluntary basis. As a result, a firm must motivate its customers and its partners to play along. – Close attention to each of the primary elements of a firm’s business model is essential for a new venture’s success. 6-27 ©2010 Prentice Hall
  • 28. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright ©2010 Pearson Education, Inc. publishing as Prentice Hall ©2010 Prentice Hall