DEVELOPING an EFFECTIVE BUSINESS MODEL
Business Models and Their Importance
A firm's business model is its plan or recipe for how it creates, delivers, and captures value for its stakeholders. Three important elements of a firm's business model are its target market, its basis for differentiation, and its key assets. Each element supports the others.
General Categories of Business Models
- Standard Business Models
Standard business models depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value for their stakeholders. In fact, many of the business models utilized by online firms were originally developed by offline firms, and simply transferred to the Internet. The things that are usually done by successful start-ups is adopt a standard business model and build upon it in one or more meaningful ways to produce a new way of creating value. Each of the standard models has inherent strengths and weaknesses. For example, companies that feature a subscription-based business model normally offer a high level of customer service.They want to retain as high a percentage of their subscribers as they can to lower churn and avoid the expenses involved with replacing existing customers. Many companies feature the participation of others as an integral part of their business models. An example is Apple, and in particular the Apple App Store.
- Disruptive Business Models
Disruptive business models are ones that do not fit the profile of a standard business model, and are impactful enough that they disrupt or change the way business is conducted in an industry or an important niche within an industry. There are two types of disruptive business models :
⤇ A new market disruption addresses a market that previously wasn't served. An example is Google and its AdWords program. AdWords allows an advertiser to buy keywords on Google's home page. This is new market disruption because it provided a way for small businesses, in large numbers, to advertise online.
⤇ A low-end market disruption is possible when the firms in an industry continue to improve products or services to the point where they are actually better than a sizable portion of their clientele needs or desires. Low-end disruptive business models are also introduced to offer a simpler, cheaper, or more convenient way to perform an everyday task (an example is Uber).
Standard business models depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value for their stakeholders. In fact, many of the business models utilized by online firms were originally developed by offline firms, and simply transferred to the Internet. The things that are usually done by successful start-ups is adopt a standard business model and build upon it in one or more meaningful ways to produce a new way of creating value. Each of the standard models has inherent strengths and weaknesses. For example, companies that feature a subscription-based business model normally offer a high level of customer service.They want to retain as high a percentage of their subscribers as they can to lower churn and avoid the expenses involved with replacing existing customers. Many companies feature the participation of others as an integral part of their business models. An example is Apple, and in particular the Apple App Store.
Disruptive business models are ones that do not fit the profile of a standard business model, and are impactful enough that they disrupt or change the way business is conducted in an industry or an important niche within an industry. There are two types of disruptive business models :
⤇ A new market disruption addresses a market that previously wasn't served. An example is Google and its AdWords program. AdWords allows an advertiser to buy keywords on Google's home page. This is new market disruption because it provided a way for small businesses, in large numbers, to advertise online.
⤇ A low-end market disruption is possible when the firms in an industry continue to improve products or services to the point where they are actually better than a sizable portion of their clientele needs or desires. Low-end disruptive business models are also introduced to offer a simpler, cheaper, or more convenient way to perform an everyday task (an example is Uber).
The Barringer / Ireland Business Model Template
The Barringer / Ireland Business Model Template is slightly more comprehensive than the Business Model Canvas in that it consists of 4 major categories and 12 individual parts. The Barringer / Ireland Business Model Template is a tool that allows an entrepreneur to describe, project, revise, and pivot a business model until all 12 parts are decided upon.
- Core Strategy
⤿ describes how the firm plans to compete relative to its competitors.
Business Mission
A business's mission or mission statement describes why it exists and what its business model is supposed to accomplish. A business's mission statement should:
🔼 Define its "reason for being"
🔼 Describe what makes the company different
🔼 Be risky and challenging but achievable
🔼 Use a tone that represents the company's culture and values
🔼 Convey passion and stick in the mind of the reader
🔼 Be honest and not claim to be something that the company "isn't"
Basis of Differentiation
A company's basis of differentiation is what causes consumers to pick one company's products over another's. It is what solves a problem or satisfies a customer need. Making certain that your points of differentiation refer to benefits rather than features is another important point to remember when determining a firm's basis of differentiation.
Target Market
A target market is a place within a larger market segment that represents a narrower group of customers with similar interests. A target market can be based on any relevant variable, as long as it identifies for a firm the group of like-minded customers that it will try to appeal to. The target market a firm selects affects everything it does, from the key assets it acquires to the financing or funding it will need to the partnerships it forms.
Product / Market Scope
A company's product market scope defines the products and markets on which it will concentrate. In completing the Barringer / Ireland Business Model Template, a company should be very clear about its initial product / market scope and project 3-5 years in the future in terms of anticipated expansion.
- Resources
⤿ Are the inputs a firm uses to produce, sell, distribute, and service a product or service. For example, a firm may need a patent to protect its basis of differentiation. Similarly, a business may need expertise in certain areas to understand the needs of its target market. A firm's most important resources, both tangible and intangible, must be both difficult to imitate and hard to find a substitute. Resources are developed and accumulated over a period of time.
Core Competencies
A core competency is a specific factor or capability that supports a firm's business model and sets it apart from its rivals. A firm's core competencies largely determine what it can do.
Key Assets
Key assets are the assets that a firm owns that enable its business model to work. Physical assets include physical space, equipment, vehicles, and distribution networks. Intellectual assets include resources such as patents, trademarks, copyrights, and trade secrets, along with a company's brand and its reputation. Financial assets include cash, lines of credit, and commitments from investors. Human assets include a company's founder or founders, its key employees, and its advisors.
- Financials
⤿ A firm's business model that describe how it earns money. For most business, the manner in which it makes money is one of the most fundamental aspects around which its business model is built.
Revenue Streams
A firm's revenue streams describe the ways in which it makes money. Some business have a single revenue stream, while others have several. All for-profit businesses need at least one revenue stream to fund their operations. Whether additional revenue streams add or subtract value depends on the nature of the business and the other elements of its business model.
Cost Structure
A business's cost structure describes the most important costs incurred to support its business model. The goal for this box in a firm's business model template is threefold:
🔼 Identify whether the business is a cost-driven or value-driven business. Cost-driven businesses focus on minimizing costs wherever possible. While value-driven business models focus on offering a high-quality product and personalized service.
🔼 Identify the nature of the business's costs. Fixed costs are costs that remain the same despite the volume of goods or services provided. Variable costs vary proportionally with the volume of goods or services produced.
🔼 Identify the business's major cost categories. It is not necessary to establish a budget or prepare pro-forma financial projections. It is necessary, however, to have a sense of a firm's major categories of costs.
Financing / Funding
Many business models rely on a certain amount of financing or funding to bring their business model to life. The business model template should indicate the approximate amount of funding that will be needed and where the money is most likely to come from. There are three categories of costs to consider: capital costs, one-time expenses, and provisions for ramp-up expenses.
- Operations
⤿ Are both integral to a firm's overall business model and represent the day-to-day heartbeat of a firm.
Product (or Service) Production
Focuses on how a firm's products / service are produced. If a firm sells physical products, the products can be manufactured or produced in-house, by a contract manufacturer, or via an outsource provider. If a firm is providing a service rather than a physical product, a brief description of how the service will be produced should be provided. The explanation doesn't need to be lengthy, but it needs to be substantive.
Chanels
A company's channels describe how it delivers its product or service to its customers. Business sell direct, through intermediaries, or through a combination of both.
Key Partners
A business doesn't want to do everything itself because the majority of tasks needed to build a product or deliver a service are outside a business's core competencies or areas of expertise. A supplier is a company that provides parts or services to another company. Today, firms are developing more cooperative relationships with suppliers. More and more, managers are focusing on supply chain management, which is the coordination of the flow of all information, money, and material that moves through a product's supply chain. The more efficiently an organization can manage its supply chain, the more effectively its entire business model will work. Along with suppliers, firms partner with other companies to make their business models work, like strategic alliances and joint ventures. The advantages are gaining access to a particular resource, risk and cost sharing, speed to market, and learning. Partnerships also have potential disadvantages, such as loss of proprietary information, management complexities, and partial loss of decision autonomy. One trend in partnering, utilized by all types of businesses, is to use freelancers (an independent contractor that has skill in a certain area) to do jobs that are outside their core competencies.
⤿ describes how the firm plans to compete relative to its competitors.
Business Mission
A business's mission or mission statement describes why it exists and what its business model is supposed to accomplish. A business's mission statement should:
🔼 Define its "reason for being"
🔼 Describe what makes the company different
🔼 Be risky and challenging but achievable
🔼 Use a tone that represents the company's culture and values
🔼 Convey passion and stick in the mind of the reader
🔼 Be honest and not claim to be something that the company "isn't"
Basis of Differentiation
A company's basis of differentiation is what causes consumers to pick one company's products over another's. It is what solves a problem or satisfies a customer need. Making certain that your points of differentiation refer to benefits rather than features is another important point to remember when determining a firm's basis of differentiation.
Target Market
A target market is a place within a larger market segment that represents a narrower group of customers with similar interests. A target market can be based on any relevant variable, as long as it identifies for a firm the group of like-minded customers that it will try to appeal to. The target market a firm selects affects everything it does, from the key assets it acquires to the financing or funding it will need to the partnerships it forms.
Product / Market Scope
A company's product market scope defines the products and markets on which it will concentrate. In completing the Barringer / Ireland Business Model Template, a company should be very clear about its initial product / market scope and project 3-5 years in the future in terms of anticipated expansion.
⤿ Are the inputs a firm uses to produce, sell, distribute, and service a product or service. For example, a firm may need a patent to protect its basis of differentiation. Similarly, a business may need expertise in certain areas to understand the needs of its target market. A firm's most important resources, both tangible and intangible, must be both difficult to imitate and hard to find a substitute. Resources are developed and accumulated over a period of time.
Core Competencies
A core competency is a specific factor or capability that supports a firm's business model and sets it apart from its rivals. A firm's core competencies largely determine what it can do.
Key Assets
Key assets are the assets that a firm owns that enable its business model to work. Physical assets include physical space, equipment, vehicles, and distribution networks. Intellectual assets include resources such as patents, trademarks, copyrights, and trade secrets, along with a company's brand and its reputation. Financial assets include cash, lines of credit, and commitments from investors. Human assets include a company's founder or founders, its key employees, and its advisors.
⤿ A firm's business model that describe how it earns money. For most business, the manner in which it makes money is one of the most fundamental aspects around which its business model is built.
Revenue Streams
A firm's revenue streams describe the ways in which it makes money. Some business have a single revenue stream, while others have several. All for-profit businesses need at least one revenue stream to fund their operations. Whether additional revenue streams add or subtract value depends on the nature of the business and the other elements of its business model.
Cost Structure
A business's cost structure describes the most important costs incurred to support its business model. The goal for this box in a firm's business model template is threefold:
🔼 Identify whether the business is a cost-driven or value-driven business. Cost-driven businesses focus on minimizing costs wherever possible. While value-driven business models focus on offering a high-quality product and personalized service.
🔼 Identify the nature of the business's costs. Fixed costs are costs that remain the same despite the volume of goods or services provided. Variable costs vary proportionally with the volume of goods or services produced.
🔼 Identify the business's major cost categories. It is not necessary to establish a budget or prepare pro-forma financial projections. It is necessary, however, to have a sense of a firm's major categories of costs.
Financing / Funding
Many business models rely on a certain amount of financing or funding to bring their business model to life. The business model template should indicate the approximate amount of funding that will be needed and where the money is most likely to come from. There are three categories of costs to consider: capital costs, one-time expenses, and provisions for ramp-up expenses.
⤿ Are both integral to a firm's overall business model and represent the day-to-day heartbeat of a firm.
Product (or Service) Production
Focuses on how a firm's products / service are produced. If a firm sells physical products, the products can be manufactured or produced in-house, by a contract manufacturer, or via an outsource provider. If a firm is providing a service rather than a physical product, a brief description of how the service will be produced should be provided. The explanation doesn't need to be lengthy, but it needs to be substantive.
Chanels
A company's channels describe how it delivers its product or service to its customers. Business sell direct, through intermediaries, or through a combination of both.
Key Partners
A business doesn't want to do everything itself because the majority of tasks needed to build a product or deliver a service are outside a business's core competencies or areas of expertise. A supplier is a company that provides parts or services to another company. Today, firms are developing more cooperative relationships with suppliers. More and more, managers are focusing on supply chain management, which is the coordination of the flow of all information, money, and material that moves through a product's supply chain. The more efficiently an organization can manage its supply chain, the more effectively its entire business model will work. Along with suppliers, firms partner with other companies to make their business models work, like strategic alliances and joint ventures. The advantages are gaining access to a particular resource, risk and cost sharing, speed to market, and learning. Partnerships also have potential disadvantages, such as loss of proprietary information, management complexities, and partial loss of decision autonomy. One trend in partnering, utilized by all types of businesses, is to use freelancers (an independent contractor that has skill in a certain area) to do jobs that are outside their core competencies.
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