Chapter 4. Developing an Effective Business Model

I.                    Business Model and Their Importance

        A business model is a firm’s plan or recipes for how it creates, delivers, and captures value for its stakeholder. A firm’s business model represents the core aspects of its business and how it fits together and support one another.

II.                  General Categories of Business Models

1.       Standard Business Models

        Depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value for their stakeholders.

2.       Disruptive Business Models

        Which are rare, 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.

b.       Low-End Market Disruption, 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 desire. This “performance oversupply” creates a vacuum that provides an opportunity for simple, typically low-cost business models to exist.

III.                The Barringer/Ireland Business Model

        Consist of 4 major categories and 12 individual parts.

1.       Core Strategy

Describes how the firms plans to compete relative to its competitors.

a.       Business Mission

Describes why it exist and what its business model is supposed to accomplish.

b.       Basis of Differentiation (Value Proposition)

The points that differentiate its products or service from competitors. What causes consumer to pick your products.

c.       Target Market

A place within a larger market segment that represents a narrower group of customers with similar interests.

d.       Product/Market Scope

The products and markets on which it will concentrate.

2.       Resources

The inputs a firm uses to produce, sell, distribute, and service a product or service.

a.       Core Competencies

A specific factor or capability that supports a firm’s business model and sets it apart from its rivals.

b.       Key Assets

The assets that a firm owns that enable its business model to work. The assets can be physical, financial, intellectual or human.

3.       Financials

Describes how it earns money.

a.       Revenue streams

Describe the ways in which it make money. Some business have a single revenue stream, while others have several.

b.       Cost Structure
Describes the most important costs incurred to support its business model.

1)      Fixed costs are the costs that remain the same despite the volume of goods or services provided.

2)      Variable costs vary proportionally with the volume of goods or services provided.

c.       Financing / Funding

Many business models rely on a certain amount of financing/funding.

4.       Operations

Both integral to a firm's overall business model and represent the day-to-day heart beat of a firm.

a.       Product (or Service) Production

How a firm's products and/or service are produced.

b.       Channels

Describe how it delivers its product/service to its customer.

c.       Key partners

Start-ups in particular, typically do not have sufficient resources (or funding) to perform all the tasks needed to make their business models work, so they rely on partners to perform key roles.