Summary Week 6 Preparing the Proper Ethical and Legal Foundation

Establishing a Strong Ethical Culture for a Firm

One of the most important things the founders of an entrepreneurial venture can do is establish a strong ethical culture for their firms. The data regarding business ethics are both encouraging and discouraging. The most recent version of the National Business Ethics Survey was published in 2013.  According to the survey, 41 percent of the 6,420 employees surveyed reported that they had observed misconduct or unethical behavior in the past year. Of the employees who observed misconduct, 63 percent reported their observation to a supervisor or another authority in their firm. While the percentage of employees who have observed misconduct or unethical behavior (41 percent) is discouraging, it’s encouraging that 63 percent of employees reported the behavior. Support, trust, and transparency also make a difference. In analyzing the results of its survey, the Ethics Resource Center concluded that the most important thing an organization can do to combat ethical misconduct is to establish a strong ethical culture. But strong ethical cultures don’t emerge by themselves. It takes entrepreneurs who make ethics a priority and organizational policies and procedures that encourage ethical behavior (and punish unethical behavior) to make it happen. The following are specific steps that an entrepreneurial organization can take to build a strong ethical culture.

Lead by Example

Leading by example is the most important thing that any entrepreneur, manager, or supervisor can do to build a strong ethical culture in their organization. In strong ethical cultures, entrepreneurs, managers, and supervisors:

■ Communicate ethics as a priority

■ Set a good example of ethical conduct

■ Keep commitments

■ Provide information about what is going on

■ Support following organizational standards

Employees also have responsibilities. The most important things that employees can do to support a strong ethical culture in an organization are to:

■ Consider ethics in making decisions

■ Talk about ethics in the work (they) do

■ Set a good example of ethical conduct

■ Support following organizational standards

Establish a Code of Conduct

A code of conduct (or code of ethics) is a formal statement of an organization’s values on certain ethical and social issues. The advantage of having a code of conduct is that it provides specific guidance to entrepreneurs, managers, and employees regarding expectations of them in terms of ethical behavior. Other codes of conduct set out more general principles about an organization’s beliefs on issues such as product quality, respect for customers and employees, and social responsibility. In all cases though, codes of conduct are intended to influence people to behave in ways that are consistent with a firm’s ethical orientation.

Implement an Ethics Training Program

Firms also use ethics training programs to promote ethical behavior. Ethics training program teach business ethics to help employees deal with ethical dilemmas and improve their overall ethical conduct. An ethical dilemma is a situation that involves doing something that is beneficial to oneself or the organization, but may be unethical. Most employees confront ethical dilemmas at some point during their careers. Ethics training programs can be provided by outside vendors or can be developed in-house.

Dealing Effectively with Legal Issues

Those leading entrepreneurial ventures can also expect to encounter a number of important legal issues when launching and then, at least initially, operating their firm.

Choosing an Attorney for a Firm

It is important for an entrepreneur to select an attorney as early as possible when developing a business venture. Selecting an attorney was instrumental in helping Tempered Mind, the company profiled in the opening feature, establish a firm legal foundation. It is critically important that the attorney be familiar with start-up issues and that he or she has successfully shepherded entrepreneurs through the start-up process before. It is not wise to select an attorney just because she is a friend or because you were pleased with the way she prepared your will.

Drafting a Founders’ Agreement

If two or more people start a business, it is important that they have a founders’ (or shareholders’) agreement. A founders agreement is a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash how long the founders will have to remain with the firm for their shares to fully vest.

Avoiding Legal Disputes

Most legal disputes are the result of misunderstandings, sloppiness, or a simple lack of knowledge of the law. Getting bogged down in legal disputes is something that an entrepreneur should work hard to avoid. It is important early in the life of a new business to establish practices and procedures to help avoid legal disputes. Legal snafus, particularly if they are coupled with management mistakes, can be extremely damaging to a new firm. There are several steps entrepreneurs can take to avoid legal disputes and complications :

Meet All Contractual Obligations

It is important to meet all contractual obligations on time. This includes paying vendors, contractors, and employees as agreed and delivering goods or services as promised. If an obligation cannot be met on time, the problem should be communicated to the affected parties as soon as possible.

Avoid Undercapitalization

If a new business is starved for money, it is much more likely to experience financial problems that will lead to litigation. A new business should raise the money it needs to effectively conduct business or should stem its growth to conserve cash.

Get Everything in Writing

Many business disputes arise because of the lack of a written agreement or because poorly prepared written agreements do not anticipate potential areas of dispute. Although it is tempting to try to show business partners or employees that they are “trusted” by downplaying the need for a written agreement, this approach is usually a mistake. Disputes are much easier to resolve if the rights and obligations of the parties involved are in writing.

Set Standards

Organizations should also set standards that govern employees’ behavior beyond what can be expressed via a code of conduct. When legal disputes do occur, they can often be settled through negotiation or mediation, rather than more expensive and potentially damaging litigation. Mediation is a process in which an impartial third party (usually a professional mediator) helps those involved in a dispute reach an agreement.

Obtaining Business Licenses and Permits

Many businesses require licenses and permits to operate. Depending on the nature of the business, licenses and permits may be required at the federal, state, and/or local levels. There are three ways for those leading a business to determine the licenses and permits that are necessary. The first is to ask someone who is running a similar business, and they will usually be able to point you in the right direction. The second is to contact the secretary of state’s office in the state where the business will be launched. The third is to use one of the search tools available online.  The following is an overview of the licenses and permits that are required in the United States at the federal, state, and local levels for business organizations.

Federal Licenses and Permits

Most businesses do not require a federal license to operate, although some do. Seemingly simple businesses sometimes require more licenses and permits than one might think.

State Licenses and Permits

In most states, there are three different categories of licenses and permits that you may need to operate a business. Most states have start-up guides that walk you through the steps of setting up a business in the state.

Business Registration Requirements

Some states require all new businesses to register with the state. For example, the State of Oklahoma requires new businesses to complete a document titled “Oklahoma Business Registration Application” prior to commencing business. The purpose of the document is to (1) register the business, (2) place the business on the radar screen of the tax authorities, and (3) make sure the business is aware of and complies with certain regulations, such as the need to withhold state and federal taxes from the paychecks of employees.

Sales Tax Permits

Most states and communities require businesses that sell goods, and in some cases services, to collect sales tax and submit the tax to the proper state authorities. If you’re obligated to collect sales tax, you must get a permit from your state. Most states have online portals that make it easy to obtain a sales tax permit.

Professional and Occupational Licenses and Permits

In all states, there are laws that require people in certain professions to pass a state examination and maintain a professional license to conduct business. Examples include barbers, chiropractors, nurses, tattoo artists, land surveyors, and real estate agents.

Local Licenses and Permits

On the local level, there are two categories of licenses and permits that may be needed. The first is a permit to operate a certain type of business. Examples include child care, barber shops and salons, automotive repair, and hotels and motels. The second category is permits for engaging in certain types of activities. Examples include the following:

■ Building permit: Typically required if you are constructing or modifying your place of business

■ Health permit: Normally required if you are involved in preparing or selling food

■ Signage permit: May be required to erect a sign

■ Street vendor permit: May be required for anyone wanting to sell food products or merchandise on a city street

■ Sidewalk café permit: May be required if tables and chairs are placed in a city right-of-way

■ Alarm permit: Sometimes required if you have installed a burglar or fire alarm

■ Fire permit: May be required if a business sells or stores highly flammable material or handles hazardous substances

Choosing a Form of Business Organization

When a business is launched, a form of legal entity must be chosen. Sole proprietorships, partnerships, corporations, and limited liability companies are the most common legal entities from which entrepreneurs make a choice. Choosing a legal entity is not a one-time event. As a business grows and matures, it is necessary to periodically review whether the current form of business organization remains appropriate.

Sole Proprietorship

The simplest form of business entity is the sole proprietorship. A sole proprietroship is a form of business organization involving one person, and the person and the business are essentially the same. Sole proprietorships are the most prevalent form of business organization. The two most important advantages of a sole proprietorship are that the owner maintains complete control over the business and that business losses can be deducted against the owner’s personal tax return.

Advantages of a Sole Proprietorship

■ Creating one is easy and inexpensive.

■ The owner maintains complete control of the business and retains all the profits.

■ Business losses can be deducted against the sole proprietor’s other sources of income.

■ It is not subject to double taxation (explained later).

■ The business is easy to dissolve.

Disadvantages of a Sole Proprietorship

■ Liability on the owner’s part is unlimited.

■ The business relies on the skills and abilities of a single owner to be successful. Of course, the owner can hire employees who have additional skills and abilities.

■ Raising capital can be difficult.

■ The business ends at the owner’s death or loss of interest in the business.

■ The liquidity of the owner’s investment is low.

Partnerships

If two or more people start a business, they must organize as a partnership, corporation, or limited liability company. Partnerships are organized as either general or limited partnerships.

General Partnerships

A general partnership is a form of business organization where two or more people pool their skills, abilities, and resources to run a business. The primary advantage of a general partnership over a sole proprietorship is that the business isn’t dependent on a single person for its survival and success.

Advantages of a General Partnership

■ Creating one is relatively easy and inexpensive compared to a corporation or limited liability company.

■ The skills and abilities of more than one individual are available to the firm.

■ Having more than one owner may make it easier to raise funds.

■ Business losses can be deducted against the partners’ other sources of income.

■ It is not subject to double taxation (explained later).

Disadvantages of a General Partnership

■ Liability on the part of each general partner is unlimited.

■ The business relies on the skills and abilities of a fixed number of partners. Of course, similar to a sole proprietorship, the partners can hire employees who have additional skills and abilities.

■ Raising capital can be difficult.

■ Because decision making among the partners is shared, disagreements can occur.

■ The business ends at the death or withdrawal of one partner unless otherwise stated in the partnership agreement.

■ The liquidity of each partner’s investment is low.

Limited Partnerships

A limited partnership is a modified form of a general partnership. The major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners. There are no limits on the number of general or limited partners permitted in a limited partnership. Similar to general partnerships, most limited partnerships have partnership agreements. A limited partnership agreement sets forth the rights and duties of the general and limited partners, along with the details of how the partnership will be managed and eventually dissolved.

Corporations

A corporations is a separate legal entity organized under the authority of a state. Corporations are organized as either C corporations or subchapter S corporations.

C Corporations

A C corporation is a separate legal entity that, in the eyes of the law, is separate from its owners. In most cases, the corporation shields its owners, who are called shareholders, from personal liability for the debts and obligations of the corporation. A corporation is governed by a board of directors, which is elected by the shareholders. Most C corporations have two classes of stock: common and preferred. Preferred stock is typically issued to conservative investors who have preferential rights over common stockholders in regard to dividends and to the assets of the corporation in the event of liquidation. Common stock is issued more broadly than preferred stock. The common stockholders have voting rights and elect the board of directors of the firm. The common stockholders are typically the last to get paid in the event of the liquidation of the corporation; that is, after the creditors and the preferred stockholders.

Advantages of a C Corporation

■ Owners are liable only for the debts and obligations of the corporation up to the amount of their investment.

■ The mechanics of raising capital is easier.

■ No restrictions exist on the number of shareholders, which differs from subchapter S corporations.

■ Stock is liquid if traded on a major stock exchange.

■ The ability to share stock with employees through stock option or other incentive plans can be a powerful form of employee motivation.

Disadvantages of a C Corporation

■ Setting up and maintaining one is more difficult than for a sole proprietorship or a partnership.

■ Business losses cannot be deducted against the shareholders’ other sources of income.

■ Income is subject to double taxation, meaning that it is taxed at the corporate and the shareholder levels.

■ Small shareholders typically have little voice in the management of the firm.

Subchapter S Corporation

A subchapter S corporation combines the advantages of a partnership and a C corporation. It is similar to a partnership in that the profits and losses of the business are not subject to double taxation. The subchapter S corporation does not pay taxes; instead, the profits or losses of the business are passed through to the individual tax returns of the owners. An S corporation is similar to a C corporation in that the owners are not subject to personal liability for the behavior of the business. An additional advantage of the subchapter S corporation pertains to self-employment tax. By electing the subchapter S corporate status, only the earnings actually paid out as salary are subject to payroll taxes. The ordinary income that is disbursed by the business to the shareholders is not subject to payroll taxes or self-employment tax.

Limited Liability Company

The limited liability company (LLC) is a form of business organization that is rapidly gaining popularity in the United States. As with partnerships and corporations, the profits of an LLC flow through to the tax returns of the owners and are not subject to double taxation. The main advantage of the LLC is that all partners enjoy limited liability. This differs from regular and limited partnerships, where at least one partner is liable for the debts of the partnership. The LLC combines the limited liability advantage of the corporation with the tax advantages of the partnership.

#Creativepreneurship #Binus@Bandung

Summary Week 5

The Five Forces Model

The five forces model is a framework entrepreneurs use to understand an industry’s structure. Professor Michael Porter developed this important tool. These forces—the threat of substitutes, the threat of new entrants (that is, new competitors), rivalry among existing firms, the bargaining power of suppliers, and the bargaining power of buyers—determine the average rate of return for the firms competing in a particular industry or a particular segment of an industry.

 

Threat of Substitutes

In general, industries are more attractive when the threat of substitutes is low. This means that products or services from other industries can’t easily serve as substitutes for the products or services being made and sold in the focal firm’s industry. The extent to which substitutes suppress the profitability of an industry depends on the propensity for buyers to substitute alternatives. This is why the firms in an industry often offer their customers amenities to reduce the likelihood they’ll switch to a substitute product, even in light of a price increase.

Threat of New Entrants

In general, industries are more attractive when the threat of entry is low. This means that competitors cannot easily enter the industry and successfully copy what the industry incumbents are doing to generate profits. A barrier to entry is a condition that creates a disincentive for a new firm to enter an industry. Let’s look at the six major sources of barriers to entry:

■ Economies of scale: Industries that are characterized by large economies of scale are difficult for new firms to enter, unless they are willing to accept a cost disadvantage.

■ Product differentiation: Industries such as the soft-drink industry that are characterized by firms with strong brands are difficult to break into without spending heavily on advertising. 

■ Capital requirements: The need to invest large amounts of money to gain entrance to an industry is another barrier to entry.

■ Cost advantages independent of size: Entrenched competitors may have cost advantages not related to size that are not available to new entrants.

■ Access to distribution channels: Distribution channels are often hard to crack. This is particularly true in crowded markets, such as the convenience store market.

■ Government and legal barriers: In knowledge-intensive industries, such as biotechnology and software, patents, trademarks, and copyrights form major barriers to entry.

Rivalry Among Existing Firms

In most industries, the major determinant of industry profitability is the level of competition among the firms already competing in the industry. Some industries are fiercely competitive to the point where prices are pushed below the level of costs. There are four primary factors that determine the nature and intensity of the rivalry among existing firms in an industry:

■ Number and balance of competitors: With a larger number of competitors, it is more likely that one or more will try to gain customers by cutting prices.

■ Degree of difference between products: The degree to which products differ from one producer to another affects industry rivalry.

■ Growth rate of an industry: The competition among firms in a slow-growth industry is stronger than among those in fast-growth industries.

■ Level of fixed costs: Firms that have high fixed costs must sell a higher volume of their product to reach the break-even point than firms with low fixed costs.

Bargaining Power of Suppliers

In general, industries are more attractive when the bargaining power of suppliers is low. In some cases, suppliers can suppress the profitability of the industries to which they sell by raising prices or reducing the quality of the components they provide. If a supplier reduces the quality of the components it supplies, the quality of the finished product will suffer, and the manufacturer will eventually have to lower its price. If the suppliers are powerful relative to the firms in the industry to which they sell, industry profitability can suffer. Several factors have an impact on the ability of suppliers to exert pressure on buyers and suppress the profitability of the industries they serve. These include the following:

■ Supplier concentration: When there are only a few suppliers to provide a critical product to a large number of buyers, the supplier has an advantage.

■ Switching costs: Switching costs are the fixed costs that buyers encounter when switching or changing from one supplier to another. If switching costs are high, a buyer will be less likely to switch suppliers.

■ Attractiveness of substitutes: Supplier power is enhanced if there are no attractive substitutes for the products or services the supplier offers.

■ Threat of forward integration: The power of a supplier is enhanced if there is a credible possibility that the supplier might enter the buyer’s industry.

Bargaining Power of Buyers

In general, industries are more attractive when the bargaining power of buyers (a start-up’s customers) is low. Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality. Several factors affect buyers’ ability to exert pressure on suppliers and suppress the profitability of the industries from which they buy. These include the following:

■ Buyer group concentration: If the buyers are concentrated, meaning that there are only a few large buyers, and they buy from a large number of suppliers, they can pressure the suppliers to lower costs and thus affect the profitability of the industries from which they buy.

■ Buyer’s costs: The greater the importance of an item is to a buyer, the more sensitive the buyer will be to the price it pays.

■ Degree of standardization of supplier’s products: The degree to which a supplier’s product differs from its competitors’ offering affects the buyer’s bargaining power.

■ Threat of backward integration: The power of a buyer is enhanced if there is a credible threat that the buyer might enter the supplier’s industry.

Industry Types and the Opportunities They Offer

Emerging Industries

An emerging industry is a new industry in which standard operating procedures have yet to be developed. The firm that pioneers or takes the leadership of an emerging industry often captures a first-mover advantage. A first-mover advantage is a sometimes insurmountable advantage gained by the first company to establish a significant position in a new market. Because a high level of uncertainty characterizes emerging industries, any opportunity that is captured may be short-lived. Still, many new ventures enter emerging industries because barriers to entry are usually low and there is no established pattern of rivalry.

Fragmented Industries

A fragmented industry is one that is characterized by a large number of firms of approximately equal size. The primary opportunity for start-ups in fragmented industries is to consolidate the industry and establish industry leadership as a result of doing so. The most common way to do this is through a geographic roll-up strategy, in which one firm starts acquiring similar firms that are located in different geographic areas. This is an often observed path for growth for businesses such as auto repair shops and beauty salons. It is difficult for them to generate additional income in a single location, so they grow by expanding into new geographic areas via either organic growth or by acquiring similar firms.

Mature Industries

A mature industry is an industry that is experiencing slow or no increase in demand, has numerous repeat (rather than new) customers, and has limited product innovation. Occasionally, entrepreneurs introduce new product innovations to mature industries, surprising incumbents who thought nothing new was possible in their industries. The lure of mature industries, for start-ups, is that they’re often large industries with seemingly vast potential if product and/or process innovations can be effectively introduced and the industry can be revitalized.

Declining Industries

A declining industry is an industry or a part of an industry that is experiencing a reduction in demand. Typically, entrepreneurs shy away from declining industries because the firms in the industry do not meet the tests of an attractive opportunity. Entrepreneurial firms employ three different strategies in declining industries. The first is to adopt a leadership strategy, in which the firm tries to become the dominant player in the industry. This is a rare strategy for a start-up in a declining industry. The second is to pursue a niche strategy, which focuses on a narrow segment of the industry that might be encouraged to grow through product or process innovation. The third is a cost reduction strategy, which is accomplished through achieving lower costs than industry incumbents through process improvements. Achieving lower costs allows a firm to sell its product or service at a lower price, creating value for consumers in the process of doing so.

Global Industries

A global industry is an industry that is experiencing significant international sales. Many start-ups enter global industries and from day one try to appeal to international rather than just domestic markets. The two most common strategies pursued by firms in global industries are the multidomestic strategy and the global strategy. Firms that pursue a multidomestic strategy compete for market share on a country-by-country basis and vary their product or service offerings to meet the demands of the local market. In contrast, firms pursuing a global strategy use the same basic approach in all foreign markets. The choice between these two strategies depends on how similar consumers’ tastes are from market to market.

Competitor Analysis

After a firm has gained an understanding of the industry and the target market in which it plans to compete, the next step is to complete a competitor analysis. A competitor analysis is a detailed analysis of a firm’s competition. It helps a firm understand the positions of its major competitors and the opportunities that are available to obtain a competitive advantage in one or more areas.

Identifying Competitors

The first step in a competitive analysis is to determine who the competition is. This is more difficult than one might think.

Sources of Competitive Intelligence

To complete a meaningful competitive analysis grid, a firm must first understand the strategies and behaviors of its competitors. The information that is gathered by a firm to learn about its competitors is called competitive intelligence. Obtaining sound competitive intelligence is not always a simple task. If a competitor is a publicly traded firm, a description of the firm’s business and its financial information is available through annual reports filed with the Securities and Exchange Commission (SEC). These reports are public records and are available at the SEC’s website (www.sec.gov).

Completing a Competitive Analysis Grid

A competitive analysis grid is a tool for organizing the information a firm collects about its competitors. It can help a firm see how it stacks up against its competitors, provide ideas for markets to pursue, and, perhaps most importantly, identify its primary sources of competitive advantage. To be a viable company, a new venture must have at least one clear competitive advantage over its major competitors.

#Creativepreneurship #Binus@Bandung

Summary Week 5

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. For example, three important elements of a firm’s business model are its target market, its basis for differentiation, and its key assets. In Her Campus’s case, its target market is college-aged females, it differentiates itself by focusing on six topics that college-aged females care about (style, beauty, health, love, life, and career), and its key assets include 4,000-plus college females volunteering in Her Campus chapters across the country writing articles that they believe other college females will be interested in.

General Categories of Business Models

There are two general categories of business models: standard business models and disruptive business models.

Standard Business Models

The first category is standard business models. This type of model is used commonly by existing firms as well as by those launching an entrepreneurial venture. Standard business models depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value for their stakeholders. Most of the standard business models, with the exception of the freemium model, have been in place for some time. It is important to understand that there is no perfect business model. Each of the standard models has inherent strengths and weaknesses. For example, the strength of the subscription business model is recurring revenue. It’s important to note that a firm’s business model takes it beyond its own boundaries.

Disruptive Business Models

The second category is disruptive business models. 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 three types of disruptive business models. The first type is called new market disruption. A new market disruption addresses a market that previously wasn’t served. The second type of disruptive business model is referred to as a low-end market disruption. This is a type of disruption that was elegantly written about by Harvard professor Clayton Christensen in the book The Innovator’s Dilemma. Low-end 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. If a start-up goes this route, the advantages must be compelling and the company must strike a nerve for disruption to take place.

The Barringer/Ireland Business Model Template

Core Strategy

The first component of a business model is core strategy. A core strategy describes how the firm plans to compete relative to its competitors. The primary elements of core strategy are: business mission, basis of differentiation, target market, and product/market scope.

Business Mission

A business’s mission or mission statement describes why it exists and what its business model is supposed to accomplish. If carefully written and used properly, a mission statement can articulate a business’s overarching priorities and act as its financial and moral compass. A firm’s mission is the first box that should be completed in the business model template. There are several rules of thumb for writing mission statements. 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

It’s important that a business clearly articulate the points that differentiate its product or service from competitors. This is akin to what some authors refer to as a company’s value proposition. 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. When completing the basis for differentiation portion of the Barringer/Ireland Business Model Template, it’s best to limit the description to two to three points. Also, make sure that the value of the points is easy to see and understand. 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

The identification of the target market in which the firm will compete is extremely important. As explained in chapter 3, a target market is a place within a larger market segment that represents a narrower group of customers with similar interests. Most new businesses do not start by selling to broad markets. Instead, most start by identifying an emerging or underserved niche within a larger market.

Product/Market Scope

The fourth element of core strategy is product/market scope. A company’s product/market scope defines the products and markets on which it will concentrate. Most firms start narrow and pursue adjacent product and market opportunities as the company grows and becomes financially secure. As explained earlier, new firms typically do not have the resources to produce multiple products and pursue multiple markets simultaneously. 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

The second component of a business model is resources. Resources are the inputs a firm uses to produce, sell, distribute, and service a product or service. At a basic level, a firm must have a sufficient amount of resources to enable its business model to work. Resources are developed and accumulated over a period of time. As a result, when completing the Barringer/Ireland Business Plan Template, the current resources a company possesses should be the resources that are noted, but aspirational resources should be kept in mind.

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 core competency can take on various forms, such as technical know-how, an efficient process, a trusting relationship with customers, expertise in product design, and so forth. It may also include factors such as passion for a business idea and a high level of employee morale. A firm’s core competencies largely determine what it can do. Most start-ups will list two to three core competencies on the business model template. Consistent with the information provided above, a core competency is compelling if it not only supports a firm’s initiatives, but is also difficult to imitate and substitute.

Key Assets

Key assets are the assets that a firm owns that enable its business model to work. The assets can be physical, financial, intellectual, or human. 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. Obviously, different key resources are needed depending on the business model that a firm conceives. In filling out the Barringer/Ireland Business Model Template, a firm should list the three to four key assets that it possesses that support its business model as a whole.

Financials

The third component of a business model focuses on its financials. This is the only section of a firm’s business model that describes how it earns money—thus, it is extremely important. For most businesses, the manner in which it makes money is one of the most fundamental aspects around which its business model is built. The primary aspects of financials are: revenue streams, cost structure, and financing/funding.

Revenue Streams

A firm’s revenue streams describe the ways in which it makes money. Some businesses have a single revenue stream, while others have several.  As noted above, many businesses have more than one revenue stream, primarily to leverage the value they are creating for their customers. The number and nature of a business’s revenue streams has a direct impact on the other elements of its business model. All for-profit businesses need at least one revenue stream to fund their operations.

Cost Structure

A business’s cost structure describes the most important costs incurred to support its business model. It costs money to establish a basis of differentiation, develop core competencies, acquire or develop key assets, form partnerships, and so on. Generally, 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, identify the nature of the business’s costs, and identify the business’s major cost categories. Initially, it is important to determine the role of costs in a business. Businesses can be categorized as cost-driven or value-driven. Cost-driven businesses focus on minimizing costs wherever possible. Next, it’s important to identify the nature of a business’s costs. Most businesses have a mainly fixed-cost or variable-cost structure. 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. The reason that it’s important to know this is that it impacts the other elements of a firm’s business model. The third element of cost structure is to identify the business’s major cost categories. At the business model stage, it is not necessary to establish a budget or prepare pro-forma financial projections.

Financing/Funding

Finally, many business models rely on a certain amount of financing or funding to bring their business model to life. Some entrepreneurs are able to draw from personal resources to fund their business. In other cases, the business may be simple enough that it is funded from its own profits from day one. In many cases, however, an initial infusion of funding or financing is required, as described above. Similar to cost structure, at the business model stage projections do not need to be completed to determine the exact amount of money that is needed. An approximation is sufficient. There are three categories of costs to consider: capital costs, one-time expenses, and provisions for ramp-up expenses.

Operations

The final quadrant in a firm’s business model focuses on operations. Operations are both integral to a firm’s overall business model and represent the day-to-day heartbeat of a firm. The primary elements of operations are: product (or service) production, channels, and key partners.

Product (or Service) Production

This section focuses on how a firm’s products and/or 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. This decision has a major impact on all aspects of a firm’s business model. If it opts to produce in-house, it will need to develop core competencies in manufacturing and procure key assets related to the production process. It will also require substantial up-front investment.

Channels

A company’s channels describe how it delivers its product or service to its customers. Businesses sell direct, through intermediaries, or through a combination of both. Many businesses sell direct, through a storefront and/or online. A firm’s selection of channels affects other aspects of its business model.

Key Partners

The final element of a firm’s business model is 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. 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 outside a business’s core competencies or areas of expertise. The first partnerships that many businesses forge are with suppliers. A supplier (or vendor) is a company that provides parts or services to another company. Almost all firms have suppliers who play vital roles in the functioning of their business models. Along with suppliers, firms partner with other companies to make their business models work. The most common types of relationships, which include strategic alliances and joint ventures. When completing the Barringer/Ireland Business Model Template, you should identify your primary supplier partnerships and other partnerships. Normally, a start-up begins with a fairly small number of partnerships, which grows over time.

#Creativepreneurship #Binus@Bandung