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.

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