Business Models

WILLIAM PAIVA, PHD

SEVIN ROSEN FUNDS, PARTNER
OKLAHOMA LIFE SCIENCE FUND, MANAGER
 Overview

 Business models as innovations

 Importance of the business model
 The business model and the value chain
 Potential flaws in the business model
 The major components of a business model
 Company’s core competency and its importance to
the business model
How To Spot Disruption
Understanding the Business Model
 What is a Business Model?

 Model
 A model is a plan or diagram that is 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.
 Business Model Definition

―A summary of the core business decisions and

trade-offs employed by a company to earn a profit‖
Hamermesh, Marshall, Pirmohamed

―When a new business model changes the economics

of an industry and is difficult to replicate, it can by
itself create a strong competitive advantage.‖
Joan Magretta
 Business Models

 Questions to ask
 is it profitable?
 is it protectable?
 is it sustainable?
 is it adaptable?
 Business models to explore
 Web 2.0 model
 Backwards approach: build the product and get a huge user base first,
and then we’ll figure out a way to monetize it
 Blockbuster vs. Redbox vs. Netflix
 Amazon vs. Barnes and Noble
Business Models in the Real World
 Innovation In Business Model

Apple…what is the real

world innovation

Redefining the size, look and

functionality of an MP3 player?
or,
 Creating a digital rights
management system that
could satisfy the music
industry (keeping artist
control over their music, but
creating a legal download
service for customers)
Apple’s breakthrough was not a
new product design, rather a
revolutionary business model.
 Importance of a Scalable
Business Model and Architecture
 Case History: Dell

It is 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, shippers,
customers, and many others to make its
business model possible.
Case History:
Dell
Business Model Framework

UNPACKING THE BUSINESS MODEL

 Unpacking the Business Model

Who do we What do we Ho do we How do we How do we

serve? provide? provide it? make money? sustain?

Who are our What are the What distribution What do we How are we
products and channels do we use? charge our different from
customers?
services we sell? customers for? competitors?
How is our value
What market chain configured?
segments do we What benefits What are the How do
and solutions do What are the major costs we customers
serve, in which we deliver to our incur in experience this
processes and
geographies? customers? activities that delivering our difference?
translate our inputs offering?
into value for
Who are the customers (outputs)? What differences
buyers of our How do we do they value
products and extract value? most?
Who are our partners?
services?
How do our suppliers What is our How sustainable
and partners help us pricing model? is our
deliver value?
differentiation?
Business Model Design

Four Components of a Business Model

 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.

 Core Strategy (2 of 3)

Primary Elements of Core Strategy

A firm’s mission, or mission statement, describes why it

exists and what its business model is supposed to
Business accomplish. For example, Southwest Airlines’ Mission
Mission Statement is as follows: “The mission of Southwest
Airlines is dedication to the highest level of customer
service delivered with a sense of warmth, friendliness,
individual pride, and company spirit.”

A company’s product/market scope defines the

Product/Market products and markets on which it will concentrate.
Scope The choice of products has an important impact on
a firm’s business model.
 Core Strategy (3 of 3)

Primary Elements of Core Strategy

It is important that a new venture

differentiate itself from its
competitors in some way that is
Basis of important to its customers. If a new
Differentiation firm’s products or services aren’t
different from those of its
competitors, why should anyone try
them? Firms often differentiate
themselves on the basis of a cost
leadership strategy or a
differentiation strategy.
 Strategic Resources (1 of 3)

 Strategic Resources
 A firm is not able to implement a strategy without
resources, so the resources a firm has affect 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.
 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
over its rivals. Examples are Sony’s competence in
Competencies
miniaturization, Dell’s competence in supply chain
management, and 3M’s competence in managing
innovation.

Strategic assets are anything rare and valuable that a

Strategic firm owns. They include plant and equipment, location,
Assets brands, patents, customer data, a highly qualified staff,
and distinctive partnerships.
 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 to 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.
 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 partners.
 Partnership Network (2 of 3)

Primary Elements of Partnership Network

A supplier is a company that provides parts or

services to another company. Intel is Dell’s primary
Suppliers
suppler for computer chips, for example. Firms are
developing more collaborative relationships with their
suppliers, and finding ways to motivate them to
perform at higher levels.

Along with suppliers, firms partner with other

companies to make their business models work. An
entrepreneur’s ability to launch a firm that achieves a
Other Key
sustainable competitive advantage may hinge as
Relationships
much on the skills of the partners that are involved as
the skills within the firm itself. The most common
types of partnerships are shown on the next slide.
 Partnership Network (3 of 3)

The Most Common Types of Business Partnerships

 Customer Interface (1 of 3)

 Customer Interface
 The way a firm interacts with its customers 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.
 Dell sells strictly online while HP sells through retail stores.

 The three elements of a company’s customer interface

are:
 Target customer.
 Fulfillment and support.
 Pricing model.
 Customer Interface (2 of 3)

Primary Elements of Customer Interface

A firm’s target market is the limited group of

individuals or businesses that it goes after or tries to
Target Market
appeal to. The target market a firm selects affects
everything it does, from the strategic assets it acquires
to the partnerships it forges to its promotional
campaigns.

Fulfillment and support describes the way a firm’s

Fulfillment and product or service “goes to market” or how it reaches
Support its customers. It also refers to the channels a company
uses and what level of customer support it provides.
All these issues impact the shape and nature of a
company’s business model.
 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
Structure models vary, depending on a firm’s target
market and its pricing philosophy.
 Decision Factors

 Revenue and Revenue Sources

 Sales (How, one time, recurring, global, domestic), service
fees, ads, subscription?
 Size, importance & timing of rev. stream?
 Costs and Cost Drivers
 Fixed, semi-variable, variable, non-recurring, timing, truly
productive, changing?
 Investment type and size (truly productive)
 Critical Success Factors (prioritize elements—most
important, most difficult, changing?)
 Revenue Sources

 Single stream (one primary source)

 Multiple streams
 Interdependent (sell one product to generate sales of
another (Razors, Printers)
 Loss Leader (multiple streams with some not
profitable to attract customers –interdependent
structure, e.g., grocery store
 Revenue Models

 Store Front
 Subscription/Membership (upfront/monthly --
clubs)
 Volume or unit based (fixed price per unit)
 Transaction Fee (brokerage)
 Advertising-based (free service with ads)
 How is ad based changing?
 Analysis
 Is the model a hybrid?
 How long to achieve sustaining sales level?
 How long to collect cash following sale?
 Grateful Dead Revenue Model

 One of the highest grossing bands of all time

 Avoided the typical music production co. rip
 Record companies had no claim on concert $
 Gave music away free at concerts—plug in
 Ticket sales $50M, fan loyalty, merchandise sales
$70M, some record sales
 Cost Drivers

 A factor that affects total costs

 Fixed
 Do not vary with volume of sales
 Semi-variable (combination-fixed, variable)
 More sales = more staff
 Variable (directly proportional to sales)
 Non –recurring (one-time or infrequent)
 Cost Structure

 The dominant cost driver or center of a business

model
 Payroll-centered (Direct) Semi variable, sales
dependent upon staff, e.g., consulting, mfg firms,
investment banks
 Payroll-centered (Support) Insurance cos.
 Inventory –auto mfrs, auto dealers, jewelry stores
 Space/Rent—high rent store fronts
 Marketing/Advertising –essential to attract/retain
customers (Internet commerce websites)
 Investment Size

 How much cash is required before positive cash flow

is achieved
 Maximum financing needed? (how deep is your
valley of death or cash trough)
 Positive cash flow point (when)?
 Cash breakeven (when)
 Software vs. Retail vs. Consulting firm vs. medical
products company
 Critical Success Factors

 Timing/size of cash inflows and outflows

 Sales Growth, customer acquisition rate, sales
cycle, inventory (turns)
 Revenue model success factors
 Subscription model (customer retention, acquisition at low
cost)
 Transaction-based (raise prices without raising costs,
economies of scale)
 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.
 Summary and Discussion Insight

 The business model defines how we structure our

business to compete
 Innovative business models create an advantage
 Business models emerge from an analysis of the
value chain
 The core strategy, the strategic resources, the
partnerships and how we interface with the
customer determine the make-up of our business
model
 A Different Perspective

With hundreds of ways to map out a company’s business model, it can get
overwhelming…Guy Kawasaki is tired of the “innovative business models.”