Chapter 5

Developing an Effective
Business Model

References:
• Entrepreneurship by Bruce R. Barringer
• Entrepreneurship by Hisrich

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 What is a Business Model?
 This chapter introduces the business model and explains
why it’s important for a new venture to develop a business
model early in its life.
 Business Model
A business model describes that how an organization creates,
delivers, and captures value.
 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.
 It’s 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.
 An example is Apple and in particular the Apple App Store. As of
May 2015, more than 500,000 apps were available through the
Apple App Store, created by over 50,000 developers. It’s a win-
win situation for both Apple and the developers.
 When partners abandon a company the opposite can
happen to its business model and future prospects.
 For example, the newspaper industry is suffering from the shift in
readership from print to online, which has caused a number of the
industry’s advertisers and partners to shift their advertising dollars
to digital news providers and aggregators.

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 Business Models
 There is no standard business model, no hard-and-fast
rules that dictate how a firm in a particular industry
should compete.
 In fact, it’s dangerous for the entrepreneur launching a new venture to
assume that the venture can be successful by simply copying the
business model of another firm—even if that other firm is the industry
leader. This is true for two reasons.
o First, it is difficult to precisely understand all of the components
of another firm’s business model.
o Second, a firm’s business model is inherently dependent on the
collection of resources it controls and the capabilities it
possesses.
o However, over time, the most successful business
models in an industry predominate.
 Business Models
 To achieve long-term success though, all business
models need to be modified across time. The reason
for this is that competitors can eventually learn how
to duplicate the benefits a particular firm is able to
create through its business model.
 In the late 2000s, for example, financial returns
suggested that competitors such as Hewlett-Packard had
learned how to successfully duplicate the benefits of Dell
Inc.’s “build-to-order” (BTO) business model.
 A business model innovation, refers to a business
model that revolutionizes how a product is
produced, sold, or supported after the sale. 5
 Dell’s Business Model
Dell’s Approach to Selling PCs versus Traditional Manufacturers
 Business Models

 A firm’s business model is developed after the

feasibility analysis stage of launching a new
venture.
o The business model stage addresses;
 how to surround it with a core strategy,
 a partnership model,
 a customer interface,
 distinctive resources,
 and an approach to creating value that represents a viable
business.
8
 How Business Models Emerge

 The Value Chain

 A value chain is a set of activities that a firm operating in a
specific industry performs in order to deliver a valuable product or
service for the market.
 The value chain is the string of activities that moves a product
from the raw material stage, through manufacturing and
distribution, and ultimately to the end user.
 By studying a product’s or service’s value chain, an organization
can identify ways to create additional value and assess whether it
has the means to do so.
 Value chain analysis is also helpful in identifying opportunities for
new businesses and in understanding how business models
emerge.
The Value Chain
How Business Models Emerge

 The Value Chain

 Entrepreneurs look at the value chain of a product or a
service to pinpoint where the value chain can be made
more effective or to spot where additional “value” can be
added.
 This type of analysis may focus on:
 A single primary activity such as marketing and
sales.
 The interface between one stage of the value chain

and another, such as the interface between

operations and outgoing logistics.
 One of the support activities, such as human

resource management.
The Most Common Types of Business Partnerships
13
The Open Handset Alliance (OHA) is a consortium of 84 firms to
develop open standards for mobile devices. The OHA was established on
5 November 2007, led by Google. OHA members are contractually
forbidden from producing devices that are based on incompatible forks
of Android.

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 "Our business concept is to give the customer
unbeatable value by offering fashion and
quality at the best price,"
 Walk into a trendy Soho boutique in New York City and you
might see high-fashion T-shirts selling for $250. Go into an
H&M clothing store and you can see a version of the same style
for $25.
 Hennes & Mauritz (H&M) is a Swedish multinational retail-
clothing company, known for its fast-fashion clothing for men,
women, teenagers and children.
 H&M exists in 57 countries with over 3,500 stores and as of
2015 employed around 132,000 people. The first store was
opened on the high street of Västerås, Sweden in 1947.
 It is ranked the second largest global clothing retailer, just
behind Spain-based Inditex (parent company of ZARA), and
leads over third largest global clothing retailer, United States
based GAP Inc.
 The reason H&M has reached this point while so many other
stores—is that the company has a clear mission and the creative
marketing strategies and concrete plans with which to carry it
out. H&M is able to put products out quickly and inexpensively
by:
 having few middlemen, owning no factories and buying
large volumes
 having a great knowledge of which goods should be bought
from which markets
 having efficient distribution systems
 being cost-conscious at every stage
Types of Business Model
Disintermediation Business Model
 Disintermediation is the
removal of intermediaries in a
supply chain, or "cutting out
the middleman". Instead of
going through traditional
distribution channels, which
had some type of intermediate,
companies may now deal with
customers directly. One
important factor is a drop in
the cost of servicing customers
directly.
 Dell’s Business Model

• Almost all firms partner with

others to make their business
models work.
• In Dell’s case, it needs the
cooperation of its suppliers,
customers, and many others to
make its business model
possible.
Bricks and Mortar Business Model
 Bricks and mortar: “Traditional”
organizations that have physical
operations and locations and don’t
provide their services exclusively
through the Internet.
Bricks and Clicks Business Model
Bricks and clicks: Organizations that have
hybrid operations. Also known as click and
mortar
Pure Play Business Model
Pure play: Firms with no stores, providing their services
exclusively through the Internet.
 Bait and Hook Model
 The bait and hook business model
(also called razor and blades
business model) is founded on the
premise that a company can
stimulate consumer excitement and
interest by giving away freebies, or
offering a basic product or service
at a very low price (the bait), and
then taking profit on recurrent
sales of refills or associated
products or services (the hook).
Subscription Business Model
 The subscription business model is
a business model where a customer
must pay a subscription price to have
access to the product/service. The
model was pioneered
bymagazines and newspapers, but is
now used by many businesses and
websites.
 Freemium is a pricing strategy by
which a product or service is
provided free of charge,
but money (premium) is charged
for advanced features or functionality.
 Franchising
 Franchising is the practice of selling
the right to use a firm's successful
business model.
 the franchise is an alternative to The parent
building "chain stores" to distribute company also
goods that avoids the investments and provides the
liability of a chain.. franchisee with
 A parent company allows support, including
entrepreneurs to use the company's advertising and
strategies and trademarks; in training, as part of
exchange, the franchisee pays an the franchising
initial fee and royalties based on agreement.
revenues.
 Brokerage Business Model
 The brokerage business model is used by companies
that act as third parties or "middle men" between the
seller and the purchaser of the product. This model
is actively used in the real estate business, stock
market trading and business-to-business trading like
mergers and acquisitions.
Manufacturer/Merchant Model
 This is one of the oldest and most common business models
in existence. In this model, a manufacturer simply sells the
goods he creates directly to consumers or sells them to a
merchant who then offers them to consumers for a slightly
higher price, thereby collecting a profit.
 Category Killer
 A product, service, brand, or company etc.,
that dominates a merchandise or service category
and has almost no competition.these have such a
distinct sustainable competitive advantage
through their business model that competing firms
find it almost impossible to operate profitably in
that industry (or in the same local area).
 Business Model Innovation
When the game gets tough, change the game .

 Business model innovation (BMI) refers to a

business's attempt to reinvent itself in order to
obtain a competitive edge and stimulate company
growth.
Business Model Innovation

Netflix is an example of
a business model
innovator.
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 Netflix, Inc. is an American media-services provider headquartered in Los
Gatos, California, founded in 1997 by Reed Hastings and Marc Randolph in
Scotts Valley, California. The company's primary business is its subscription-
based streaming media service which offers online streaming of a library of
films and television programs, including those produced in-house. As of
October 2018, Netflix has 137 million total subscribers worldwide, including
58.46 million in the United States.
 Netflix's initial business model included DVD sales and rental by mail, but
Hastings jettisoned the sales about a year after the company's founding to focus
on the DVD rental business. Netflix expanded its business in 2007 with the
introduction of streaming media while retaining the DVD and Blu-ray rental
service. The company expanded internationally in 2010 with streaming
available in Canada, followed by Latin America and the Caribbean. Netflix
entered the content-production industry in 2012. Netflix has greatly expanded
the production and distribution of both film and television series since 2012,
and offers a variety of "Netflix Original" content through its online library. By
January 2016, Netflix services operated in more than 190 countries.[14] Netflix
released an estimated 126 original series and films in 2016, more than any other
network or cable channel. 28