Developing an Effective

Business Model

Chapter 4

4-1
Model?
• Model
• A model is a plan or diagram that’s used to make or
describe something.

4-2
What is a Business Model?

• A business model is a firm’s plan or recipe for how it creates,

delivers, and captures value for its stakeholders.

4-3
Business Model?
• 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.
• (Look at the different standard models on the next
slide)

4-4
4-5
4-6
Churn

• Churn is the measure of how many customers stop

using a product. This can be measured based on
actual usage or failure to renew (when the product is
sold using a subscription model). Often evaluated for a
specific period of time, there can be a monthly,
quarterly, or annual churn rate.
• Example: Telecomn

4-7
Disruptive

• Disruptive: A break or interruption in the normal course or

continuation of some activity or process.

4-8
Disruptive Technologies

• Disruptive Technologies : An innovation i.e. (interruption) that

significantly alters the way that (consumers, industries or business)
operate due to new emerging technologies that creates new
products, services and markets
- Netflix, Uber, Digital Photography
• Disruptive business models, which are rare, are models 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.

4-9
Disruptive Business Models (cont.)

• A new market disruption addresses a market that previously wasn’t

served. Examples:
• New-Market Disruption, Personal
Computers and Smartphones. Two
examples of new-market disruption
outlined in Disruptive Strategy are the
emergence of personal computers and,
later, smartphones.
• Google AdWords program (Table 4.2)
• Salesfroce.com (Table 4.2)

4-10
4-11
Dell’s Business Model
1 of 2

• Beyond Its Own Boundaries

• 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.
• In Dell’s case, it needs the cooperation of its suppliers,
customers, and many others to make its business model
work.

4-12
Dell’s Business Model
2 of 2

Dell’s Approach to Selling PCs versus Traditional Manufacturers

(next slide)

4-13
The Importance of Business Models
Having a clearly articulated business model is important
because it does the following:

• Serves as an ongoing extension of feasibility analysis. A business

model continually asks the question, “Does this business make
sense?”
• Focuses attention on how all the elements of a business fit
together and constitute a working whole i.e. (system).
• Describes why the network of participants needed to make a
business idea viable are willing to work together.
• Articulates a company’s core logic to all stakeholders, including
the firm’s employees.
4-15
Diversity of Business Models

• There is no standard business

model for an industry or for
a target market within an
Diversity or Variety in industry.
• However, over time, the most
Business Models successful business models
in an industry predominate.
• There are always
opportunities
for business model innovation.

4-16
How Business Models Emerge
1 of 3

• The Value Chain

i. 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.
ii. 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.
iii. Value chain analysis is also helpful in identifying
opportunities for new businesses and in
understanding how business models emerge.

4-17
How Business Models Emerge
2 of 3

The Value Chain

4-18
How Business Models Emerge
3 of 3

• The Value Chain (continued)

• 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.

4-19
Potential Fatal Flaws in Business Models

• Fatal Flaws
• Two fatal flaws can render a business model untenable
from the beginning:
• A complete misread of the customer
• Utterly unsound economics

4-20
Churn

• Churn: Refers to the number of subscribers that a subscription-based

business loses each month (specific period of time)
• A high churn rate means that customers are not loyal to
the brand.
• Telecommunications companies are a classic example
of high churn rates, sometimes exceeding 25%.
•

4-21
Pareto's Principle (80-20 Rule)

• The Pareto principle states that for many outcomes, roughly 80% of
consequences come from 20% of causes.
• In other words, a small percentage of causes have an outsized effect. This
concept is important to understand because it can help you identify
which initiatives to prioritize so you can make the most impact.

4-22
Components of a Business Model
(Four Components)

4-23
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

4-24
Core Strategy
2 of 3

Primary Elements of Core Strategy

A firm’s mission, or mission statement,

Mission
describes why it exists and what its business
Statement
model is supposed to accomplish.

Product/Market A company’s product/market scope defines

Scope the products and markets on which it will
concentrate.

4-25
Core Strategy
3 of 3

Primary Elements of Core Strategy

It is important that a new venture

differentiate itself from its competitors in
Basis of some way that is important to its customers.
Differentiation If a new firm’s products or services aren’t
different from those of its competitors, why
should anyone try them?

4-26
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

4-27
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
Core advantage. Examples include Sony’s competence
Competencies in miniaturization and Dell’s competence in
supply chain management.

Strategic assets are anything rare and valuable that a

firm owns.
Strategic
Assets They include plant and equipment, location, brands,
patents, customer data, a highly qualified staff, and
distinctive partnerships.

4-28
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.

4-29
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 key relationships

4-30
Partnership Network
2 of 3

Primary Elements of Partnership Network

A supplier is a company that provides parts or

Suppliers services to another company. Intel is Dell’s
primary suppler for computer chips, for example.

Firms partner with other companies to make their

business models work. An entrepreneur’s ability
Other Key to launch a firm that achieves a competitive
Relationships advantage may hinge as much on the skills of the
partners as on the skills within the firm itself.

4-31
4-32
Partnership Network
3 of 3

4-33
Customer Interface
1 of 3

• Customer Interface
• The way a firm interacts with its customer 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.
• The three elements of a company’s customer interface
are:
• Target customer
• Fulfillment and support
• Pricing model

4-34
Customer Interface
2 of 3

Primary Elements of Customer Interface

Target A firm’s target market is the limited group of

Market individuals or businesses that it goes after or tries to
appeal to.

Fulfillment and support describes the way a firm’s

Fulfillment product or service reaches its customers. It also
and Support refers to the channels a company uses and what
level of customer support it provides.

4-35
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 models
Structure vary, depending on a firm’s target market and its
pricing philosophy.

4-36
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.

4-37
Bibliography

• Entrepreneurship: Successfully Launching New Ventures by Bruce Barringer

(BB) & R. Daune Ireland. 6th Edition.
• Essentials of Entrepreneurship and small Business Management by Norman M.
Scarborough (NM) 5th Edition.
• Entrepreneurship and Small Business, 3rd edition by Paul Burns.
• Who Moved Cheese by Dr Spenser Johnson
• Technology Strategy for Managers and Entrepreneurs by Scott A Shan

Updated 21-3-2023 4-38