Chapter 4. Developing an Effective Business Model

Business Models and Their Importance

A business model is a firm's plan or recipe for how it creates, delivers, and captures value for its stakeholders. As we can see in the Barringer/Ireland Business Model Template, a firm's business model represents the core aspects of its business. It also describes how the core aspects fit together and support one another. For example, three important elements of a firm's business are its target market, its basis for differentiation, and its key assets. Each element supports the others.

General Categories of Business Models

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

Standard Business Models

This type of model is used commonly by existing firms as well as by those launching an entrepreneurial venture. Standard business model depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value for their stakeholders. There are a number of standard or common business models, with the exception of the freemium model, have been in place for some time. In fact, many of the business models utilized by online firms were originally developed by offline firms, and simply transferred to the internet.

It is important to understand that there is no perfect business model. each of the standard models has inherent strengths and weakness. For example, the strength of the subscription business model is recurring revenue. The disadvantage of the subscription business model is "churn." Churn refers to the number of subscribers that subscription-based business loses each month. This is why companies that features a subscription-based business model normally offer a high level of customer service. They want to retain as high a percentage of their subscribers as they can to lower churn and avoid the expenses involved with replacing existing customers.

It is important to note that a firm's business model takes it beyond its own boundaries. The trick to getting something like this to work is to provide sufficient incentive for partners to participate. Many companies feature the participation of others as an integral part of their business models. Positive scenarios like this often allow businesses to not only strengthen but to expand their business models.

Regardless of the business model a start-up is rolling out, one thing that new companies should guard themselves against is the thinking that one particular business model is a "homerun" regardless of circumstances. The strength of the opportunity must be assessed and the feasibility of the idea must be validated.

Disruptive Business Model

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 model is conducted in an industry or an important niche within an industry.

There are types of disruptive business models:

• New Market Disruption: Addresses a market that previously wasn't served.
• Low-end Market Disruption: Low-end market 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. This "performance oversupply" creates a vacuum that provides an opportunity for simple, typically low-cost business model to exist. 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

Although not everyone agrees precisely on the components of a business model, many agree that a successful business model has a common set of attributes. These attributes are often laid out in a visual framework or template so it's easy to see the individual parts and their interrelationships. One widely-used framework is the Business Model Canvas, popularized by Alexander Osterwalder and Yves Pigneur in their book, Business Model Generation. The Business Model Canvas consists of nine basic parts that show the logic of how a firm intends to create, deliver, and capture value for its stakeholders.

The business model framework used here, the Barringer/Ireland Business Model Template is slightly more comprehensive than the Business Model Canvas in that it consists of 4 major categories and 12 individual parts. The 12 parts make up a firm's business models. The job of the entrepreneur, or team of entrepreneurs, is to configure their firm's business model in a manager that produces a viable and exciting business. The Barringer/Ireland Business Model Template is a tool that allows an entrepreneur to describe, project, revise, and pivot a business model until all 12 parts are decided upon.

Here are the 4 categories and the 12 individual elements of a firm's business model:

Core Strategy

Core strategy describes how the firm plans to compete relatives to its competitors. The primary elements of core strategy are:

• Business Mission → A business mission/mission statement describes why it exists and what its business model is supposed to accomplish. If carefully written and used properly, a mission can articulate a business overarching priorities and act as 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:

1. Define its "reason for being"
2. Describes what makes the company different
3. Be risky and challenging but achievable
4. Use a tone that represents the company's culture and values
5. Convey passion and stick in the mind of the reader
6. Be honest and not claim to be something that the company "isn't"

• Basis of differentiation → 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 or three points. Also, make sure that the value of the points is easy to see and understand. Making certain that your point of differentiation refer to benefits rather than features is another important point to remember when determining a firm's basis of differentiation. Points of differentiation that focus on features such as the technical merits of a product, are less compelling than those that focus on benefits, which is what a product can do.

• Target Market → 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. A firm's target market should be made explicit on the business model template. A target market can be based on any relevant variable, as long as it identifies for a firm the group of like-minded customers that it will try to appeal to. The target market a firm selects affects everything it does, from the key assets it acquires to the financing or funding it will need to the partnerships it forms.

• Product/Market Scope → Product/Market Scope defines the products and markets on which it will concentrate. 

Most firms starts narrow and pursue adjacent product and market opportunities as the company grows and becomes financially secure. New firms typically do not have the resources to produce multiple products and pursue multiple market simultaneously.

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. A business may need expertise in certain areas (i.e., core competencies) to understand the needs of its target market. At a deeper level a firm's most important resources, both tangible and intangible, must be both difficult to imitate and hard to find a substitute for in order for the company's business model to be competitive over the long term.
Resources are developed and accumulated over a period of time. As a current 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 bee 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. The key idea is that to be competitive a business must be particularly good at certain things, and those certain things must be supportive of all elements of its business model.

• 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.

Firms vary regarding the key assets they prioritize and accumulate. All companies require financial assets to varying degrees. 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 supports its business model as a whole. In some cases, the ongoing success of a firm's business model hinges largely on a single key resource.

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 business, 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 → Revenue Streams describes the ways in which it makes money. Some business have a single revenue streams, while others have several.

The nature of the way business make money also varies, Some business make money via one-time customer payments, while others receive recurring revenue by selling a subscription service. Some business are very creative in the ways in which they make money.

• Cost Structure → Cost Structures 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. The goal for this box in a firm's business model template is threefold:

1. Identify whether the business is a cost-driven or value-driven business
2. Identify the nature of the business's costs
3. Identify the business's major cost categories

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.

• Financing/Funding → Many business models rely on  a certain amount of financing or funding to bring their business model to life. Most business incur costs prior to the time they generate revenue.

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 →  This section focuses on how a firm's products and/or service are produced.
• Channels → Describes how it delivers its product or service to its customers. Business sell direct, through intermediaries, or through a combination of both.
• Key Partners →  The 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 the most cases, most business does not want to do everything itself because they majority of tasks needed to build a product or deliver a service are outside a business's core competencies or areas of expertise.