Entrepreneurship and

Innovation
Chapter 4: Developing An Effective Business Model
 1. Business models and their importance.
2. Two general types of business models—standard and
disruptive models.
Chapter's Learning
3. Components of the Barringer/Ireland Business Model
objectives Template that entrepreneurs can use to develop a
business model for their firm.
Chapter 4: Developing An Effective

Business Model
Business Model And Their Importances
Business Models
• A business model is a firm’s plan or recipe for how it creates, delivers, and captures value for
its stakeholders.
• The proper time to develop a business model is following the feasibility analysis stage and
prior to fleshing out the operational details of the company.
• A firm’s business model is integral to its ability to succeed both in the short and long term.

Fleshing out the

Initial validtaion of Preparation of the
operational details of
the business idea Business model
the company
Chapter 4: Developing An Effective

Business Model
Two general types of business models—standard and disruptive
models.
Standard Business Models
• The first category is standard business models.
• Standard business models depict existing plans or recipes firms can use to
determine how they will create, deliver, and capture value.
• There are a number of standard or common business models, which are
shown on the next two slides.
• Several standard Business Models are illustrated in the next slide
 Business Model Description Representative Companies
Advertising Business Based on providing advertisers access to highly targeted customer niches Google, Facebook
Model
Auction Business Model To provide a platform for individuals and businesses to sell items in an auction eBay, uBid.com
format
Bricks and Clicks Business Integrates both offline Apple, Barnes & Noble
Model (bricks) and online (clicks) presences
Franchise Business Model a firm that has a successful product or service (franchisor) licenses its trademark Panera Bread, 24-Hour Fitness
and method of doing business to other businesses (franchisees)
Freemium Business Model provides a basic version of its service for free, and makes money by selling a Dropbox, Pandora
premium version of the service
Low-Cost Business Model Relies on driving down costs and making money by servicing a large number of Southwest Airlines, Walmart
customers
Manufacturer/Retailer Produces and sells (online, offline, or both) a product Fitbit, Tesla Motors
Business Model
Peer-to-Peer A model in which a business acts as a matchmaker between individuals with a Airbnb, Uber, Task Rabbit
Business Model service to offer and others who want the service
Razor and Blades Business Sales of dependent goods for different prices—one good (a razor) is sold at a Game Consoles and Games,
Mode discount, with the dependent good (blades) sold at a considerably higher margin Mobile Phones
Subscription customer pays a monthly, quarterly, or yearly subscription fee to have access to a Birchbox, Blue Apron, Netflix
Business Model product or service
Traditional Retailer A firm sell its products or services, made by others, directly to consumers at a Amazon, Whole Foods
Business Model markup from the original price. Can be sold online or offline Markets, Zappos
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.
• They are impactful enough that they disrupt or change the way business is
conducted in an industry or an important niche within an industry.
• Types of disruptive business models:

New market Low-end market disruption: a firm

disruption: Disrupt that improve its solutions to provide
a previously the better sizable portion of their
unserved market clients' needs and desire

• The next slides depict four business models that were disruptive when they
were introduced.
 Disruptive Business Model Standard Business Model That Was Disrupted Company or Companies That
Introduced It
Direct-to-Consumer Computer Sales (which allowed Computers that were assembled, shipped to a Dell
consumers to customize their computers) store, and then sat on shelves until someone
bought them. No customization was possible
because the computer was assembled before
the customer bought it
Online Text Ads on Search Engines (allowed advertisers Traditional banner advertising, provided by Yahoo, Google
to place ads for products that searchers were already companies such as Yahoo. Some services
searching for) required a minimum $10,000 ad buy for a
company to advertise on the Internet
Software as a Service (SaaS) (By moving software to the Traditional installed CRM software, which Salesforce.com
cloud, allowed users to access the software and their required large licensing fees, provided by
data from anywhere there was an Internet connection) vendors such as Siebel Systems and PeopleSoft
Quickly connects riders with the owners of private cars Local taxis and town-car services Uber
who are willing to provide rides
First company to provide riders with an app that
connects them with the owners of private cars who are
willing to provide rides.
Advantages include: cleaner cars, avoiding the
frustration of trying to hail a cab, direct billing via Uber
so no money changes hands between the passenger and
driver, and Uber knowing the location of the nearest
driver so pickup time is often reduced.
Chapter 4: Developing An Effective

Business Model
The Barringer/Ireland Business Model Template
The Barringer/Ireland Business Model
• Not everyone agrees precisely on the components of a business model.
• However, many agree that a successful business model has a common set of
attributes.
• One widely-used framework is the Business Model Canvas, popularized by
Alexander Osterwalder and Yves Pigneur in their book, Business Model
Generation
• The Barringer/Ireland Business Model is slightly more comprehensive
than the Business Model Canvas in that it consists of 4 major categories
and 12 individual parts
• The Barringer/Ireland Business Model Template is shown in the next slide.
 Core Strategy Resources
Business Mission Basis of Differentiation Core Competency Key Assets

The
Barringer/ Target Market Product/Market Scope

Ireland
Business
Model
Template Financials
Revenue Streams
Operations
Product/Service
production
Channels

Cost Structure Financing/Funding

Key Partners
Core Strategy
• The first component of the 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: Core Strategy
Business Mission Basis of Differentiation
 Business Mission
 Basis of Differentiation
 Target Market
Target Market Product/Market Scope
 Product/Market Scope
Core Strategy
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 well-written mission statement is something
that a business can continually refer back to as it makes important decisions in
other elements of its business model.
• The mission statement sould emphasize:
• 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”
Core Strategy
Basis of Differentiation
• It’s important that a business clearly articulate the points that differentiate its
product or service from competitors.
• 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.
• It is best to limit a company’s basis of differentiation to two to three key points.
• Make sure that your points of differentiation refer to benefits rather than features.
Core Strategy
Target Market
• The identification of the target market in which the firm will compete is extremely
important.
• A target market is a place within a larger market segment that represents a
narrow group of customers with similar interests.
• A firm’s target market should be made explicit in the business model template.
• The target market should focus more on the customers' groups psychographic,
not demographic
Core Strategy
Product/Market Scope
• A company’s product/market scope defines the products and markets on which it
will concentrate.
• Most firms start with a narrow product/market scope, and pursue adjacent
product and market opportunities as the company grows.
• In completing the business model template, a company should be very clear
about its initial product/marketExample:
scope and project 3-5 years for future expansion.
the product/market scope of Dropbox:
• Launch—Single product/Silicon Valley tech-savvy users
• 1–2 years into existence—Single product/Growing number of Silicon
• Valley tech-savvy users and people they told about the service
• 3 years into existence—Single product/All computer and Internet
users
• 4 years into existence—Two products/All computer and Internet
users
• 5 years into existence—Four products/All computer and Internet
users
• 6 years into existence—Six products/All computer and Internet
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.
• A firm’s most important resources, both tangible and intangible, must be
both difficult to imitate and hard to find a substitute for. Resources
• Resources are developed and accumulated over time. Core Competency Key Assets
Resources
Core Competencies
• A core competency is a specific factor or capability that supports a firm’s
business model and sets it apart from 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.
• A firms' 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.
Example
• Most start-ups should have two of IndieU's
to three core core competencies:
competencies.
• Connecting independent, unsigned musicians to colleges and
college students
• Recruiting and managing a volunteer network
• Recruiting independent, unsigned musicians to place songs on the
firm’s website
Resources
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: physical space, equipment, vehicles, and distribution
networks.
• Intellectual assets: patents, trademarks, copyrights, and trade secrets,
along with a company’s brand and its reputation.
• Financial assets: cash, lines of credit, and commitments from investors.
• Human assets: company’s founder or founders, its key employees, and
its advisors. Example of IndieU's core competencies:
• Connecting independent, unsigned musicians to colleges and
college students
• Recruiting and managing a volunteer network
• Recruiting independent, unsigned musicians to place songs on the
firm’s website
Financials
• The third component of a firm’s business model focuses on its financials.
• This is the only section of a firm’s business model that describes how it earns
money.
• For most businesses, the manner in which it makes money is one of the most
fundamental aspects of its business model.
Financials
Revenue Streams

Cost Structure Financing/Funding

Financials
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.
• For example, most restaurants have a single revenue stream. Their
customers order a meal and pay for it. Other restaurants may have several
revenue streams—including meals, a catering service, product sales (such as
bottle barbeque sauce for a barbeque restaurant)…
• The most common revenue streams will be illustrated in the next slide
Financials
Revenue Streams Description
Advertising Revenue generated from advertising a particular product or service in a newspaper, magazine, website,
or in some other manner.
Commissions Revenue generated by bringing two parties together to complete a sale. Etsy and eBay generate revenue
in this manner. The money usually comes from taking a small percentage of the sale price
Download Fee Revenue generated by allowing a user to download a digital product, such as a smartphone app, an e-
book, or a software product
Licensing Revenue generated from charging for the use of a protected intellectual property, such as a software
product
Matchmaking Revenue generated by matching someone who wants temporary access to an asset or competency with
someone who owns an asset or has a competency and is willing to make it available. This is how peer-to-
peer networks work. Examples include Airbnb, TaskRabbit, and Uber
Product Sale Selling a physical good
Renting/Leasing Renting or leasing an asset such as a rental car, a copy machine, or a piece of specialized machinery.
Service Sale Selling a service
Subscription Service Selling a subscription
Financials
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, and acquire/develop key assets,
• The goal is to identify whether the business is cost-driven or value-driven:
• Cost-driven businesses focus on minimizing costs wherever possible
• Value-driven business models focus on offering a high-quality product
(or experience) and personalized service.
• Two types of cost:
• 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
• Define the business major's cost categories: the most important part of the
Financials
Financing/Fundings
• Many business models rely on a certain amount of financing or funding to
bring their business model to life.
• Requires a projection of the amount of money that is needed.
• There are three categories of costs to consider:
Provisions for other
Capital costs One-time expenses
expenses

• Some entrepreneurs are able to draw from personal resources to fund their
business.
• In many cases, an initial infusion of funding or financing is needed.
• The business model template should indicate the amount of funding that will
be needed and where the money will most likely come from.
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.

Operations
Product/Service Channels
production

Key Partners
Operations
Products/Service Production
• This section focuses on how a firm’s products and/or services are produced.
This decision has a major impact on all aspects of a firm’s business model.
• For example:
• If a firm sells a physical product, the product can be produced in-house,
by a contract manufacturer, or via an outsource provider.
• For services – a brief description of how the service will be produced.

Rover.com service description:

Rover.com will connect dog owners and dog sitters via a website.
The dog sitters will be screened to ensure a quality experience.
Customer support will be provided 24/7 to troubleshoot any
problems that occur. Pet insurance is provided that covers any
medical bills that a dog has while in the care of a Rover.com sitter
Operations
Channels
• A company’s channels describe how it delivers its product or service to its
customers.
• Businesses either sell direct, through intermediaries (such as distributors and
wholesalers), or via a combination of both.
• Some firms employ a sales force that calls on potential customers to try to
close sales. This is an expensive strategy but necessary in some instances.
 Operations
Key partners
• Start-ups usually do not have sufficient resources to perform all the tasks
necessary to make their business models work
• Need to rely on key partners to perform important roles.
• The most common types of business partnerships
Partnership form Description
Joint venture An entity created by two or more firms pooling a portion of their resources to create a separate, jointly-owned
organization
Network A hub-and-wheel configuration with a local firm at the hub organizing the interdependencies of a complex array of firms
Consortia A group of organizations with similar needs that band together to create a new entity to address those needs
Strategic alliance An arrangement between two or more firms that establishes an exchange relationship but has no joint ownership
involved
Trade Associations Organizations (typically nonprofit) that are formed by firms in the same industry to collect and disseminate trade
information, offer legal and technical advice, furnish industry-related training, and provide a platform for collective
lobbying
TOMS’ One-for-One
Business Model:
Is it Sustainable for
the Future?

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Thank you!