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LAUNCHING NEW VENTURES – AN ENTREPRENEURIAL APPROACH, 7E
Kathleen R. Allen
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Developing and Testing a Business Model
Chapter 5
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter ObjectivesExplain what a business model is
and what it accomplishes.Discuss the process for developing
and testing a business model.Explore how to innovate a business
model.
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Developing andTesting a Business Model
Much thought and effort are required before a company’s products or services reach the market. Drucker asks:◦What is our mission?◦Who is our customer?◦What does our customer value?◦What are our results?◦What is our plan?
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1 Understanding the Business Model
The term “business model” can mean:◦ The activities or tasks a business undertakes◦ A blueprint for running a business
The business model reflects the strategic decisions and trade-offs that entrepreneurs make to earn a profit
A successful venture creates value by differentiating itself from competitors and/or by meeting an unserved need in the market
Creation and capture of value take place within the value network
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5.1- The Components of the Business Model
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1a Value PropositionThe value proposition is the benefit
that the customer derives form the product or service you are offering; it is the reason the customer will buy◦The unique mix of product, price,
service, relation, and image that a company offers to a group of targeted clients
◦You need to identify a need or “pain” that customers are experiencing
◦Don’t confuse features with benefits– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Table 5.1- Features v. Benefits…
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1b Customer Segments Who is the customer? – a vital
questionMany entrepreneurs assume their
customer is the user of the product or service they offer, but in many industries it is not. ◦Example: Jordan NeuroScience (which
remotely monitored brainwaves of trauma patients in ERs) customers were not the patients, nor doctors, but hospital administrators who made the purchasing decision
◦That revelation changed their business model
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5.2- Customer Segmentation Matrix
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1c Distribution ChannelsThe distribution channel answers the
question, “How do you deliver the benefit to the customer?” ◦Many options, but the best is the one
that fulfills the customer’s expectations about where and how they want to purchase
◦Most services delivered direct to customers, but products often go through channel intermediaries (distributors and retailers)
◦There are pros and cons in going direct– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Table 5.2- Direct to the Customer…
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1d Strategic PartnersCommon today for startups to
partner with existing companies to tap into expertise and resources the entrepreneur doesn’t have◦One example is the buyer-supplier
relationship, used to reduce costs or share facilities like manufacturing or warehousing
◦Partnerships may involve competitors sharing resources in one area while competing in another
◦Some partnerships involve licensing intellectual property rather than developing it in-house
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1e Business Activities and Resource Requirements
Business activities could involve manufacturing, distribution, R&D, or a network or technology platform
Each type of business has different functions and unique resource requ9irements critical to delivering the value proposition
Resources include human, physical, intellectual and capital
Some businesses more automated – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1f Revenue SourcesImportant component of business
model is to identify revenue streams:◦Subscription or membership◦Volume or unit-based◦Licensing and syndication◦Transaction fee◦Advertising
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1g Cost DriversEqually important are expenses and
cost drivers:◦Marketing or advertising cost structure◦Inventory cost structure◦Office or retail space cost structure◦Support center cost structure◦Direct cost structure
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1h Why Business Models FailFour major reasons for failure:
◦Flawed Logic◦Limited Strategic Choices◦Imperfect Value Creation & Capture
Assumptions◦Incorrect Assumptions about the Value
Chain
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.1i When Business Models Change
1. Incrementally expand2. Revitalize an established model3. Take an existing model into new
areas4. Add new models via acquisition5. Use existing core competencies to
build new business models
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.2 Testing and ValidatingBusiness Model Feasibility
Feasibility analysis involves the testing, evaluation and validation of a proposed business model for a new venture◦A tool used to assess and reduce risk at
startup: Customer Size of market Technical feasibility of the product Feasibility of the business model Ability of founding team to successful
execute the business model– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.2a Developing and Testing HypothesesBegin with educated guesses
(hypotheses)Decide how to test themIn addition, business factors:
◦1. Is there a customer and market of sufficient size to make the concept viable, able to grow?
◦2. Do the capital requirements to start and operate to a positive cash flow make sense?
◦3. Can an appropriate startup or founding team be assembled to effectively execute the concept?
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5.3- Initial Unvalidated Business Model for…App
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5.4- Validating the Business Model
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.2b Considering the Impact of the Macro EnvironmentFactors outside the control of the
entrepreneur also impact the business model:◦1. Industry factors and trends◦2. market factors and trends◦3. global economic factors
No business model completely survives first contact with the market or industry
Even effective models must change over time
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5.5- Macro Environmental Factors and the Business Model
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5.6-Taleb’s Risk Barbell
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.3 Innovating with Business Models
View the uncertainty of the future as an opportunity to find new places to compete; known as the “blue ocean strategy” seeking the white spaces where no one is playing◦1. Eliminate something that the industry
has traditionally done◦2. Reduce something below the industry
standard◦3. Raise something above the industry
standard◦4. Create something the industry has
never done
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.3a When the CustomerDoesn’t Want to Pay
Many social networking sites provide a two-sided platform where users can upload and edit content and share with others◦Content contributed freely, so how to
entrepreneurs monetize the platform?◦Advertising, the basic model, has come
under attack by advertisers and usersLinkedIn uses a freemium model
◦People use for free, pay for premium features
Sponsors may provide resources– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.3b Facing Dominant PlayersStartups often try to compete for
value with large, established firmsHow do they capture value in the
industry?◦An R&D company might license its
patents. This model is lowest-risk, but with fewest rewards
◦An engineering design company would develop customized solutions for its customers; but risk to its intellectual property, and value to customer is greater than for startup
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.3b Facing Dominant Players◦A device manufacturing firm is an
integrated position that would require the startup to control most points in the value chain as it sells finished product to its customers. It could capture most of the value, but at high capital expenditures it may not be able to afford
Each position has pluses and minuses, and long term ramifications
Dominant players may seek to acquire the startup before the initial phase ends
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5.7-Simple Value Chain for Devices
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5.4 Drawing Conclusions from Feasibility Analysis
Most products in common use today were originally though to be infeasible
So how does an Entrepreneur determine whether a new business concept is feasible when research is done and tested?◦Each step in the analysis provides
information, and the entrepreneur can make a judgment about whether to proceed
◦Also ask whether the business satisfies your personal needs and goals
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 5.8- Entrepreneur’s Business Model Canvas
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New Venture Action PlanDevelop your initial hypotheses
about the components of the business model
Design experiments to test your hypotheses
Make change in your business model to reflect what you’ve learned
– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.