Chapter 6

Developing an
Effective Business
Model

6-1
 Chapter Objectives

1. Describe a business model.

2. Explain business model innovation.
3. Discuss the importance of having a clearly
articulated business model.
4. Discuss the concept of the value chain.
5. Identify a business model’s two potential fatal
flaws.

6-2
 Chapter Objectives

6. Identify a business model’s four major

components.
7. Explain the meaning of the term business
concept blind spot.
8. Define the term core competency and describe
its importance.
9. Explain the concept of supply chain
management.
10. Explain the concept of fulfillment and support.

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 What is a Business Model?
• Model
– A model is a plan or diagram that’s used to make or
describe something.
• 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.
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 Dell’s Business Model

• 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
possible.
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 Dell’s Business Model
Dell’s Approach to Selling PCs versus Traditional
Manufacturers

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 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.
• 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
all employees.

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 Diversity of Business Models
• There is no standard business
model for an industry or for
a target market within an
industry.
Diversity or
• However, over time, the most
Variety in successful business models
Business in an industry predominate.
Models • There are always opportunities
for business model innovation.

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Business Model Innovation

Netflix is an example
of a business model
innovator.

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 How Business Models Emerge
• The Value Chain
– 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.
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How Business Models Emerge
The Value Chain

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 How Business Models Emerge
• 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.
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 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.

Pets.com sported an
unsound business model,
and failed. 6-13
Components of a Business Model
Four Components of a Business Model

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 Core Strategy
• 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.

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 Core Strategy
Primary Elements of Core Strategy

A firm’s mission, or mission statement,

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

Product/Market A company’s product/market scope

Scope defines the products and markets on
which it will concentrate.

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 Core Strategy
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
Differentiation customers. If a new firm’s products or
services aren’t different from those of its
competitors, why should anyone try
them?

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 Strategic Resources

• Strategic Resources
– A firm is not able to implement a strategy without
resources, so the resources a firm has affects 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.
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 Strategic Resources
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
Competencie competence in miniaturization and Dell’s
s competence in supply chain management.

Strategic assets are anything rare and valuable

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

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 Strategic Resources

• 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
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.
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 Partnership Network

• 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.
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 Partnership Network
Primary Elements of Partnership Network

A supplier is a company that provides

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

Firms partner with other companies to make

their business models work. An
Other Key entrepreneur’s ability to launch a firm that
Relationsh achieves a competitive advantage may hinge
ips as much on the skills of the partners as on
the skills within the firm itself.
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 Partnership Network
The Most Common Types of Business
Partnerships

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 Customer Interface

• 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.
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 Customer Interface
Primary Elements of Customer Interface

A firm’s target market is the limited

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

Fulfillment and support describes the way a

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

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 Customer Interface
Primary Elements of Customer Interface

The third element of a company’s

customer interface is its pricing
Pricing
structure. Pricing models vary,
Structure
depending on a firm’s target market
and its pricing philosophy.

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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.
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