Chapter 6

Developing an
Effective Business
Model
Saira Sanawar

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 Chapter Objectives
1 of 2

1. Describe a business model.

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

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 Chapter Objectives
2 of 2

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
1 of 2

• 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
2 of 2

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(compose) 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 Variety in
• However, over time, the most
Business Models successful business models
in an industry predominate.
• There are always opportunities
for business model innovation.

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Business Model Innovation

Netflix is an example of
a business model
innovator.

Case Study:

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 How Business Models Emerge
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• 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
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The Value Chain

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 How Business Models Emerge

• The inbound logistics that are necessary for our

company's survival was transported into the company
warehouse through the use of trucks.
• Outbound logistics is the process of storing,
transporting and distributing goods to customers.
 How Business Models Emerge
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• 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(provide) a business model
untenable (not able to be maintained) from the beginning:
• A complete misread of the customer.
• Utterly(absolutely) unsound(broken,unsafe) economics.

Pets.com sported an unsound

business model, and failed.

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Components of a Business Model

Four Components of a Business Model

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 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.

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 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 suppose to accomplish.

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

Scope products and markets on which it will
concentrate.

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 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?

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 Strategic Resources
1 of 3

• Strategic Resources
– A firm is not able to implement a strategy without
resources, so the resources a firm has affects its business
model substantially(significantly).
• 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
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Primary Elements of Strategic Resources

A core competency is a resource or capability that

Core
serves as a source of a firm’s competitive advantage.
Competencies
Examples include Dell’s competence in supply chain
management .

Strategic Strategic assets are anything rare and valuable that

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

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 Dell’s competence in supply chain
management .
• Undoubtedly, Dell is a benchmark(standard) in
apotheosis(climax) in lean (move into slope position)
inventory and manufacture. First, they focus on very
detail in logistics to ensure the
raw material arriving in factories as fast as possible.
Second, they keep tracking the purchasing patterns
and forecast demand three times a day. Third, choose
suppliers who are willing to store inventories for
them.
 Strategic Resources
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• 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(copy).
– This type of advantage is achievable when a firm has
strategic resources and the ability to use them.

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 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.

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 Partnership Network
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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 to
Other Key launch a firm that achieves a competitive
Relationships advantage may hinge(attach, join) as much on the
skills of the partners as on the skills within the firm
itself.

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 Partnership Network
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The Most Common Types of Business Partnerships

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 Customer Interface
1 of 3

• Customer Interface
– The way a firm interacts with its customer hinges(attach,
join)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
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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 it customers. It also refers
and Support to the channels a company uses and what level of
customer support it provides.

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 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.

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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(overall: means whole parts not separate) 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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 Practical Tool
• Microsoft Office Visio Professional 2007
• The first main objective of Visio Professional process flow mapping
is for organizations to gain an understanding of all of the steps
involved in a particular process. A Visio Professional process flow
map is traditionally drawn on a large sheet of paper; these days,
software programs are available. The visual illustration helps
companies understand what steps are involved in each process. It
also helps them visualize how each step works together with other
step within the same process. A Visio Professional process flow map
is shared with employees to teach them about the steps and how
each step fits in to the process.
• Download this software and install on your systems.