Chapter 6

Developing an Effective Business Model

Bruce R. Barringer
R. Duane Ireland
 Chapter Objectives
1 of 2

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.

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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
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• Beyond Its Own Boundaries

– 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 work.
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 Dell’s Business Model
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Dell’s Approach to
Selling PCs

versus

Traditional
Manufacturers

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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
Business Models  However, over time, the most successful
business models in an industry predominate and
sustain while the weaker models lag behind

 There are always opportunities for business

model innovation. e.g. Brick only to Click only

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 How Business Models Emerge
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• The Value Chain (a diagnostic tool)

– 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

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How Business Models Emerge
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The Value Chain

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 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 a business model unsustainable

from the beginning:

• A complete misread of the customer (responsiveness and

efficiency)

• Utterly unsound economics (high investment and low profit

models)

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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
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Primary Elements of Core Strategy

A firm’s mission, or mission statement,

Mission
describes why it exists and what its business
Statement
model is supposed to accomplish.
(reason for existence)

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

Scope the products and markets on which it will
concentrate. (value to be delivered)

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 Core Strategy
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Primary Elements of Core Strategy

It is important that a new venture
differentiates itself from its competitors in
some way that is important to its customers.
If a new firm’s products or services aren’t
Basis of different from those of its competitors, Why
Differentiation should anyone try them?

Cost leadership
A specific niche
Innovation

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 Components of a Business Model

Four Components of a Business Model

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 Strategic Resources
1 of 4

• Strategic Resources

– A firm is not able to implement a strategy without resources, so

the resources a firm has affect 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 / Unique resources

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 Strategic Resources
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Primary Elements of Strategic Resources

Core competences are the skills and abilities by which

resources are deployed through an organisation’s activities and
Core processes such as to achieve competitive advantage in ways
Competencies that others cannot imitate or obtain.
Examples include Honda’s competence in efficient engines
and Dell’s competence in supply chain management. (ability to
use strategic resources)
Strategic Strategic assets are anything rare and valuable that a firm owns.
Assets/Unique They include plant and equipment, location, brands, patents,
Resources customer data, a highly qualified staff, and distinctive
partnerships.

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 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 to 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 (ability to use is essential)

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 Components of a Business Model

Four Components of a Business Model

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 Partnership Network
1 of 3
• Partnership Network

– 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. (However,
occasionally, a non core activity can also give 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 supplier for computer chips.

Firms partner with other companies to make their

business models work. An entrepreneur’s ability
Other Key to launch a firm that achieves a competitive
Relationships advantage may depend as much on the skills of
the partners as on the skills within the firm itself.
(Indirect channels and intermediaries)

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 Partnership Network
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Consortium It  is an association of two or more individuals, companies, organizations or any

combination of these entities with the objective of participating in a common
activity or pooling their resources for achieving a common goal. (May lead to a
joint venture) – it is not a separate entity with a separate legal management
structure etc as in case of JV.
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 Components of a Business Model

Four Components of a Business Model

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 Customer Interface
1 of 3

• Customer Interface

– The way a firm interacts with its customer depends upon 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 its customers.
and Support

It also refers to the channels a company uses and

what level of customer support it provides.

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 Customer Interface
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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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publishing as Prentice Hall

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