DEVELOPING AND TESTING A BUSINESS MODEL

1. 4 DEVELOPING AND TESTING A BUSINESS MODEL

2. Learning Objectives • Explain what a business model is and what it accomplishes. • Discuss the process for developing a business model. • Explore the testing of a business model through feasibility analysis.

3. The Business Model • Peter Drucker’s 5 questions form the basis for development of the business model: • What is our mission? • Who is our customer? • What does our customer value? • What are our results? • What is our plan?

4. Business Model Components Table 4.1

5. Why Business Models Fail • Flawed logic • Limited strategic choices • Imperfect value creation and capture assumptions • Incorrect assumptions about the value chain

6. Developing a Concept for a New Business • A business concept is a concise description of an opportunity that contains four essential elements: • The customer definition • The value proposition • The product/service • The distribution channel

7. The Value Proposition • The benefit that the customer derives from the product or service • It is often intangible. • Entrepreneur needs to identify the need or “pain” the customer is experiencing

8. The Customer Definition • The customer is the one who pays for the solution. • This may or may not be the end user of the product or service being offered • The customer determines all the other components: • What the entrepreneur will offer • What the value proposition is • How the benefit will be delivered to the customer

9. The Solution Being Offered • A solution to the problem the customer is facing • Most businesses produce both products and services.

10. The Distribution Channel • How do you deliver the benefit to the customer? • Must create a clear and concise concept statement (or “elevator pitch”) • Not difficult but requires ability to parse words

11. The Entrepreneur's Story • A compelling story has a beginning, middle, and end. • How they identified or created the opportunity • Challenges they overcame • Where they are now

12. Building a Business Model • What are the size and importance of the revenue streams that the business model can generate? • What costs most affect the model, and what is their size and importance to the model? In other words, what are the cost drivers for the business? • How much capital is required to execute the business model and what is the timing of the cash needs? • What are the critical success factors to achieving the goals of the business model?

13. Building a Business Model (cont’d) • Changes may occur in several ways: • Incrementally expand the existing model • Revitalize an established model • Take an existing model into new areas • Add new models via acquisition • Use existing core competencies to build new business models • Reinvent the business model

14. Building a Business Model Figure 4.1

15. Building a Business Model—Stages • Stage 1: Identify position in value chain • The value chain consists of all the companies that contribute to the development and distribution of a good. • Upstream is the top of the value chain and upstream from manufacturers (e.g. supplier/producer of raw materials). • Downstream refers to the intermediaries such as distribution and retailers, and are “downstream” from the manufacturers and assemblers. • Location of the company within the value chain normally reflects the entrepreneur’s capabilities and risk-taking propensity.

16. Building a Business Model—Stages (cont’d) • Stage 2: Calculate how to create value for the customer • Rely on market research • Stage 3: Identify revenue sources • Subscription or membership • Volume or unit-based • Licensing and syndication • Transaction fee • Advertising

17. Building a Business Model—Stages (cont’d) • Stage 4: Determining expenses and cost drivers • Marketing or advertising cost structure • Inventory cost structure • Office or retail space cost structure • Support centered cost structure • Direct cost structure

18. Building a Business Model—Stages (cont’d) • Stage 5: Develop the competitive strategy • Effective competitive strategy either: • Differentiates the new venture from existing ventures • Creates a niche in the market that other companies are not serving • Has access to other resources that others in the industry do not • Stage 6: Test the model through feasibility analysis

19. Analyzing the Feasibility of a Business Model • All opportunities involve uncertainty, which is characterized by varying degrees of risk. • Risks to be reduced are associated with: • Customer, size of the market, technical feasibility of the product, and ability of the founding team to successfully execute the venture • Risks can be identified and dealt with. • Uncertainty means outcomes are unknown so subjective probabilities must be applied.

20. Feasibility and the Business Plan • Split view amongst entrepreneurs on the value of the business plan. • Investors moving away from written business plans of past to brief, well-constructed executive summary or an effective pitch.

21. The Outcomes of Feasibility Analysis • Determination of whether the business model appears feasible • Entrepreneur looks at the forecasted outcomes in four ways: • What is the probability a change in the forecast will occur • What is the magnitude of the change if it occurs • What is the impact of the change on the business • What can be done to mitigate the change or reduce the impact substantially

22. Feasibility Analysis: Testing the Business Model Figure 4.4

23. Preparing for Feasibility Analysis • Three critical success factors: • Is there a customer and market of sufficient size to make the concept viable and able to grow? • Do the capital requirements to start and operate to a positive cash flow make sense? • Can an appropriate startup or founding team be assembled to effectively execute the concept?

24. The Feasibility Tests • Areas to be analyzed: • Industry and market/customer • Product/service • Founding team • Financial needs assessment *Refer to Table 4.3 for a complete list of questions to be asked in each area.

25. Quick Screen for Multiple Options • Quick screen ideas before undertaking a thorough feasibility study on any one of the concepts: • Start with a concept statement • Examine the industry • Identify the market – customer & competitors • Identify how the product/service benefits the customer • Examine founding/management team capabilities • List all resources needed by the business

26. Looking Ahead • Part One: Entrepreneurial Opportunity (Ch 1-4) • Part Two: Feasibility Analysis • Chapter 5: Analyzing the Industry and Market • Chapter 6: Analyzing Product/Service Design and Protection • Chapter 7: Building the Founding Team • Chapter 8: Calculating Startup Capital Requirements • Part Three: Business Design (Ch 9-15) • Part Four: Planning for Growth and Change (Ch 16-18)

27. New Venture Action Plan • Create a concept statement for a new venture. • Develop a business model for the venture. • Craft a story that explains the business and is compelling to others. • Prepare to conduct a feasibility analysis on the business model.