DEVELOPING AN EFFECTIVE BUSINESS MODEL

What is a 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 Importance of 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
Dell’s Business Model
BUSSINESS MODEL 1
Dell’s Approach to Selling PCs versus Traditional Manufacturers
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  • 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.
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.
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.
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Components of a Business Model
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1.  Core Strategy
The first component of a business model is the core strategy, which describes how a firm competes relative to its competitors.
Mission Statement
A firm’s mission, or mission statement, describes why it exists and what its business model is suppose to accomplish
Product/Market Scope
A company’s product/market scope defines the products and markets on which it will concentrate.
Basis of Differentiation
It is important that a new venture differentiate itself from its competitors in some way that is important to its customers. If a new firm’s products or services aren’t different from those of its competitors, why should anyone try them?
2. 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.
Core Competencies
A core competency is a resource or capability that serves as a source of a firm’s competitive advantage. Examples include Sony’s competence in miniaturization and Dell’s competence in supply chain management.
Strategic Assets
Strategic assets are anything rare and valuable that a firm owns. They include plant and equipment, location, brands, patents, customer data, a highly qualified staff, and distinctive partnerships.
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.
Suppliers
A supplier is a company that provides parts or services to another company. Intel is Dell’s primary suppler for computer chips, for example.
Other Key Relationships
Firms partner with other companies to make their business models work. An entrepreneur’s ability to launch a firm that achieves a competitive advantage may hinge as much on the skills of the partners as on the skills within the firm itself.
4. 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.
Target Market
A firm’s target market is the limited group of individuals or businesses that it goes after or tries to appeal to.
Fulfillment and Support
Fulfillment and support describes the way a firm’s product or service reaches it customers. It also refers to the channels a company uses and what level of customer support it provides.
Pricing Structure
The third element of a company’s customer interface is its pricing structure. Pricing models vary, depending on a firm’s target market and its pricing philosophy.