launching new ventures – an entrepreneurial approach, 7e kathleen r. allen – © 2016 cengage...

LAUNCHING NEW VENTURES – AN ENTREPRENEURIAL APPROACH, 7E

Kathleen R. Allen

– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Developing and Testing a Business Model

Chapter 5


Chapter ObjectivesExplain what a business model is

and what it accomplishes.Discuss the process for developing

and testing a business model.Explore how to innovate a business

model.


Developing andTesting a Business Model

Much thought and effort are required before a company’s products or services reach the market. Drucker asks:◦What is our mission?◦Who is our customer?◦What does our customer value?◦What are our results?◦What is our plan?


5.1 Understanding the Business Model

The term “business model” can mean:◦ The activities or tasks a business undertakes◦ A blueprint for running a business

The business model reflects the strategic decisions and trade-offs that entrepreneurs make to earn a profit

A successful venture creates value by differentiating itself from competitors and/or by meeting an unserved need in the market

Creation and capture of value take place within the value network


Figure 5.1- The Components of the Business Model


5.1a Value PropositionThe value proposition is the benefit

that the customer derives form the product or service you are offering; it is the reason the customer will buy◦The unique mix of product, price,

service, relation, and image that a company offers to a group of targeted clients

◦You need to identify a need or “pain” that customers are experiencing

◦Don’t confuse features with benefits– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Table 5.1- Features v. Benefits…


5.1b Customer Segments Who is the customer? – a vital

questionMany entrepreneurs assume their

customer is the user of the product or service they offer, but in many industries it is not. ◦Example: Jordan NeuroScience (which

remotely monitored brainwaves of trauma patients in ERs) customers were not the patients, nor doctors, but hospital administrators who made the purchasing decision

◦That revelation changed their business model


Figure 5.2- Customer Segmentation Matrix


5.1c Distribution ChannelsThe distribution channel answers the

question, “How do you deliver the benefit to the customer?” ◦Many options, but the best is the one

that fulfills the customer’s expectations about where and how they want to purchase

◦Most services delivered direct to customers, but products often go through channel intermediaries (distributors and retailers)

◦There are pros and cons in going direct– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Table 5.2- Direct to the Customer…


5.1d Strategic PartnersCommon today for startups to

partner with existing companies to tap into expertise and resources the entrepreneur doesn’t have◦One example is the buyer-supplier

relationship, used to reduce costs or share facilities like manufacturing or warehousing

◦Partnerships may involve competitors sharing resources in one area while competing in another

◦Some partnerships involve licensing intellectual property rather than developing it in-house


5.1e Business Activities and Resource Requirements

Business activities could involve manufacturing, distribution, R&D, or a network or technology platform

Each type of business has different functions and unique resource requ9irements critical to delivering the value proposition

Resources include human, physical, intellectual and capital

Some businesses more automated – © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license


5.1f Revenue SourcesImportant component of business

model is to identify revenue streams:◦Subscription or membership◦Volume or unit-based◦Licensing and syndication◦Transaction fee◦Advertising


5.1g Cost DriversEqually important are expenses and

cost drivers:◦Marketing or advertising cost structure◦Inventory cost structure◦Office or retail space cost structure◦Support center cost structure◦Direct cost structure


5.1h Why Business Models FailFour major reasons for failure:

◦Flawed Logic◦Limited Strategic Choices◦Imperfect Value Creation & Capture

Assumptions◦Incorrect Assumptions about the Value

Chain


5.1i When Business Models Change

1. Incrementally expand2. Revitalize an established model3. Take an existing model into new

areas4. Add new models via acquisition5. Use existing core competencies to

build new business models


5.2 Testing and ValidatingBusiness Model Feasibility

Feasibility analysis involves the testing, evaluation and validation of a proposed business model for a new venture◦A tool used to assess and reduce risk at

startup: Customer Size of market Technical feasibility of the product Feasibility of the business model Ability of founding team to successful

execute the business model– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5.2a Developing and Testing HypothesesBegin with educated guesses

(hypotheses)Decide how to test themIn addition, business factors:

◦1. Is there a customer and market of sufficient size to make the concept viable, able to grow?

◦2. Do the capital requirements to start and operate to a positive cash flow make sense?

◦3. Can an appropriate startup or founding team be assembled to effectively execute the concept?


Figure 5.3- Initial Unvalidated Business Model for…App


Figure 5.4- Validating the Business Model


5.2b Considering the Impact of the Macro EnvironmentFactors outside the control of the

entrepreneur also impact the business model:◦1. Industry factors and trends◦2. market factors and trends◦3. global economic factors

No business model completely survives first contact with the market or industry

Even effective models must change over time


Figure 5.5- Macro Environmental Factors and the Business Model


Figure 5.6-Taleb’s Risk Barbell


5.3 Innovating with Business Models

View the uncertainty of the future as an opportunity to find new places to compete; known as the “blue ocean strategy” seeking the white spaces where no one is playing◦1. Eliminate something that the industry

has traditionally done◦2. Reduce something below the industry

standard◦3. Raise something above the industry

standard◦4. Create something the industry has

never done


5.3a When the CustomerDoesn’t Want to Pay

Many social networking sites provide a two-sided platform where users can upload and edit content and share with others◦Content contributed freely, so how to

entrepreneurs monetize the platform?◦Advertising, the basic model, has come

under attack by advertisers and usersLinkedIn uses a freemium model

◦People use for free, pay for premium features

Sponsors may provide resources– © 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license


5.3b Facing Dominant PlayersStartups often try to compete for

value with large, established firmsHow do they capture value in the

industry?◦An R&D company might license its

patents. This model is lowest-risk, but with fewest rewards

◦An engineering design company would develop customized solutions for its customers; but risk to its intellectual property, and value to customer is greater than for startup


5.3b Facing Dominant Players◦A device manufacturing firm is an

integrated position that would require the startup to control most points in the value chain as it sells finished product to its customers. It could capture most of the value, but at high capital expenditures it may not be able to afford

Each position has pluses and minuses, and long term ramifications

Dominant players may seek to acquire the startup before the initial phase ends


Figure 5.7-Simple Value Chain for Devices


5.4 Drawing Conclusions from Feasibility Analysis

Most products in common use today were originally though to be infeasible

So how does an Entrepreneur determine whether a new business concept is feasible when research is done and tested?◦Each step in the analysis provides

information, and the entrepreneur can make a judgment about whether to proceed

◦Also ask whether the business satisfies your personal needs and goals


Figure 5.8- Entrepreneur’s Business Model Canvas


New Venture Action PlanDevelop your initial hypotheses

about the components of the business model

Design experiments to test your hypotheses

Make change in your business model to reflect what you’ve learned


launching new ventures – an entrepreneurial approach, 7e kathleen r. allen – © 2016 cengage...

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