1. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DEVELOPING AND TESTING A BUSINESS MODEL 4

2. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Business Model  Peter Drucker’s 5 questions form the basis for development of the business model: 1.What is our mission? 2.Who is our customer? 3.What does our customer value? 4.What are our results? 5.What is our plan?

4. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Business Model Components Table 4.1

5. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why Business Models Fail  Flawed logic  Limited strategic choices  Imperfect value creation and capture assumptions  Incorrect assumptions about the value chain

6. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Developing a Concept for a New Business  A business concept is a concise description of an opportunity that contains four essential elements: 1.The customer definition 2.The value proposition 3.The product/service 4.The distribution channel

7. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Solution Being Offered  A solution to the problem the customer is facing Most businesses produce both products and services.

10. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Building a Business Model 1. What are the size and importance of the revenue streams that the business model can generate? 2. 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? 3. How much capital is required to execute the business model and what is the timing of the cash needs? 4. What are the critical success factors to achieving the goals of the business model?

13. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Building a Business Model Figure 4.1

15. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Building a Business Model— Stages (cont’d)  Stage 5: Develop the competitive strategy Effective competitive strategy either: 1.Differentiates the new venture from existing ventures 2.Creates a niche in the market that other companies are not serving 3.Has access to other resources that others in the industry do not  Stage 6: Test the model through feasibility analysis

19. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Outcomes of Feasibility Analysis  Determination of whether the business model appears feasible  Entrepreneur looks at the forecasted outcomes in four ways: 1.What is the probability a change in the forecast will occur 2.What is the magnitude of the change if it occurs 3.What is the impact of the change on the business 4.What can be done to mitigate the change or reduce the impact substantially

22. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Feasibility Analysis: Testing the Business Model Figure 4.4

23. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Preparing for Feasibility Analysis  Three critical success factors: 1.Is there a customer and market of sufficient size to make the concept viable and 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?

24. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Quick Screen for Multiple Options  Quick screen ideas before undertaking a thorough feasibility study on any one of the concepts: 1.Start with a concept statement 2.Examine the industry 3.Identify the market – customer & competitors 4.Identify how the product/service benefits the customer 5.Examine founding/management team capabilities 6.List all resources needed by the business

26. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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) – 26

27. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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.