1. 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.

2. Developing and Testing a Business Model Chapter 5 – © 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.

3. Chapter Objectives Explain 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. – © 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.

4. Developing and Testing 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? – © 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. 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 – © 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.

6. Figure 5.1- The Components of 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.

7. 5.1a Value Proposition The 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.

8. Table 5.1- Features v. 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.

9. 5.1b Customer Segments Who is the customer? – a vital question Many 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 – © 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.

10. Figure 5.2- Customer Segmentation Matrix – © 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.

11. 5.1c Distribution Channels The 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.

12. Table 5.2- Direct to the Customer… – © 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.

13. 5.1d Strategic Partners Common 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 – © 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.

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

15. 5.1f Revenue Sources Important component of business model is to identify revenue streams: ◦ Subscription or membership ◦ Volume or unit-based ◦ Licensing and syndication ◦ Transaction fee ◦ Advertising – © 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.

16. 5.1g Cost Drivers Equally 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 – © 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.

17. 5.1h Why Business Models Fail Four major reasons for failure: ◦ Flawed Logic ◦ Limited Strategic Choices ◦ Imperfect Value Creation & Capture Assumptions ◦ Incorrect Assumptions about the Value Chain – © 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.

18. 5.1i When Business Models Change 1. Incrementally expand 2. Revitalize an established model 3. Take an existing model into new areas 4. Add new models via acquisition 5. Use existing core competencies to build new business models – © 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.

19. 5.2 Testing and Validating Business 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.

20. 5.2a Developing and Testing Hypotheses Begin with educated guesses (hypotheses) Decide how to test them In 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? – © 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.

21. Figure 5.3- Initial Unvalidated Business Model for…App – © 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.

22. Figure 5.4- Validating 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.

23. 5.2b Considering the Impact of the Macro Environment Factors 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 – © 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.

24. Figure 5.5- Macro Environmental Factors and 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.

25. Figure 5.6- Taleb’s Risk Barbell – © 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.

26. 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 – © 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.

27. 5.3a When the Customer Doesn’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 users LinkedIn 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 distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. 5.3b Facing Dominant Players Startups often try to compete for value with large, established firms How 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 – © 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.

29. 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 – © 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.

30. Figure 5.7- Simple Value Chain for Devices – © 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.

31. 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 – © 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.

32. Figure 5.8- Entrepreneur’s Business Model Canvas – © 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.

33. New Venture Action Plan Develop 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 – © 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.