4 Business Models
Learning Objectives
After completing this chapter, you will be able to
- Describe what a business model is
- Analyze existing and proposed businesses to determine what business models they are applying and what business models they plan to apply
- Develop and analyze alternative business models for new entrepreneurial ventures
Overview
In this chapter the concept of the business model is introduced. One concept of the business model in particular, the Business Model Canvas, is explored as a way to conceptualize and categorize elements of a business model.
What are Business Models?
Magretta described business models as “stories that explain how enterprises work”[1] noted that they reveal “the rationale of how an organization creates, delivers, and captures value.”[2] Chatterjee said that “A business is about selling what you make for a profit. A business model is a configuration (activity systems) of what the business does (activities) and what it invests in (resources) based on the logic that drives the profits for a specific business.”[3]
Osterwalder said that a start-up is something quite different than an ongoing venture.[4] A start-up should not be viewed as a smaller version of a company because it requires very different skills to start up a company than it does to operate one. A start-up that is still a start-up after some time has passed—maybe after a couple of years for some kinds of start-ups—is actually a failed enterprise since it hasn’t converted into an ongoing venture. Entrepreneurs who develop a business model for their ventures that deliver value to the targeted customers and to the entrepreneur stand a better chance of converting their start-up into an ongoing venture.
The Business Model Canvas
The business model canvas is made up of nine parts that, together, describe the business model (see Figure 6).
Parts[5]
- Key partners
- Who are our key partners?
- Who are our key suppliers?
- Which key resources are we acquiring from partners?
- Which key activities do partners perform?
- Motivations for partnerships: optimization and economy; reduction of risk and uncertainty; acquisition of particular resources and activities
- Key activities
- What key activities do our value propositions require?
- Our distribution channels?
- Customer relationships?
- Revenue streams?
- Categories: production; problem solving; platform/network
- Key resources
- What key resources do our value propositions require?
- Our distribution channels?
- Customer relationships?
- Revenue streams?
- Types of resources: physical; intellectual (brand patents, copyrights, data); human; financial
- Value propositions
- What value do we deliver to the customer?
- Which one of our customer’s problems are we helping to solve?
- What bundles of products and services are we offering to each customer segment?
- Which customer needs are we satisfying?
- Characteristics: newness; performance; customization; “getting the job done”; design; brand/status;