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Chapter 4

Developing a Business Model

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Learning Objectives

• Explain what a business concept is.• Position the concept in the value chain.• Develop an effective distribution strategy.• Build a business model for a new concept.


Developing a Business Concept

• A business concept is a concise description of an opportunity that contains four essential elements:

1. The customer definition2. The value proposition and compelling story3. The product/service4. The distribution channel


Figure 4.1: The Business Concept


Business Concept: The Customer Definition

– The customer is the one who pays.– The end use customer is as important as the

intermediary customer.


Business Concept: The Value Proposition

• The compelling story is the benefit that the customer derives from the product or service– It is often intangible

• The compelling story answers the questions:– Why the interest? – What problem does this solve?


Business Concept

• The Product/Service– What does the customer need?– What is the team’s core competency?

• The Distribution Channel– How will the benefit be delivered to the

customer?


The Concept Statement• Creating a clear and concise concept

statement is not difficult but telling a compelling story can be.

• A compelling story consists of a problem and a solution.

• The problem being solved should be presented in a simple and clear way.


Concept Quick Test

• Am I really interested in this business opportunity?

• Is anyone else interested?

• Will people pay for what is being offered?

• Why me?

• Why now?


The Value Chain and the Concept

• Upstream activities, those related to the production of a product or service, which may include raw materials, product development, manufacturing, and warehousing.

• Downstream activities, those associated with selling the product or service such as customer acquisition, sales transactions, and logistics.


Forces Affecting the Value Chain

The Internet– Reduced transaction costs– Disintermediation



• Characteristics of an effective distribution channel:– Inventory– Ownership– Financing and payment– Risk management– Member power



• Developing a distribution strategy:– Evaluate strategies of similar companies– Look for the opportunity gaps

• Factors affecting the choice of strategy:– Costs– Market coverage– Speed and reliability


The Business Model

• How to make money from the products and services offered:

– How will value be created for stakeholders?– How will competitive advantage be

achieved?– How to sustain efficacy of the model over

time?


The Business Model

• Why do they fail?

– flawed logic – limited strategic choices – imperfect value creation and capture

assumptions– incorrect assumptions about the value chain


Building a Business Model

• What are the size and importance of the revenue streams that the business model can generate?

• 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?


Building a Business Model (continued)

• How much capital is required to execute the business model and what is the timing of the cash needs?

• What are the critical success factors to achieving the goals of the business model?


When the Business Model Must Change

• Expanding the existing model • Revitalizing an established model • Taking an existing model into new areas • Adding new models via acquisition• Using existing core competencies to build new

business models • Reinventing the business model

Small Business & Entrepreneurship

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