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Entrepreneurship Part 9 - Business Models

In this article of the series entrepreneurship we will introduce the concept of business models. Show how the study of business models can inform the entrepreneur. In addition we will see how we can provide a system to characterize business models and discuss the role of business model innovation. To take it right here, in the following article (10) we will have a deep dive on competition evaluation.

To start off let’s define the phrase Business Model

A business model is the description of the way in which a company, a corporate system or an industry creates value on the market.

Bieger and Agost (2001)

Or in other words, a business model is a “story that explains how enterprise work”.

Hence, a good business model has to provide answers to the following questions:

• Who is the customer?

• For what is the customer willing to pay for?

• What is the underlying economic logic that explains how we can deliver value to customers at reasonable costs?

The business model is a structural template that describes the organization of a focal firm's transactions with all of its external constituents in factor and product markets.

Zott & Amit (2008)

The emergence of the network economy provides a multitude of opportunities for new and innovative business models, which is also a challenge for management theory.

The internet as a basic innovation and other technological innovations allow completely new networks. Corporate networks and customer networks allow new divisions of labor and possibilities of communication between companies, customers and suppliers.

One role of business models is hence to providing a set of generic level descriptors, of how a form organizes itself to create and distribute value in a profitable manner.

So what is the deal? Finding opportunities!

To define and find business opportunities we have several steps to take

1 Analysis of the organizational environment

• Macro-economic development and Megatrends

• Juristic and regulatory developments

• Technological developments

• Changes in society

• Natural environment

2 Developments within an industry

• Type

• Growth (today and forecast)

• Market segments

• Marketing standards

• General trends

• Opportunities?

3 Analysis of the competitive environment

• Product systems and services

• Positioning within the industry (strengths and weaknesses)

• Marketing (4P)

• Market share

• Competitors reaction

• Opportunities?

4 Development of a profile for the target market

• Customer needs, product design, distribution, branding …

• Focus on the end customer

• Customer profile

  • Who is my potential customer?

  • How do my customers behave?

  • How do my customers decide to purchase my product or service?

  • What is the decision of my customer influencing?

• Opportunities?

5 Definition of Sales Target

• Use as many formal and informal ways to find a sales target as possible

• Compare your results with external market data

Finally answer the following question:

DO WE AIM AT AN ATTRACTIVE MARKET?

To categorize your business idea following graphics shell support:

Source: McKinsey

So finally the questions is: “Is your Idea an Opportunity?”

Idea generation is only the first part of the process that leads towards the development of a successful business model. To evaluate an idea, five major areas need to be understood:

1. Customers

2. Competitors

3. Suppliers and Vendors

4. Government

5. Broader Global Environment

Global business environment

Whats left is the open question of who is now your customer?

To optimize the features most important to the customer, the first question is who the core customers are. Customer groups can be broken down into two general categories.

Primary Target Audience (PTA)

Is the customer group which is most likely to buy at a price that preserves your margins, and with a frequency that reaches your target revenues. These buyers share common characteristics and behaviors and account for the highest volume of sales.

Secondary Target Audience (STA)

The secondary target audience includes future primary buyers, those buying at a high rate within a small segment and people who influence primary buyers. Their characteristics and buying behaviors usually differ from those of the primary buyers.

Next article of the series in entrepreneurship we will look at how to evaluate your competition. Stay tuned - and thanks for reading.