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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.

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Entrepreneurship Part 8 - The innovation process

Welcome back to the next part of the entrepreneurship series. In this article we want to have a look on different ways to develop a business idea. This will also then define the end of the chapter creativity, innovation and entrepreneurship.

In the end we are talking about six different ways and here they are with some examples:

Analyze the state of the art technology
The iPhone is a combination of:
- Telecommunication
- MP3-Player
- Camera
- and much more

Analyze existing products and services
- You can create your own books, calendar, blog, etc. > publishing

Watch science and research
Learn from nature, typically a good advisor, e.g. artificial spider silk:
Advantages:
- biotech chip to replace spinneret
- lighter than cotton, stronger than steel
- perfect eco-balance
Applications:
- Bulletproof vests
- Different kinds of armor
- Aircraft construction
- Automotive construction

Detect trends and mega-trends
- Miniaturization
- Modularization
- Combination
- Instand Operativeness
- Substitution of mechanical systems
- Sustainable/Green energy supply
- Hydrogen as energy supply
- Do we still need human workforce…
- etc.

Monitore demographic trends
- Convenience
- Individualization
- Automation of work
- Need for adventure

Develop new solutions

But how can it be seen, the process model of creativity, innovation and entrepreneurship.

Entrepreneurship as a process

This is all speeded up as new opportunities come across every day as life cycles of goods and services are shortened to the absolute minimum.

Next article of the series in entrepreneurship we will start to have a look at business models and value creation. Stay tuned - and thanks for reading.

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Entrepreneurship Part 5 - A guide for the right growth

Welcome back! In part 5 of the series about entrepreneurship let us discuss about the right growth rate.

To find the optimal growth rate for a new business, entrepreneurs must consider many factors, including the following:

• Economies of scale, scope or customer network

• The ability to lock in customers or scarce resources

• Competitors’ growth

• Resource constraints

• Internal financing capability

• Tolerant customers

• Personal temperaments and goals

An Entrepreneur’s guide to the Big Issue (Bhide, 1999)

Economic growth mainly occurs not because of broad improvements in technology, productivity and resource availability, but because entrepreneurs

1. improve their technology, organization and processes

2. become more productive and innovative

3. force other firms out of business

As the ongoing creative destruction occurs, new and better jobs than the lost ones are created, the overall level of productivity rises and economic wellbeing increases.

To keep it short. Entrepreneurship is a process in which people identify new opportunities and convert them into marketable products and services. Therefore, the field of entrepreneurship involves the study of

1. sources of opportunities

2. the process of discovery, evaluation and exploitation of opportunities

3. the set of individuals who discover, evaluate and exploit these opportunities

Five factors have been commonly cited as being crucial for entrepreneurship to take place: an individual (the entrepreneur), a market opportunity, adequate resources, a business organization and a favorable environment.

Hope you liked what you have been reading. In the next part of entrepreneurship we will go in phase 2 and talk about creativity and innovation on the entrepreneurial journey.

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Entrepreneurship Part 4 - ENT as a Process

Welcome back! In part 4 of the series about entrepreneurship we will have a look on entrepreneurship as a process.

In the field of research entrepreneurship is concerned with the following questions:

• Who recoginzes entrepreneurial opportunities?

• How and when does the process of opportunity recognition happen?

• Entrepreneurship as a field is hence closely related to economics, strategic management, sociology, psychology, historical research, anthropology et al.

When we think about a model of the entrepreneurial process it will look something like this:

Model of entrepreneurial process.

So lets think about the model of venture creation

A model of value creation.

The creation of a new venture to exploit an entrepreneurial opportunity is more likely when:

• there are a few incentives for an individual to exploit the opportunity within an existing organization

• incumbent firms in an industry can not achieve high levels of economies of scale and scope

• there are low entry barriers in an industry

Alternative ways to make use of an opportunity could be a management buy-in (MBI) or management buy-out (MBO), the foundation of a joint venture, or a selling of user rights or license.

Values

Readiness for change, or at least the willingness to live with it, is essential of a society is to create wealth and value for its population.

Politics

At a macro level, politics provide a framework for entrepreneurship by organizing a society. However, if chaos impedes entrepreneurship, conversely too much order is just as bad. Successful societies create and manage a tension between order and chaos.

Economic Institutions

Institutions like property rights, stock exchanges, banks, courts, laws of contract et al. are tools used by entrepreneurs to capitalize on opportunities and convert those opportunities into marketable services and products.

This brings us to the question: What are the reasons for new venture creations?

1 Desire for autonomy

Entrepreneurs want to be independent, possibly work at location of their choice and be their own boss.

2 Material rewards

Entrepreneurs want to be rewarded according to their efforts and because of the anticipated financial gains.

3 Creativity

Many entrepreneurs want to take advantage of their own talents, to create something new and to realize their desire to bring something new into existence.

But there are also some reasons that speak against new venture creations:

1 Lack of resources

Many potential entrepreneurs think that they lack competencies in management or marketing. They also have to face the liability of newness and the problems to find sufficient finance.

2 Compliance costs

High taxes and the costs of complying with government legislation are perceived as a major hurdle.

3 Hard reality

The process of venture creation is often harder and riskier than initially expected. The future is perceived as very uncertain and, as a result, a certain fear of failure emerges over while the would-be entrepreneur gathers resources and processes information to launch the venture.

Once this is done we want to show some relevant performance measures:

Relevant performance measures

Hope you enjoyed the read. Next in line will be finding the right growth rate including an entrepreneur’s guide to the big issues.

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Entrepreneurship Part 3 - The Key Elements of ENT

Let’s continue our entrepreneurial journey by having a look on opportunities as it seems that these have a crucial impact on our path of self fulfillment. We thereby follow the key elements of entrepreneurship as shown in part 1.

An opportunity can be defined as a situation in which new services, products or processes can be introduced and sold at a greater price than its own costs of production. Entrepreneurs perceive market needs and/or underemployed resources and recognize a “match” between those two.

What may later be called an opportunity may appear as imprecisely defined market needs. These are the sources of market-pulled opportunities. The role of the entrepreneur is to recognize these needs and develop an offer in which customers are willing to pay for.

Under-utilized or unemployed resources may also offer possibilities to create value for customers. This type of opportunities can be called market-pushed opportunities. The role of the entrepreneur is to identify resources that are not optimally used and then seek a better user or combination of these for a specific market.

According to Peter Drucker, Austrian-born American management consultant, educator, and author (1909-2005), there are three different categories of opportunities:

1. Inefficiencies within existing markets due to either information asymmetries or the limitations in technology in terms of satisfying certain known but unfulfilled market needs

2. The emergence of significant changes in social, political, demographic and economic forces

3. Inventions and discoveries that produce new knowledge

The tendency to discover these opportunities are dependent on psychological characteristics, information and knowledge availability, creative processing and cognitive heuristics.

Good entrepreneurial opportunities fulfill the following four criteria:

1. They generate additional value for the customer and thereby for parts of society or society as a whole

2. They satisfy desires and needs for which some people are willing to pay for

3. They have a solid market potential, i.e. generate revenues and yield, so that the entrepreneurs can easily show a clear value proposition to their stakeholders

4. They are in accordance with entrepreneur’s characteristics and balance risk and return

The heterogeneous field of entrepreneurship - by Bruyat & Julien (2001)

With the opportunities on the one hand we have to have a look on the resources on the other.

The term resource includes a variety of different things. Basically any thing or quality that is useful in doing something can be considered as a resource.

The resource based view of companies recoginzes six different types of resources:

1. Financial

2. Physical

3. Human

4. Technological

5. Social

6. Organizational

The third key element of entrepreneurship is the organization.

Many different types of organizational arrangements exist for the exploitation of entrepreneurial opportunities. Although most attention has been paid to new independent start-ups, other possible types of organizational structure include corporate ventures, spin-offs/spin-outs, franchises, joint ventures or business acquisitions.

Entrepreneurship can take place in diverse environments and there are many ways to become an entrepreneur also MBO or MBI (Management Buyout/Management buy-in).

Looking at the key elements of entrepreneurship next in line will be the surrounding environment.

The environment plays a crucial role on the entrepreneurial journey as it can be more or less rich of opportunities. Several conditions influence the pursuit of these opportunities. For example, opportunities can emerge because of market inefficiencies that result from information asymmetry across time and place, or as a result of political, regulatory, social or demographic changes.

There are two relevant levels of the environment:

1. At the community level, both the number of organizations in an industry and the strength of relationships between these organizations are important to entrepreneurs.

2. At the social level, cultural norms and values shape the environment for an organization as well as government activities and policies.

This was it for today - in part 4 will be discussing the entrepreneurial journey as a process.

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Entrepreneurship Part 2 - Social Skills

What there is in our business is plenty of plans, plenty of entrepreneurs and plenty of money. But there is a shortage of great teams.

John Doerr | Silicon Valley Venture Capitalist

According to Baron and Markmann (2000) there are several social skills that are described in the following that have potential relevance to entrepreneurial success:

Social skills relevant to entrepreneurs’ success | Baron & Markmann (2000)

The flow of entrepreneurial success starts with high level of social skills.

The short way is that social skills will broaden social networks with enhanced reputation. This leads to an increased social capital which enhances the success of an entrepreneur.

The second way of the cause effect chain is that a high level of social skills will lead lead to positive affective reactions on the part of others. Through the enhanced judgements and decisions about the entrepreneur. This will automatically improve relations between the founders. Improve the performance of key tasks (e.g. raising capital, recruiting employees and gaining customers. And nevertheless shows the ability to form successful business alliances. The result again: Enhanced success of an entrepreneur.

The assertion of Baron and Markmann that social skills can play an important role in the entrepreneurial journey of success has some implications for entrepreneurs and others wishing to assist them in their efforts to start new ventures:

1. Training in social skills can help many entrepreneurs succeed

2. Training in social skills is readily available - and it works

3. Training in social skills is already included in the curricula of many business schools and is used by many organizations

4. Enhanced social skills can contribute to entrepreneurs’ social capital

5. Training in social skills - or at least a discussion of this topic - should be part of all programs in entrepreneurship

6. Entrepreneurs can be persuaded to seek much training

In order to describe an entrepreneur we will follow the 10 Ds defined by Bygrave (2010) that symbolize the spring of entrepreneurial behavior:

1. Dream: Entrepreneurs have a vision of what the future could be like for them and their businesses. And they have the ability to implement it.

2. Decisiveness: They don’t procrastinate, they make decisions swiftly

3. Doers: Once they decide a course of action, they implement it quickly

4. Determination: They provide total commitment and they seldom give up

5. Dedication: They are totally dedicated to their business, sometimes at considerable cost to their personal relationships

6. Devotion: They love what they do

7. Details: The devil is a squirrel. Entrepreneurs are on top of critical details

8. Destiny: They want to be in charge of their own destiny

9. Dollars: They assume that if they are successful, they will be rewarded

10. Distribute: Entrepreneurs distribute the ownership of their businesses with key employees who are critical to the success of the business

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Entrepreneurship Part 1 - The Nature of Entrepreneurship

Some people see the entrepreneur as a mangy wolf, which must be beaten to death. Others see the cow, which one can milk continuously. Only a few recognize the horse that pulls the wagon.

Winston Churchill (1874-1965) | British Statesman and Prime Minister

Before we get starting to have a deep dive in entrepreneurship we to explain how we will handle it. In this article, “The Nature of Entrepreneurship” we will go through some definitions of entrepreneurship, state the key elements of entrepreneurship, explain the process of new venture creation and finally explain the role of entrepreneurship in economic growth.

You never know what will happen when things change. But do you know what will happen when things don't change?

Elias Canetti (1905-1994) | Author

Where does Entrepreneurship come from?

The word Entrepreneurship comes from the french word entreprendre meaning “to undertake” or “to take in ones own hands”. The term ENTREPRENEUR was first used by the Irish Banker Richard Cantillon in the end of the 18th century to describe a person that realizes an income stream under uncertain conditions.

Jean-Babtiste Say defined it even further: “An entrepreneur is a person that shifts economic resources from an area of lower productivity into an area of higher productivity and greater yield”.

During the industrial revolution the term “Entrepreneur” was used to describe an individual that strived for venture ideas, developed it, assembled resources and created a new business venture. Some famous entrepreneurs by that time have been: Rockefeller, Andrew Carnegie, James Watt, Thomas Edison and Gottlieb Daimler, just to name a few.

But before we go ahead, let’s make some definitions for a common understanding:

Entrepreneur:

A person that destroys the existing economic order by introducing new services or products, by creating new forms of organization or by exploiting new raw materials. The entrepreneur doesn’t have to be the owner of a company.

Entrepreneurship:

A process that brings out new business opportunities and converting them into marketable services and goods.

Entrepreneurial opportunities:

A new solution to the market that can be sold at a price that is higher than its manufacturing costs.

To sum it up:

Entrepreneurs use innovation to exploit or create change and opportunity for the purpose of making profit. They do this by shifting economic resources from an area of lower productivity into an area of higher productivity and greater yield, accepting a high degree of risk and uncertainty in doing so.

Burns (2005)

... a slippery concept... not easy to work into a formal analysis because it is so closely associated with the temperament or personal qualities of individuals.

Penrose (1959)

According to J.A. Schumpeter (1883-1950) a former Austrian political economist three statements on “Creative Destruction” are key:

1. Economic growth is the result of new technologies, processes and organizational structures, generated by innovative entrepreneurs.

2. As productivity rises, enterprises that are less productive disappear from the market.

3. This process of foundation, expansion and displacement ist the main characteristic of Creative Destruction.

Concerning the model of entrepreneurship, there are five key elements that describe the necessity of entrepreneurship in order to occur:

1. An individual (> The Entrepreneur)

2. A opportunity in the market

3. Adequate resources

4. A business organization

5. A favorable environment

These five factors are considered as something that must be present in order to have a fruitful journey on the path of entrepreneurship.

The Key Elements of Entrepreneurship

The entrepreneur is the basis of the entrepreneurial process - the chief conductor who perceives an opportunity, marshals the resources to pursue this opportunity and builds an organization which combines the resources necessary to exploit the opportunity.

Five factors have been identified that influence the way in which opportunities are recognized.

1. Internal locus of control

2. Prior knowledge

3. Social Networks

4. Active search for opportunities

5. Entrepreneurial alertness

A famous Malaysian entrepreneur, Tan Sri Francis Yeoh, once said when asked about the role of luck he said:

Don't read these books about being lucky. If you want to do something better for humanity, it's a very good start. If you want to make it because you want to be rich, I guess you will make it one day, but you are likely to be unhappy.

Tan Sri Francis Yeoh (2007)