Chapter 6

Developing an
Effective Business
Model

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 Chapter Objectives
1 of 2

1. Describe a business plan and business model.

2. Explain business model innovation.
3. Discuss the importance of having a clearly
articulated business model.
4. Discuss the concept of the value chain.
5. Identify a business model’s two potential fatal
flaws.

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 Chapter Objectives
2 of 2

6. Identify a business model’s four major components.

7. Explain the meaning of the term business concept
blind spot.
8. Define the term core competency and describe its
importance.
9. Explain the concept of supply chain management.
10. Explain the concept of fulfillment and support.

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 The Business Plan
o Potential investors are not likely to
consider investing in a new venture until
the business plan has been completed

o The business plan helps the entrepreneur

maintain perspective as to what
needs to be accomplished.

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• Entrepreneurs use planning and organizing to outline
goals and define how the organization will accomplish
business tasks. They may use a systematic plan broken
down into steps or develop a generalized approach for
achieving goals through various functions or processes.
• Strong planning and organization techniques ensure the
enterprise stays focused on its goals and objectives.
• Proper planning and organization management can also
help the business remain flexible and adjust to changes
in the economic environment.

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• A business plan is a written document prepared by the entrepreneur that
describes all the relevant external and internal elements involved in starting
a new venture. It is often an integration of functional plans such as
marketing, finance, manufacturing, and human resources.
• Components of Business Planning
Sales and Marketing
Any sales and marketing decision made must be based on a
realistic sales estimate over the period.
2. "Igniting Operations”
Operational decisions cover Production, Engineering, Distribution,
Human Resources, and Information Communication and Technology.
3. Technology
The use of Technology can generate a significant market advantage that
competitors find difficult to match.

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 Characteristics of a Sound
Business Plan
A business plan should be detailed. In listing products and services for
example, it should not stop by just enumerating them, it should include
the descriptions and scope of the products and services.
2. It should include a market research that identifies competitors, the share of
the market and the range of the products produced. By learning how
competitors conduct their operations, tricks of the trade in the business
may be learned and entered to be used as a basis to excel.
3.It needs to have a list of everything needed which comprises the equipment,
technology, raw materials, financial and other resources needed when
starting and running a business venture. Having all these listed will give
an idea on how much capital is needed before the start-up and how
much money should made in a day to make the business survive.
4It also needs to be written in formal format and style since a business plan is
something that have to be presented to business partners, financial firms
and banks. Refrain from using slang in any part of the plan
5. A business plan should be error – free. This is important because the
business plan defines the business person. 6-7
 Why do we need a Business
Plan
• A business plan is an effective tool for defining the existing realities. It prompts
to analyze the business project or the existing situation objectively and
critically, define a focus and set realistic goals. It may also constitute the basis for
control and evaluation.
• A good business plan will reveal weaknesses or omissions in planning. Because
good business plans require a guesstimate of risk calculation, it helps to reduce
risks.
• It provides a valuable communication tool presented in an organized, credible
manner, which allows lenders, outside directors, investors, banks and employees to
obtain a complex view of your business. Even if, in some cases, a business plan
format is not officially required when applying for a loan, although most lenders will
ask for one, the very existence of a plan constitutes a plus, a step forward in
obtaining the loan.

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 Obtaining the facts for a
Business Plan
A business plan gives an insight into the entrepreneur's ability to define and develop
policies for the essential areas of the business. This business document will map
out the entire process by considering all the possible factors.

Fundamental factors that is needed in creating a business plan:

1. Consultants and Backing Type: When starting to create a business plan, one
must decide who will be reviewing it as this could help form a great plan.
2. Business Plan Outline: Outlining the plan for the business is the second most
vital point once it has targeted its audience. The target audience will determine
the structure of your document..
• Research and Information Collection: Once decided on the financial
investment and its sources, it is time to make a research.
The approach from the work experience of the entrepreneur and
observation will help to research the market and the product.
Published information from library, internet and paid database services
will inform the entrepreneur on the market growth, overall industry outlook and
customer requirements. Field research will help in covering interviews with
Copyright ©2012
customers, Pearson Education,
suppliers, Inc. publishing
competitors, as Prentice
and industry Hall
experts. 6-9
• The approach from the work experience of the entrepreneur and observation will help
to research the market and the product.
Published information from library, internet and paid database services will
inform the entrepreneur on the market growth, overall industry outlook and customer
requirements. Field research will help in covering interviews with customers,
suppliers, competitors, and industry experts.
Collection Files: sum up all experiences, interviews, and research in files for the plan
analysis.
5. General Industry Overview: have a general understanding of the industry and the
knowledge about the various strategies and services that apply in developing the
business.
• 6. Analysis: Once data is collected, analyze the process of building an aggressive
profile, a comprehensive plan and consider the risks involved with it.
• 7. Executive Summary: When all the segments of the business plan is thoroughly
completed write an executive summary highlighting the key points and including the
loan repayment methods and return on investments.
8. Review and Editing: a well-written business plan opens the doors to success. It will
become a road map to success, which guides the entrepreneur in the right direction.
Therefore, make sure that it has been proofread and checked for a number of times
before giving a final copy.

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 What is a Business Model?

• Model
– A model is a plan or diagram that’s used to make or
describe something.
• Business Model
– A firm’s business model is its plan or diagram for how it
competes, uses its resources, structures its relationships,
interfaces with customers, and creates value to sustain
itself on the basis of the profits it generates.
– The term “business model” is used to include all the
activities that define how a firm competes in the
marketplace.
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 Dell’s Business Model
1 of 2

• Beyond Its Own Boundaries

– It’s important to understand that a firm’s business model
takes it beyond its own boundaries.
– Almost all firms partner with others to make their business
models work.
– In Dell’s case, it needs the cooperation of its suppliers,
customers, and many others to make its business model
work.

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 Dell’s Business Model
2 of 2

Dell’s Approach to Selling PCs versus Traditional Manufacturers

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 The Importance of Business Models
Having a clearly articulated business model is important
because it does the following:

• Serves as an ongoing extension of feasibility analysis. A business

model continually asks the question, “Does this business make
sense?”
• Focuses attention on how all the elements of a business fit
together and constitute a working whole.
• Describes why the network of participants needed to make a
business idea viable are willing to work together.
• Articulates a company’s core logic to all stakeholders, including
the firm’s employees.
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 Diversity of Business Models

• There is no standard business

model for an industry or for
a target market within an
Diversity or Variety in industry.
• However, over time, the most
Business Models successful business models
in an industry predominate.
• There are always opportunities
for business model innovation.

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 How Business Models Emerge
1 of 3

• The Value Chain

– The value chain is the string of activities that moves a
product from the raw material stage, through
manufacturing and distribution, and ultimately to the end
user.
– By studying a product’s or service’s value chain, an
organization can identify ways to create additional value
and assess whether it has the means to do so.
– Value chain analysis is also helpful in identifying
opportunities for new businesses and in understanding how
business models emerge.
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How Business Models Emerge
2 of 3

The Value Chain

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 How Business Models Emerge
3 of 3

• The Value Chain (continued)

– Entrepreneurs look at the value chain of a product or a
service to pinpoint where the value chain can be made
more effective or to spot where additional “value” can be
added.
– This type of analysis may focus on:
• A single primary activity such as marketing and sales.
• The interface between one stage of the value chain and another,
such as the interface between operations and outgoing logistics.
• One of the support activities, such as human resource management.

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• 219,000 IKEA co-workers (and their families) – from product development and
supply to production, transport and retail.
• More than 1 billion customers and their families in 62 markets (860 million visits
to 467 IKEA stores and 3.8 billion visits to IKEA websites in the past year).
• Thousands of suppliers and service providers and their families across the world.
Millions of people work in the IKEA value chain to make and transport our
products and components, provide food for our restaurants, and deliver essential
services to IKEA companies.
• The people in the communities where we operate, and in society at large.

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-19

 Inbound Logistics
• IKEA has 1220 suppliers in 55 countries worldwide. These suppliers need
raw materials for goods production. Inbound logistics deals with the
purchasing of these materials. The majority of the component's suppliers
are externally located all around the globe. It has 31 trading offices in 26
diverse countries that provide raw materials. China comes at the top with a
20% product purchase rate. The average relationship length of the IKEA
suppliers is up to 11 years. It means that the world's largest furniture store
keeps a stable supplier relationship.
• Operations
• This activity includes the overall creation procedure of furnished products. It starts
from the initial phase of treating the raw materials up to product finishing. IKEA
Value Chain (Analysis) distributes its operational activities in three separate
sections.
• Finance
• Property
• Franchise
• Finance being the core of the business, uses decentralized strategies to develop
ideal global operating procedures. There are numerous franchises worldwide that6-20
• deliver ideal furniture products in the market. The biggest one is the Ikea Group franchise
which has 158,800 people working. This organizational franchise is an active member of 30
markets and controls 367 stores. As for the property, IKEA has 40 production stores in 10
countries. So, most of its produced goods contain IKEA industrial raw products. The major
production unit is in the south pacific and east Asia. Therefore, IKEA saves a lot of cost
through human resource payments.
• Outbound Logistics
• Once the product is complete, the company has two options. They either store the
goods or starts shipping them to customers. Outbound logistics refer to the same two
procedures of transporting and warehousing. IKEA is a big corporation running in 50
markets. For that reason, it requires a foolproof transporting and storing strategy.
Besides that, the company uses a widely spread network of service centers for the
task. It has 11 customer division centers and 28 general distribution centers
interconnected in 16 countries. As for the transporting service, the company uses two
distinct waysThe parcel way is for any product below 25kg. Its minimum price is $12,
which can change with the central location.
• Truck delivery transports any product above the 25kg weight limit. Its price range
starts from $50 and goes up according to the package.

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 Marketing And Sales
•A good business only flourishes if it inspires enough customers to purchase the goods.
Still, it isn't as easy as it seems. Therefore, IKEA uses these value analysis charts to
minimize any mistakes during the marketing process.
•On top of that, it helps them portray their products in the best way that tempts customers
to buy. IKEA uses different means of marketing advertisement. For instance, digital
media, sales promotional seminars, and events.
Service
•IKEA has reliable customer service that has been resolving user-experience issues for
decades. These not only answer confusing queries but also allow customers to give
feedback that may result in sudden product improvement.
•The company uses effective customer-service techniques like telephone helpline
service, exchange, and refund through service in case of any eligible condition
•Support Activities
•As the name suggests, these activities work as a helping hand in the value chain
analysis of any corporation. The IKEA value chain analysis has primary and secondary
activities, supporting its entire framework. We'll discuss all these below.
•Firm Infrastructure
•The structural hierarchy of a corporation measures its success rate. The better a
management committee organizes, the better the company will perform. Considering this
fact, many companies came up with the idea of an analytic report that highlights 6-22
the areas of improvement within the framework. IKEA has three divisional frameworks that start from the
franchise. It jumps up to the range and stops at suppliers. Furthermore, the firm has regional service stores
under an individual head CEO.
Human Resources
•The thing that actively impacts a corporation's performance is its customers' working attitude and skill
excellency. The secret to IKEA's growth lies in its employee efficiency and satisfaction. The firm not only hires
the best employees but also uses advanced training programs for employees to reach their extreme potential.
Technology Development
•IKEA value chain analysis uses advanced technological improvements for operational perfection and cost-
effectiveness. The company uses digitalization techniques for precise organizational procedures. Besides that,
the firm is now trying to use data-driven creation to automate product manufacturing. Therefore, it will help
minimize any human error during production.

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 Procurement
•The support procurement activity might be a fancy word for you, but its
function is not new. It assists the inbound logistics to actively collect
and purchase the goods from a massive supplier range. Think of it as a
secondary assist in the raw material purchase. IKEA has eight different
business units. This activity connects them all and helps purchasing
and transferring goods accessible

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 Potential Fatal Flaws in Business Models

• Fatal Flaws
– Two fatal flaws can render a business model untenable
from the beginning:
• A complete misread of the customer
• Utterly unsound economics

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Components of a Business Model

Four Components of a Business Model

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 Core Strategy
1 of 3

• Core Strategy
– The first component of a business model is the core
strategy, which describes how a firm competes relative to
its competitors.
• Primary Elements of Core Strategy
– Mission statement
– Product/market scope
– Basis for differentiation

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 Core Strategy
2 of 3

Primary Elements of Core Strategy

A firm’s mission, or mission statement,

Mission
describes why it exists and what its business
Statement
model is supposed to accomplish.

Product/Market A company’s product/market scope defines

Scope the products and markets on which it will
concentrate.

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 Core Strategy
3 of 3

Primary Elements of Core Strategy

It is important that a new venture

differentiate itself from its competitors in
Basis of some way that is important to its customers.
Differentiation If a new firm’s products or services aren’t
different from those of its competitors, why
should anyone try them?

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 Strategic Resources
1 of 3

• Strategic Resources
– A firm is not able to implement a strategy without
resources, so the resources a firm has affect its business
model substantially.
• For a new venture, its strategic resources may initially be limited to
the competencies of its founders, the opportunity they have
identified, and the unique way they plan to serve their market.
– The two most important strategic resources are:
• A firm’s core competencies
• Strategic assets

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 Strategic Resources
2 of 3

Primary Elements of Strategic Resources

A core competency is a resource or capability that

serves as a source of a firm’s competitive
Core advantage. Examples include Sony’s competence in
Competencies miniaturization and Dell’s competence in supply
chain management.

Strategic assets are anything rare and valuable that a

Strategic firm owns. They include plant and equipment,
Assets location, brands, patents, customer data, a highly
qualified staff, and distinctive partnerships.

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 Strategic Resources
3 of 3

• Importance of Strategic Resources

– New ventures ultimately try to combine their core
competencies and strategic assets to create a sustainable
competitive advantage.
– This factor is one that investors pay close attention to when
evaluating a business.
– A sustainable competitive advantage is achieved by
implementing a value-creating strategy that is unique and
not easy to imitate.
– This type of advantage is achievable when a firm has
strategic resources and the ability to use them.
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 Partnership Network
1 of 3

• Partnership Network
– A firm’s partnership network is the third component of a
business model. New ventures, in particular, typically do
not have the resources to perform key roles.
– In most cases, a business does not want to do everything
itself because the majority of tasks needed to build a
product or deliver a service are not core to a company’s
competitive advantage.
– A firm’s partnership network includes:
• Suppliers
• Other key relationships

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 Partnership Network
2 of 3

Primary Elements of Partnership Network

A supplier is a company that provides parts or

Suppliers services to another company. Intel is Dell’s
primary suppler for computer chips, for example.

Firms partner with other companies to make their

business models work. An entrepreneur’s ability
Other Key to launch a firm that achieves a competitive
Relationships advantage may hinge as much on the skills of the
partners as on the skills within the firm itself.

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 Partnership Network
3 of 3

The Most Common Types of Business Partnerships

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 Customer Interface
1 of 3

• Customer Interface
– The way a firm interacts with its customer hinges on how it
chooses to compete.
• For example, Amazon.com sells books over the Internet while
Barnes & Noble sells through its traditional bookstores and online.
– The three elements of a company’s customer interface are:
• Target customer
• Fulfillment and support
• Pricing model

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 Customer Interface
2 of 3

Primary Elements of Customer Interface

Target A firm’s target market is the limited group of

Market individuals or businesses that it goes after or tries to
appeal to.

Fulfillment and support describes the way a firm’s

Fulfillment product or service reaches its customers. It also
and Support refers to the channels a company uses and what
level of customer support it provides.

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 Customer Interface
3 of 3

Primary Elements of Customer Interface

The third element of a company’s customer

Pricing interface is its pricing structure. Pricing models
Structure vary, depending on a firm’s target market and its
pricing philosophy.

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Recap: The Importance of Business Models

• Business Models
– It is very useful for a new venture to look at itself in a
holistic manner and understand that it must construct an
effective “business model” to be successful.
– Everyone that does business with a firm, from its
customers to its partners, does so on a voluntary basis. As
a result, a firm must motivate its customers and its partners
to play along.
– Close attention to each of the primary elements of a firm’s
business model is essential for a new venture’s success.

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