DEVELOPING AN

EFFECTIVE
BUSINESS MODEL

TOPIC 5
Learning Objectives

4.1 Describe business models and discuss their impor-

tance.
4.2 Identify and describe the two general types of busi-
ness models—standard and disruptive.
4.3 Explain the components of the Barringer/Ireland Busi-
ness Model Template that entrepreneurs can use to
develop a business model for their firm.
Business Models

• Business Model
– A business model is a firm’s plan or recipe for how it
creates, delivers, and captures value for its stakehold-
ers.
– The proper time to develop a business model is fol-
lowing the feasibility analysis stage and prior to flesh-
ing out the operational details of the company.
– A firm’s business model is integral to its ability to suc-
ceed both in the short and long term.
General Categories of Business
Models (1 of 5)
• Standard Business Models
– The first category is standard business models.
– Standard business models depict existing plans or
recipes firms can use to determine how they will
create, deliver, and capture value.
– There are a number of standard or common busi-
ness models, which are shown on the next two
slides.
General Categories of Business
Models (2 of 5)
• Standard Business Models
Business Model Representative Companies
Advertising Business Model Google, Facebook
Auction Business Model eBay, uBid
Bricks and Clicks Business Model Apple, Barnes & Noble
Franchise Business Model 24 Hour Fitness, Panera Bread
Freemium Business Model Dropbox, Evernote
Low-Cost Business Model Southwest Airlines, Warby Parker
Manufacturer/Retailer Business
Apple, Fitbit, Tesla Motors
Model
Peer-to-Peer Business Model Airbnb, Uber
General Categories of Business
Models (3 of 5)
• Standard Business Mod-
els
Business Model Representative Companies
Game Consoles and Games,
Razor and Blades Business Model
Printers and Ink Cartridges
Subscription Business Model Birchbox, Blue Apron, Netflix
Traditional Retailer Business Model Whole Foods Markets, Zappos
General Categories of Business
Models (4 of 5)
• Disruptive Business Models
– The second category is disruptive business models.
– Disruptive business models, which are rare, are ones
that do not fit the profile of a standard business
model.
– They are impactful enough that they disrupt or
change the way business is conducted in an indus-
try or an important niche within an industry.
– The next slides depict four business models that
were disruptive when they were introduced.
General Categories of Business
Models (5 of 5)
• Disruptive Business Mod-
els Business Model Company or Companies
That Introduced It
Direct-to-Consumer Computer Sales (which allowed
Dell
consumers to customize their computers)
Online Text Ads on Search Engines (allowed
advertisers to place ads for products that searchers Yahoo, Google
were already searching for)
Software as a Service (SaaS) (By moving software to
the cloud, allowed users to access the software and
Salesforce.com
their data from anywhere there was an Internet
connection)
Cloud-based Service to Connect Riders and People
Willing to Provide Rides (Provided riders with an app Uber, Lyft
that connects them with the owners of private cars)
Barringer/Ireland Business Model
Template (1 of 2)
• Barringer/Ireland Business Model Template
– Although not everyone agrees precisely on the
components of a business model, many agree that
a successful business model has a common set of
attributes.
– These attributes can be laid out in a visual frame-
work or template so it is easy to see the individual
parts and their interrelationships.
– The Barringer/Ireland Business Model Template is
shown in the next slide.
Barringer/Ireland Business Model
Template (2 of 2)
Figure 4.2 Barringer/Ireland Business Model Template
Core Strategy (1 of 5)

• Core Strategy
– The first component of the business model is core
strategy.
– A core strategy describes how the firm plans to
compete relative to its competitors.
– The primary elements of core strategy are:
• Business Mission
• Basis of Differentiation
• Target Market
• Product/Market Scope
Core Strategy (2 of 5)

• Business Mission
– A business’s mission or mission statement describes
why it exists and what its business model is sup-
posed to accomplish.
– If carefully written and used properly, a mission
statement can articulate a business’s overarching
priorities and act as its financial and moral compass.
– A well-written mission statement is something that
a business can continually refer back to as it makes
important decisions in other elements of its busi-
ness model.
Core Strategy (3 of 5)

• Basis of Differentiation
– It’s important that a business clearly articulate the
points that differentiate its product or service from
competitors.
– A company’s basis of differentiation is what causes
consumers to pick one company’s products over an-
other’s.
– It is what solves a problem or satisfies a customer
need.
– It is best to limit a company’s basis of differentiation
to two to three key points.
– Make sure that your points of differentiation refer to
benefits rather than features.
Core Strategy (4 of 5)

• Target Market
– The identification of the target market in which
the firm will compete is extremely important.
– A target market is a place within a larger market
segment that represents a narrow group of cus-
tomers with similar interests.
– A firm’s target market should be made explicit in
the business model template.
Core Strategy (5 of 5)

• Product/Market Scope
– A company’s product/market scope defines the
products and markets on which it will concentrate.
– Most firms start with a narrow (or limited)
product/market scope, and pursue adjacent product
and market opportunities as the company grows
and becomes more financially secure.
– In completing the business model template, a com-
pany should be very clear about its initial
product/market scope and project 3-5 years in the
future in terms of anticipated expansion.
Resources (1 of 3)

• Resources
– The second component of a business model is re-
sources.
– Resources are the inputs a firm uses to produce,
sell, distribute, and service a product or service.
– A firm’s most important resources, both tangible
and intangible, must be both difficult to imitate and
hard to find a substitute for.
• This stipulation is necessary for an individual
company’s business model to be competitive
over the long term.
Resources (2 of 3)

• Core Competencies
– A core competency is a specific factor or capability
that supports a firm’s business model and sets it
apart from rivals.
– A core competency can take on various forms,
such as technical know-how, an efficient process, a
trusting relationship with customers, expertise in
product design, and so forth.
– Most start-ups will list two to three core compe-
tencies in their business model template.
Resources (3 of 3)
• Key Assets
– Key assets are the assets that a firm owns that enable its
business model to work. The assets can be physical, fi-
nancial, intellectual, or human.
• Physical assets include physical space, equipment, ve-
hicles, and distribution networks.
• Intellectual assets include resources such as patents,
trademarks, copyrights, and trade secrets, along with
a company’s brand and its reputation.
• Financial assets include cash, lines of credit, and
commitments from investors.
• Human assets include a company’s founder or
founders, its key employees, and its advisors.
Financials (1 of 5)

• Financials
– The third component of a firm’s business model fo-
cuses on its financials.
– This is the only section of a firm’s business model
that describes how it earns money—thus, it is ex-
tremely important.
– For most businesses, the manner in which it makes
money is one of the most fundamental aspects of
its business model.
Financials (2 of 5)

• Revenue Streams
– A firm’s revenue streams describe the ways in which
it makes money.
– Some businesses have a single revenue stream while
others have several.
– For example, most restaurants have a single revenue
stream. Their customers order a meal and pay for it.
Other restaurants may have several revenue streams
—including meals, a catering service, product sales
(such as bottled barbeque sauce for a barbeque
restaurant), and apparel products with the name of
the restaurant on them.
Financials (3 of 5)

• Cost Structure
– A business’s cost structure describes the most impor-
tant costs incurred to support its business model.
– It costs money to establish a basis of differentiation,
develop core competencies, acquire and develop key
assets, and so forth.
– Generally, the goal for this box in a firm’s business
model template is threefold:
• Identify whether the business is a cost-driven or
value-driven business.
• Identify the nature of the business’s costs.
• Identify the business’s major cost categories.
Financials (4 of 5)

• Financing/Funding
– Many business models rely on a certain amount of fi-
nancing or funding to bring their business model to
life.
– At the business model stage projections do not need
to be completed to determine the exact amount of
money that is needed. An approximation is sufficient.
– There are three categories of costs to consider:
• Capital costs.
• One-time expenses, such as building a Web site
and training initial employees.
• Provisions for ramp-up expenses (most businesses
incur costs before they earn revenues).
Financials (5 of 5)

• Financing/Funding (continued)
– Some entrepreneurs are able to draw from per-
sonal resources to fund their business. In other
cases, the business may be simple enough that it is
funded from its own profits from day one.
– In many cases, however, an initial infusion of fund-
ing or financing is needed.
– The business model template should indicate the
appropriate amount of funding that will be needed
and where the money will most likely come from.
Operations (1 of 5)

• Operations
– The final quadrant in a firm’s business model fo-
cuses on operations.
– Operations are both integral to a firm’s overall
business model and represent the day-to-day
heartbeat of a firm.
Operations (2 of 5)

• Product (or Service) Production

– This section focuses on how a firm’s products and/
or services are produced.
– For example, if a firm sells a physical product, the
product can be manufactured or produced in-
house, by a contract manufacturer, or via an out-
source provider.
• This decision has a major impact on all aspects
of a firm’s business model.
– If a firm is producing a service rather than a physi-
cal product, a brief description of how the service
will be produced should be provided.
Operations (3 of 5)

• Channels
– A company’s channels describe how it delivers its
product or service to its customers.
– Businesses either sell direct, through intermediaries
(such as distributors and wholesalers), or via a
combination of both.
– Some firms employ a sales force that calls on po-
tential customers to try to close sales. This is an ex-
pensive strategy but necessary in some instances.
Operations (4 of 5)

• Key Partners
– The final element of a firm’s business model is key
partners.
– Start-ups, in particular, typically do not have suffi-
cient resources (or funding) to perform all the tasks
necessary to make their business models work, so
they rely on key partners to perform important roles.
– The table on the next slide identifies the most com-
mon types of business partnerships.
Operations (5 of 5)

Table 4.4 The Most Common Types of Business Partnerships

Partnership Form Description
Joint venture An entity created by two or more firms pooling a portion of
their resources to create a separate, jointly-owned organiza-
tion
Network A hub-and-wheel configuration with a local firm at the hub
organizing the interdependencies of a complex array of firms
Consortia A group of organizations with similar needs that band to-
gether to create a new entity to address those needs
Strategic alliance An arrangement between two or more firms that establishes
an exchange relationship but has no joint ownership involved
Trade associations Organizations (typically nonprofit) that are formed by firms in
the same industry to collect and disseminate trade informa-
tion, offer legal and technical advice, furnish industry-related
training, and provide a platform for collective lobbying
Source: B. Barringer and J. S. Harrison, “Walking a Tightrope: Creating Value Through
Interorganizational Relationships,” Journal of Management 26, no. 3 (2000): 367–403.
Thank you