Business Models
BA 560
Prof. Thomas Dowling
Fall Term, 2006
An
effective business
model is the heart of a
successful business
plan.
Definition
A business model describes, as a
system, how the pieces of a business
fit together.
 A business model’s great strength as
a planning tool is that it focuses
attention on how all the elements of
the system fit into a working whole.

Business Model Basics

Answers 2 basic questions:
1. What will a business do to be
successful?
 2. How will it make $$$ doing these
things?


A business model explains the
underlying economic logic about how
a business can deliver value to
customers at an appropriate cost.
Business Hypothesis

Business modeling is the managerial
equivalent of the scientific method you begin with a hypothesis, which
the venture team tests in action and
revises as necessary.
Critical Tests

There are two critical tests:
1. The Narrative Test (Does the story
make sense?)
 2. The Numbers Test (Does the P&L
add up?)


Most new businesses fail because
they do not pass one or both of these
critical tests.
Successful Business Model
Characteristics
Clearly answers Peter Drucker’s
question: “Who is the customer?”
 Has all the elements of a good story:
precisely delineated characters,
plausible motivations, and a plot that
turns on an insight about value.
 Represents a better way than existing
alternatives

Successful Business Model
Characteristics
Creates new incremental demand (not
just shifting revenues between
existing market participants)
 Generates profit. Profits tell you the
degree to which your business model
is working (not just sales and revenue
- think dot.com here)

Role of Strategy
Business models do not really
consider the role of competition dealing with competitors is strategy’s
job.
 A competitive strategy explains how
you will do better than your rivals.
 Many managers confuse business
models with strategy.

Role of Strategy

Wal-Mart’s business model - discount
retailing - started in the early 1950’s.
Sam Walton created a unique
strategy - he sought out isolated rural
towns rather than metropolitan areas
and cities like the top 10 discounters
when he started (1962).
Role of Strategy

Sam Walton said: “Our key strategy
was to put good-sized stores into little
one-horse towns which everyone else
was ignoring.” He rightly bet that if his
stores could match or beat the city
discounter prices “people would shop
at home.” He was right!!!
Role of Strategy
Michael Dell was a true business
model pioneer.
 Dell’s direct to customer business
model laid out which value chain
activities Dell would do (and not do).
Yet it still had critical strategic choices
to make about which customers to
serve and what kinds of products and
services to offer.

Role of Strategy

When a new business model changes
the economics of an industry (i.e. Dell,
SW Airlines) and it is difficult to
replicate, it can create a strong
competitive advantage.
Impact on Organizational
Culture

Effective business models:




Align employees to deliver the kind of value
the company wants to create.
Are easy to grasp and remember top to
bottom - easily retold to customers.
Help individuals to see their own job within
the larger context of the firm and to tailor
their behavior accordingly.
Create a powerful tool for business strategy
execution.
Final Thoughts ...
The business model is the 'engine' of
the new venture and is the most
important piece of IP that any start-up
actually owns.
 If you get the business model right,
then the harder you work, the more
money you make (Google is an
example here). If you get it wrong,
then the harder you work, the more
money you lose.

Final Thoughts ...

The key to the business model is to:
"Suivez L'argent"-- follow the money:
how a business actually acquires
money and uses it. When you follow
the money, presumably, if there isn't
any (or enough), you'll discover this
early and stop.
Examples of Business
Models






The subscription business model
The razor and blades business model
(bait and hook)
The multi-level marketing business
model
The network effects business model
The monopolistic business model
The cutting out the middleman model
Examples of Business
Models






The auction business model
The online auction business model
The bricks and clicks business model
The loyalty business models
The industrialization of services business
model
The servitization of products business
model