A firm’s business model is its plan or recipe for how it creates, delivers, and captures value for its stakeholders.
General Categories of Business Models
There are two general categories of business models: standard business models and disruptive business models.
A. Standard Business Models
Standard business models depict existing plans or recipes firms can use to determine how they will create, deliver, and capture value for their stakeholders.
B. Disruptive Business Models
Disruptive business models, are rare, are ones that do not fit the profile of a standard business model and are impactful enough that they disrupt or change the way business is conducted in an industry or an important niche within an industry. There are two types of disruptive business models.
1. Newmarket disruption
Addresses a market that previously wasn’t served.
2. Low-end market disruption
Possible when the firms in the industry continue to improve products or services to the point where they are actually better than a sizable portion of their clientele needs or desires. This “performance oversupply” creates a vacuum that provides an opportunity for simple, typically low-cost business models to exist.
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 are often laid out in a visual framework or template so it is easy to see the individual parts and their interrelationships. One widely-used framework is the Business Model Canvas, popularized by Alexander Osterwalder and Yves Pigneur in their book, Business Model Generation. The Business Model Canvas consists of nine basic parts that show the logic of how a firm intends to create, deliver, and capture value for its stakeholders.
The Barringer/Ireland Business Model Template is slightly more comprehensive than the Business Model Canvas in that it consists of 4 major categories and 12 individual parts. The 12 parts make up a firm’s business model.
A. Core Strategy
A core strategy describes how the firm plans to compete relative to its competitors.
1. Business Mission
A business’s mission or mission statement describes why it exists and what its business model is supposed 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 firm’s mission is the first box that should be completed in the business model template. 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 business model.
A business’s mission statement should:
- Define its “reason for being”
- Describe what makes the company different
- Be risky and challenging but achievable
- Use a tone that represents the company’s culture and values
- Convey passion and stick in the mind of the reader
- Be honest and not claim to be something that the company “isn’t”
2. Basis of Differentiation
A company’s basis of differentiation is what causes consumers to pick one company’s products over another’s. It is what solves a problem or satisfies a customer's needs. When completing the basis for the differentiation portion of the Barringer/Ireland Business Model Template, it’s best to limit the description to two to three points.
A target market is a place within a larger market segment that represents a narrower group of customers with similar interests. Most new businesses do not start by selling to broad markets. Instead, most start by identifying an emerging or underserved niche within a larger market.
4. Product/Market Scope
A company’s product/market scope defines the products and markets on which it will concentrate. Most firms start narrow and pursue adjacent product and market opportunities as the company grows and becomes financially secure.
B. Resources
Resources are the inputs a firm uses to produce, sell, distribute, and service a product or service.
1. Core Competencies
A core competency is a specific factor or capability that supports a firm’s business model and sets it apart from its 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. It may also include factors such as a passion for a business idea and a high level of employee morale. A firm’s core competencies largely determine what it can do.
Most start-ups will list two to three core competencies on the business model template. Consistent with the information provided above, a core competency is compelling if it not only supports a firm’s initiatives but is also difficult to imitate and substitute. Few start-ups have core competencies in more than two to three areas.
2. Key Assets
Key assets are the assets that a firm owns that enable its business model to work. The assets can be physical, financial, intellectual, or human.
- Physical assets include physical space, equipment, vehicles, 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.
C. Financials
This is the only section of a firm’s business model that describes how it earns money. For most businesses, the manner in which it makes money is one of the most fundamental aspects around which its business model is built. The primary aspects of financials are revenue streams, cost structure, and financing/funding.
1. 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.
2. Cost Structure
A business’s cost structure describes the most important costs incurred to support its business model. 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 (fixed costs and variable costs), and identify the business’s major cost categories.
Businesses can be categorized as cost-driven or value-driven.
- Cost-driven businesses focus on minimizing costs wherever possible.
- Value-driven business models focus on offering a high-quality product (or experience) and personalized service.
- Fixed costs are costs that remain the same despite the volume of goods or services provided.
- Variable costs vary proportionally with the volume of goods or services produced.
- Business's major cost helps a business understand where its major costs will be incurred.
Finally, many business models rely on a certain amount of financing or funding to bring their business model to life.
In these cases, the business model template should indicate the approximate amount of funding that will be needed and where the money is most likely to come from.
There are three categories of costs to consider: capital costs, one-time expenses, and provisions for ramp-up expenses.
- Capital costs include real estate, buildings, equipment, vehicles, furniture, fixtures, and similar capital purchases.
- one-time expenses such as legal expenses to launch the business, website design, procurement of initial inventory, and similar one-time expenses and fees.
- ramp-up expenses are where they lose money until they are fully up to speed and reach profitability.
Operations are both integral to a firm’s overall business model and represent the day-to-day heartbeat of a firm. The primary elements of operations are product (or service) production, channels, and key partners.
1. Product (or Service) Production
This section focuses on how a firm’s products and/or services are produced.
If a firm sells physical products, the products can be manufactured or produced in-house, by a contract manufacturer, or via an outsource provider.
If a firm is providing a service rather than a physical product, a brief description of how the service will be produced should be provided.
2. Channels
A company’s channels describe how it delivers its product or service to its customers. Businesses sell direct, through intermediaries, or through a combination of both.
- Sell Direct: Via company-owned stores or company-owned websites.
- Through Intermediaries: Via distributors and wholesalers. Or using other company-owned websites/services (AliExpress, Amazon, Banggood, Tokopedia).
3. Key Partners
Start-ups, in particular, typically do not have sufficient resources (or funding) to perform all the tasks needed to make their business models work, so they rely on partners to perform key roles.
The first partnerships that many businesses forge are with suppliers. A supplier (or vendor) is a company that provides parts or services to another company. Almost all firms have suppliers who play vital roles in the functioning of their business models.
Along with suppliers, firms partner with other companies to make their business models work. The most common types of relationships, which include strategic alliances and joint ventures.
The advantages of participating in partnerships include: gaining access to a particular resource, risk and cost-sharing, speed to market, and learning.
Partnerships also have potential disadvantages.The disadvantages include loss of proprietary information, management complexities, and partial loss of decision autonomy.
