More About Business Model

A business model is a framework for creating economic, social, and/or other forms of value. The term business model is thus used for a broad range of informal and formal descriptions to represent core aspects of a business, including purpose, offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.

Conceptualization of business models try to formalize informal descriptions into building blocks and their relationships. While many different conceptualizations exist, Osterwalder proposed^[1] a synthesis of different conceptualizations into a single reference model based on the similarities of a large range of models, and constitutes a business model design template which allows enterprises to describe their business model:

Infrastructure

• Core capabilities: The capabilities and competencies necessary to execute a company's business model.
• Partner network: The business alliances which complement other aspects of the business model.
• Value configuration: The rationale which makes a business mutually beneficial for a business and its customers.

Offering

• Value proposition: The products and services a business offers. Quoting Osterwalder (2004), a value proposition "is an overall view of .. products and services that together represent value for a specific customer segment. It describes the way a firm differentiates itself from its competitors and is the reason why customers buy from a certain firm and not from another."

Customers

• Target customer: The target audience for a business' products and services.
• Distribution channel: The means by which a company delivers products and services to customers. This includes the company's marketing and distribution strategy.
• Customer relationship: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.

Finances

• Cost structure: The monetary consequences of the means employed in the business model. A company's DOC.
• Revenue: The way a company makes money through a variety of revenue flows. A company's income.

To extract value from an innovation, a start-up (or any firm for that matter) needs an appropriate business model. Business models convert new technology to economic value. Business model is a method of doing business by which a company can generate revenue to sustain itself. Its also spells out where the company is positioned in the value chain.

For some start-ups, familiar business models cannot be applied, so a new model must be devised. Not only is the business model important, in some cases the innovation rests not in the product or service but in the business model itself.
Business models are a component of a business plan or a business case. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom present a basic framework describing the elements of a business model.
Given the complexities of products, markets, and the environment in which the firm operates, very few individuals, if any, fully understand the organization's tasks in their entirety. The technical experts know their domain and the business experts know theirs. The business model serves to connect these two domains as shown in the following diagram:
Role of Business Model

Technical Inputs

Business Model

Economic Outputs

A business model draws on a multitude of business subjects, including economics, entrepreneurship, finance, marketing, operations, and strategy. The business model itself is an important determinant of the profits to be made from an innovation. A mediocre innovation with a great business model may be more profitable than a great innovation with a mediocre business model.

In their research, Chesbrough and Rosenbloom searched literature from both the academic and the business press and identified some common themes. They list the following six components of the business model:

1. Value proposition - a description the customer problem, the product that addresses the problem, and the value of the product from the customer's perspective.
2. Market segment - the group of customers to target, recognizing that different market segments have different needs. Sometimes the potential of an innovation is unlocked only when a different market segment is targeted.
3. Value chain structure - the firm's position and activities in the value chain and how the firm will capture part of the value that it creates in the chain.
4. Revenue generation and margins - how revenue is generated (sales, leasing, subscription, support, etc.), the cost structure, and target profit margins.
5. Position in value network - identification of competitors, complementors, and any network effects that can be utilized to deliver more value to the customer.
6. Competitive strategy - how the company will attempt to develop a sustainable competitive advantage, for example, by means of a cost, differentiation, or niche strategy.

Business Model vs. Strategy
Chesbrough and Rosenbloom contrast the concept of the business model to that of strategy, identifying the following three differences:

1. Creating value vs. capturing value - the business model focus is on value creation. While the business model also addresses how that value will be captured by the firm, strategy goes further by focusing on building a sustainable competitive advantage.
2. Business value vs. shareholder value - the business model is an architecture for converting innovation to economic value for the business. However, the business model does not focus on delivering that business value to the shareholder. For example, financing methods are not considered by the business model but nonetheless impact shareholder value.
3. Assumed knowledge levels - the business model assumes a limited environmental knowledge, whereas strategy depends on a more complex analysis that requires more certainty in the knowledge of the environment.

Structure of Business Models
All business models must specify their revenue model (the description of how the company or an E-Commerce project will earn revenue). Revenue sources are:

• Transaction fees
• Subscription fees
• Advertisement fees
• Affiliate fees
• Sales
• Other models

Value proposition is the description of the benefits a company can derive from using E-Commerce.

References

1. Alexander Osterwalder, The Business Model Ontology - A Proposition In A Design Science Approach, Thesis, 2004.
2. Malone et al., Do Some Business Models Perform Better than Others?, May 2006.

Interpretations and Definitions of Entrepreneurship

There are many interpretations and definitions of entrepreneurship.
Entrepreneurship according to Onuoha (2007)^[1] is the practice of starting new organizations or revitalizing mature organizations, particularly new businesses generally in response to identified opportunities. According to intellectuals and business experts, the definition of entrepreneurship is simply the combining of ideas, hard work, and adjustment to the changing business market. It also entails meeting market demands, management.

Entrepreneurship is often a difficult undertaking, as a vast majority of new businesses fail. Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur only part-time) to major undertakings creating many job opportunities. Many "high value" entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business. Angel investors generally seek returns of 20-30% and more extensive involvement in the business.^[2]

Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. Lately more holistic conceptualizations of entrepreneurship as a specific mindset (see also entrepreneurial mindset) resulting in entrepreneurial initiatives e.g. in the form of social entrepreneurship, political entrepreneurship, or knowledge entrepreneurship emerged.

The concept of entrepreneurship has a wide range of meanings. On the one extreme an entrepreneur is a person of very high aptitude who pioneers change, possessing characteristics found in only a very small fraction of the population. On the other extreme of definitions, anyone who wants to work for himself or herself is considered to be an entrepreneur.

The word entrepreneur originates from the French word, entreprendre, which means "to undertake." In a business context, it means to start a business. The Merriam-Webster Dictionary presents the definition of an entrepreneur as one who organizes, manages, and assumes the risks of a business or enterprise.

Schumpeter's View of Entrepreneurship
Austrian economist Joseph Schumpeter 's definition of entrepreneurship placed an emphasis on innovation, such as:

• new products
• new production methods
• new markets
• new forms of organization

Wealth is created when such innovation results in new demand. From this viewpoint, one can define the function of the entrepreneur as one of combining various input factors in an innovative manner to generate value to the customer with the hope that this value will exceed the cost of the input factors, thus generating superior returns that result in the creation of wealth.

Entrepreneurship vs. Small Business
Many people use the terms "entrepreneur" and "small business owner" synonymously. While they may have much in common, there are significant differences between the entrepreneurial venture and the small business. Entrepreneurial ventures differ from small businesses in these ways:

1. Amount of wealth creation - rather than simply generating an income stream that replaces traditional employment, a successful entrepreneurial venture creates substantial wealth, typically in excess of several million dollars of profit.
2. Speed of wealth creation - while a successful small business can generate several million dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid; for example, within 5 years.
3. Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive of sure profits many entrepreneurs would be pursuing the idea and the opportunity no longer would exist.
4. Innovation - entrepreneurship often involves substantial innovation beyond what a small business might exhibit. This innovation gives the venture the competitive advantage that results in wealth creation. The innovation may be in the product or service itself, or in the business processes used to deliver it.

References

1. Onuoha G.,"Entrepreneurship", AIST International Journal 10:20-32, 2007.
2. Zoltan Acs and David B. Audretsch, Handbook of Entrepreneurship Research: An Interdisciplinary Survey and Introduction, Springer, 2003.
3. Casson, M., The Entrepreneur: An Economic Theory, second edition, Edward Elgar Publishing 2003.
4. Shane S.,A general theory of entrepreneurship : the individual-opportunity nexus in New Horizons in Entrepreneurship series, Edward Elgar Publishing, 2003.