Session 4. Idea Assesment and Developing An Effective Business Model

IDEA ASSESSMENT
AND DEVELOPING
AN EFFECTIVE
BUSINESS MODEL
Session 4
IDEA ASSESSMENT
▪ Idea assessment:
▪ The process of examining a particular need in the market,

developing a solution for that need, and determining the
entrepreneur’s ability to successfully turn the idea into a
business.
Copyright © 2016 Pearson Education, Inc 4-2

NEW BUSINESS PLANNING PROCESS

IDEA ASSESSMENT
Use an idea sketch pad to ask key questions addressing:
1.Customers
2.Offering
3.Value proposition
4.Core competencies
5.People

IDEA SKETCH PAD

FEASIBILITY ANALYSIS
▪ Is a particular idea a viable foundation for creating a successful

business?
▪ Feasibility study addresses the question: “Should we proceed with
this business idea?”

ELEMENTS OF A FEASIBILITY ANALYSIS


PRODUCT OR SERVICE FEASIBILITY ANALYSIS
▪ Determines the degree to which a product or service idea

appeals to potential customers and identifies the resources
necessary to produce it.
▪ Two questions:
1. Are customers willing to purchase our product or service?
2. Can we provide the product or service to customers at a
profit?

PRODUCT OR SERVICE FEASIBILITY ANALYSIS
▪ Primary research:
▪ Collect data firsthand and analyze it.
▪ Secondary research:
▪ Gather data that already has been compiled and analyze it.
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PRIMARY RESEARCH TECHNIQUES
▪ Customer surveys and questionnaires

▪ Focus groups
▪ Prototypes
▪ In-home trials
▪ “Windshield” research
▪ Trade associations and business directories
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PRIMARY RESEARCH TECHNIQUES
▪ Industry databases
▪ Demographic data
▪ Forecasts
▪ Articles
▪ Local data
▪ Internet
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FINANCIAL FEASIBILITY ANALYSIS
▪ Capital requirements: an estimate of how much start-up capital is

required to launch the business.
▪ Estimated earnings: forecasted income statements.
▪ Time out of cash: the total cash it will take to sustain the business
until the business achieves break-even cash flow.
▪ Return on investment: combining the previous two estimates to
determine how much investors can expect their investments to
return.


ENTREPRENEUR FEASIBILITY
▪ Is this idea right for me?
▪ Assess entrepreneurial readiness: knowledge, experience, and
skills necessary for entrepreneurs to be successful.
▪ Assess whether the business will be able to generate enough
profit to support everyone’s income needs.

ENVIRONMENTAL FORCES AND NEW VENTURES

INDUSTRY AND MARKET FEASIBILITY ANALYSIS
Assess industry attractiveness using six macro forces:
1. Sociocultural
2. Technological
3. Demographic
4. Economic
5. Political and legal
6. Global

▪ Ask:
▪ How large is the industry?
▪ How fast is it growing?
▪ Is the industry as a whole profitable?
▪ Is the industry characterized by high profit margins
or razor-thin margins?
▪ How essential are its products or services to
customers?

▪ What trends are shaping the industry’s future?
▪ What threats does the industry face?
▪ What opportunities does the industry face?
▪ How crowded is the industry?
▪ How intense is the level of competition in the industry?
▪ Is the industry young, mature, or somewhere in between?

PORTER’S FIVE FORCES MODEL
▪ Five forces interact with one another to determine the setting in

which companies compete and, hence, the attractiveness of the
industry:
1. Rivalry among companies in the industry
2. Bargaining power of suppliers
3. Bargaining power of buyers
4. Threat of new entrants
5. Threat of substitute products or services

FIVE FORCES MODEL

FIVE FORCES MODEL

RIVALRY AMONG COMPANIES
▪ Strongest of the five forces
▪ Industry is more attractive when:
▪ Number of competitors is large, or, at the other extreme,
quite small
▪ Competitors are not similar in size or capacity
▪ Industry is growing fast
▪ Opportunity to sell a differentiated product or service exists

FIVE FORCES MODEL

BARGAINING POWER OF SUPPLIERS
▪ The greater the leverage of suppliers, the less attractive the
industry.
▪ Many suppliers sell a commodity product
▪ Substitutes are available
▪ Switching costs are low
▪ Items account for a small portion of the cost of finished
products

FIVE FORCES MODEL

BARGAINING POWER OF BUYERS
▪ Buyers’ influence is high when number of customers is
small and cost of switching to a competitor’s product is
low.
▪ Customers’ switching costs are high
▪ Number of buyers is large
▪ Customers want differentiated products
▪ Customers find it difficult to collect information for
comparing suppliers
▪ Items account for a small portion of customers’
finished products

FIVE FORCES MODEL

THREAT OF NEW ENTRANTS
▪ The larger the pool of potential new entrants, the less attractive an
industry is.
▪ Industry is more attractive to new entrants when:
▪ Advantages of economies of scale are absent
▪ Capital requirements to enter are low
▪ Cost advantages are not related to company size
▪ Buyers are not loyal to existing brands
▪ Government does not restrict the entrance of new companies

FIVE FORCES MODEL

THREAT OF SUBSTITUTES
▪ Substitute products or services can turn an industry on its head.

▪ Industry is more attractive to new entrants when:
▪ Quality substitutes are not readily available
▪ Prices of substitute products are not significantly lower
than those of the industry’s products
▪ Buyers’ switching costs are high

FIVE FORCES MATRIX

WHAT IS A BUSINESS MODEL?
▪ Once you have identified your opportunity, the next step is to

device a strategy to pursue that opportunity.
▪ You need to understand exactly what your business model is.
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.
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-35

DELL’S BUSINESS MODEL
▪ 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.

DELL’S BUSINESS MODEL
Dell’s Approach to Selling PCs versus Traditional Manufacturers

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.

DIVERSITY OF BUSINESS MODELS
• There is no standard business
model for an industry or for
Diversity or Variety in a target market within an
Business Models industry.
• However, over time, the most
successful business models
in an industry predominate.
• There are always opportunities
for business model innovation.

HOW BUSINESS MODELS EMERGE
▪ 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.

The Value Chain

▪ The Value Chain
▪ 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.

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

COMPONENTS OF A BUSINESS MODEL
Four Components of a Business Model

CORE STRATEGY
▪ 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

CORE STRATEGY
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.
A company’s product/market scope defines

Product/Market the products and markets on which it will
Scope concentrate.

CORE STRATEGY
Primary Elements of Core Strategy
It is important that a new venture differentiate

itself from its competitors in some way that is
Basis of 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?

STRATEGIC RESOURCES
▪ 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

STRATEGIC RESOURCES
Primary Elements of Strategic Resources
A core competency is a resource or capability that

Core serves as a source of a firm’s competitive
Competencies advantage.
Examples include Sony’s competence in
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.
STRATEGIC RESOURCES
▪ 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.

PARTNERSHIP NETWORK
▪ 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

PARTNERSHIP NETWORK
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.
Other Key An entrepreneur’s ability to launch a firm that
Relationships achieves a competitive advantage may hinge as much
on the skills of the partners as on the skills within the
firm itself.
PARTNERSHIP NETWORK
The Most Common Types of Business Partnerships

CUSTOMER INTERFACE
▪ 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

CUSTOMER INTERFACE
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 Fulfillment and support describes the way a firm’s

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

CUSTOMER INTERFACE
Primary Elements of Customer Interface
The third element of a company’s customer

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

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.

YOUR FIRST STEPS ARE TO…
 Select a business model

 Determine a basic strategy category
 Differentiation
 Low cost
 Niche
Copyright © 2014 John Wiley & Sons, Inc.

THE BUSINESS MODEL
▪ Many for the world changing businesses that have formed
over the past 10 years have struggled to find a viable
business model.
▪ Example: Twitter
▪ The danger is that customers used to getting something for
free may not want to pay for it.
CREATE YOUR BUSINESS MODEL
Revenue Sources of
Model Revenue
Business
Model Cost of
Goods Sold
Cost Model
Operating
Expenses

THE FIRST MOVER MYTH
▪ Beware of “first mover advantage” and claims that “we do
not have any competition.”
▪ Entrepreneurs who make these claims don’t truly understand
the nature of their business and what first mover advantage
really is.
▪ Even if you are first and gain a substantial customer base,
you may not succeed with a first mover advantage.
TO SUCCEED AS A SUCCESSFUL FIRST
MOVER YOU MUST…
 Be first (or very early) into the market
 Capture a large percentage of the market quickly
 Create switching costs so customers stick with you
First movers rarely win and its an expensive strategy to take

FIRST MOVER’S ARE OFTEN SURPASSED
Industry First Mover Current Leader
Social Networking Friendster Facebook
Video Games Atari Nintendo
Web Browser Mosaic Google
Internet Search Engine Excite Google
Word Processing Software WordStar Microsoft Word
Personal Computer Altair Dell
Email Juno Yahoo Mail
Diet Soda No-Cal Diet Coke
Presentation Software Harvard Graphics Microsoft PowerPoint
Online Bookseller Book Stacks Unlimited Amazon
ATM Machines Docutel Diebold

TO WIN, YOUR STRATEGY MUST BE TO BE ONE, OR MORE, OF
THESE
Cheaper Faster
Better
YOUR PEOPLE ARE YOUR ADVANTAGE
Values
Selection Structure
Founders need to create a culture and align the employees they select with the values
and structure of the company

YOUR PEOPLE ARE YOUR ADVANTAGE
▪ Values: You need to identify what values you want to drive your
organization.
▪ Value communicate what kind of work environment founders
want to create and what guidelines they use in hiring future
employees.
▪ Selection: It’s important to hire the right person the first time.
▪ Structure: The structure of a new venture changes as it matures.
Have a flexible organization structure.
▪ Find team members and early-stage employees who are
overqualified for the tasks they will initially be doing.
DEVELOP YOUR ENTRY STRATEGY
Benchmark
Devise Initial Market Test
Create a Platform

▪ Benchmarking: Before you raise outside capital, first learn
from others. Bench mark competitors and learn “best
practices” from firms that operate inside and outside your
industry of interest.
▪ Create a simple matrix that identifies the firm and its
strategy, core customers, sources of competitive advantage,
basic revenue model and major cost categories and any
other elements that you think might be useful.
▪ Initial Market Test: Device your initial market test once you have a
strong understanding of your completion.
▪ While you can visualize and plan for your business in great details
over a long period of time, you never truly learn whether it is a
viable business until you make a sale.
▪ Too many entrepreneurs make the mistake of spending 1 million
rupees only to find out that customer’s don’t like the basic concept.
▪ Adapting your concept at that point is more costly than if you had
completed some earlier market tests.
▪ Adapt your business based on what you learn at each market test.
▪ Creating a Platform: Create a platform on which to grow your
business.
▪ The key to your entry strategy is to find a pathway into the industry
and a way of surviving the first two to three years when most
businesses are operating with a negative cash flow.
▪ Starting in year three, you need to envision how you will not only
grow your firm but also thrive.
BENCHMARK YOUR COMPETITION: THE JETBLUE EXAMPLE

GROWTH STRATEGY
▪ The first two to three years is about survival.
▪ The firm has to prove that its customers are interested in its
offerings, refine its operations, and increase its visibility.
▪ After the first couple of years, firms have to seek growth.
▪ Although experience suggests that the first few years of a new
venture should focus on testing the market and refining your
business model, it is never too early to start thinking about how you
will grow.
YOU CAN DRIVE GROWTH 3 WAYS
Franchising
Product mix
expansion
Geographic
expansion
Growth
FRANCHISING HAS 3 MAIN BENEFITS
 Replicability
 Established and proven methods
 New sources of revenue

 Royalties and fees from franchisees
 New capital funds growth
Franchising works best with service businesses that are easy to replicate. Be sure to
monitor franchisees to maintain brand purity

TOP 10 US FRANCHISORS DO WELL
# Chain US Total Franchise US Franchise Units Sales per store ($
Sales ($) rounded)
1 McDonald’s 24 billion 11,833 2 million
2 Subway 8.2 billion 21,195 387,000
3 Burger King 7.6 billion 6,280 1.2 million
4 Wendy’s 5.8 billion 4,662 1.3 million
5 Dunkin’ Donuts 5 billion 5,451 913,000
6 Taco Bell 4.2 billion 4,322 983,000
7 KFC 4 billion 4,302 925,000
8 Pizza Hut 3.9 billion 6,196 629,000
9 Applebee’s 3.3 billion 1,343 2.5 million
10 SONIC Drive-Ins 3 billion 2,706 1.1 million
Source: Technomic/Restaurant Finance, compiled by Blue MauMau 2007

Drive growth with product mix
 Many companies start with one product, but as they gain traction
in the marketplace, they recognize new opportunities to add to
their mix.
 Tangents and adjacencies
 What makes sense with current offerings?
 Spread current costs
 New products  revenues more than costs
 Maintain same distribution channels
Build on the base that was already created from existing products. Share resources,
relationships and channels with current lines?

Consider these 3 topics before expanding geographically
 Expanding geographically is another common growth strategy.
 This natural growth is based on the underlying assumption that customers should like
your product or service elsewhere if they like it in the location where you have founded
the company.
 Customers
 Go where they are
 Mimic proven success strategies
 Vendors
 Can you use the same vendors?
 Any new costs? Leverage volume for better pricing
 Distribution
 Same channels?
 Leverage volume

DEVELOPING AND TESTING A BUSINESS MODEL
▪ Key questions to address:
1. What value does the business offer customers?
2. Who is my target market?
3. What do they expect of me as my customers?
4. How do I get information to them, and how do they want to
get the product?
5. What are the key activities to make all this come together,
and what will they cost?
6. What resources do I need to make this happen, including
money?
7. Who are the key partners I will need to attract to be
successful?

THE BUSINESS MODELING PROCESS


THE BUSINESS MODEL CANVAS


TEST THE VALUE PROPOSITION
▪ Ask customers:
▪ Do we really understand the customer problem the business
model is trying to address?
▪ Do these customers care enough about this problem to spend
their hard-earned money on our product?
▪ Do these customers care enough about our product to help us
by telling others through word-of-mouth?


BUSINESS PROTOTYPING
▪ Entrepreneurs test their business models on a small scale
before committing serious resources to launch a business that
might not work.
▪ Recognizes that a business idea is a hypothesis that needs to
be tested before taking it full scale.

BUSINESS PROTOTYPING
▪ Test early versions of a product or service using a lean start-up: a

process of rapidly developing simple prototypes to test key
assumptions by engaging real customers
▪ Begin the lean start-up process using a minimal viable product: the
simplest version of a product or service with which an entrepreneur
can create a sustainable business


PIVOTS
▪ Pivots: the process of making changes and adjustments in the

business model on the basis of the feedback a company receives
from customers.
1. Product pivot
2. Customer pivot
3. Revenue model pivot

CONCLUSION
▪ The best business ideas start with a common problem or

need.
▪ The ideas assessment process helps an entrepreneur
more efficiently and effectively examine multiple ideas to
identify the solution with the most potential.
▪ A feasibility analysis helps the entrepreneur determine
whether an idea can be transformed into a viable
business.

CONCLUSION
▪ Developing a business model helps the entrepreneur better

understand all that will be required to launch and build a
business.
▪ Once the entrepreneur completes the idea assessment,
feasibility study, and business model, he or she is ready to
develop the business plan.

Create something that is unique … If you set up a company selling widgets like the
bloke down the road and the only difference is that yours are cheaper, you’ll make
a living, but that is all you’ll achieve. If you can be truly differentiated and unique,
then you’ve really got something.
Martyn Dawes, founder of Coffee Nation

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IDEA ASSESSMENT

▪ The process of examining a particular need in the market,

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▪ Is a particular idea a viable foundation for creating a successful

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▪ Determines the degree to which a product or service idea

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▪ Customer surveys and questionnaires

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▪ Capital requirements: an estimate of how much start-up capital is

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▪ Five forces interact with one another to determine the setting in

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▪ Substitute products or services can turn an industry on its head.

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▪ Once you have identified your opportunity, the next step is to

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▪ Beyond Its Own Boundaries

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A firm’s mission, or mission statement,

A company’s product/market scope defines

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-46

It is important that a new venture differentiate

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-47

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-48

A core competency is a resource or capability that

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-50

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-51

Firms partner with other companies to make their

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Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 6-54

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