Example of Business Model
Entrepreneurs start with ideas, but idea is only a concept or mental impression of a person. From the idea, entrepreneurs develop a vision. A vision is a statement describes the value it can create as well as the future for the startup. The vision helps set the direction and motivates people to work toward the same direction. For example Bill Gates’ vision about put a personal computer in every house in the U.S is a powerful vision that motivates Microsoft people. However, to share information about the business, Entrepreneurs must develop a business model to describe the rationale of how the startup creates, delivers value and grow to become a profitable business.
From the business model, entrepreneurs can describe, manipulate each components to get the maximum benefit possible. The business model is the foundation for the company strategy to be implemented through the structures, processes and activities. Each component of the business model must be validated carefully to make sure that it is correct and feasible. In the beginning, the business model is only a hypothesis, or a guess but through market validation, it becomes a reality. Entrepreneurs cannot build startups on their opinion or their hope. Everything they do must be based on facts and data. This is the key concept that distinguish between a success and a failure.
The business model consists of eight components: The Value (The products or services), The customers; The Chanel (How do you reach customers and deliver value); The Customer relationships (How do you get customers, keep them, grow them and acquire more customers); The Revenue (How much money you make); The Cost (How much money you spend to create the Value) Resources (What do you need to develop your value) Activities (What you must do) and Partnerships (Who should you work with to optimize your value?).
Since technical students are not comfortable with the concept of business model it would be best to use real examples to illustrate this concept. Since most students are familiar with Apple, Let’s us start with this company. Of course, Apple is no longer a startup but every time it starts a new product or service, Steve Jobs treated it like a startup. He develops a vision and business model to discuss it with his people.
In 2001, Apple started to develop a MP3 player called the iPod. This device works in conjunction with iTunes software that allows users to transfer music from a computer to the iPod. The software also provides a connection to Apple’s online store so users can buy and download music to the iPod. Steve Jobs vision is: “Provide a seamless music experience by integrate our music device to our computer software that connect to our online store where users can easily search, buy, download, and enjoy music.”
The vision of “Combine hardware, software, and online store” completely disrupts the music industry where they sell music CD in physical stores. It gave Apple a dominant market position within two years. It also disrupts the MP3 hardware industry and pushed most of Apple ‘s competitors into bankruptcy. Apple is NOT the first company that develops the MP3 in the market. There were at least 65 well established companies that sell MP3 players such as Sonny, Panasonic, Samsung, Rio, Diamond, SanDisk, Zune, Casio etc. All of these companies were very successful until they were outpaced by Apple.
The business model of Steve Jobs on iPod and iTunes: The Value (The products or services – Seamless music experience), The customers (People who want to listen to music); The Chanel (How do you reach customers and deliver value – Apple online store and electronic retail stores); The Customer relationships (How do you get customers, keep them, grow them and acquire more customers – Brand name that keep them switch to Apple product); The Revenue (How much money you make –iTunes store make money selling music, iPods hardware revenues ); The Cost (How much money you spend to create the Value – cost of people, marketing, sales and manufacturing) Resources (What do you need to develop your value – Our People, Apple brand, music, iTunes, iPod) Activities (What you must do – hardware design to perfection and best marketing people) and Partnerships (Who should you work with to optimize your value? – music companies, hardware manufacturer).
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
