02/03/2014

Business models - MaRS Discovery District

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Business models
A business model describes the value an organization offers to its customers. It illustrates the capabilities and resources required to create, market and deliver this value, and to generate profitable, sustainable revenue streams. In principle, a business model does not matter to customers; it is important to the company and the organization of its business. The business model determines the external relationships with suppliers, customers and partners. However, it is primarily focused on the companys business processes.

Importance of the business model

The business model is the key factor that leads to success in start-ups. It provides the starting point that allows a company to maximize its profitsthe sooner the business model is in place, the better. A viable business model is a key determinant (along with product development) in obtaining funding. Also, a business model must be scalable. Investors must be able to envision a start-ups business model (from an organizational and process perspective) as the company grows.

Defining the business model

A companys strategy defines the companys market and customers, and determines the value proposition for the customers business. The business model focuses on how a start-up captures
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Business models - MaRS Discovery District

some of the value for itself (i.e., how the company makes money). It determines the viability of the company. The business model focuses on coordinating internal and external processes to determine how the start-up interacts with solution partners, distribution channels and customers.

Source: Alex Osterwalder / arvetica

How the business model works

The business model describes, as a system, how the components of the business (i.e., organizational strategy, business processes) fit together to produce a profit. It answers the question,How does this business work? The answer to the question consists of two parts: 1. It includes a description of the efforts that generate sales, which produce revenue. The value proposition is delivered to the target customer through a distribution channel. The flow and update of the value proposition is influenced by the relationship capital created through the companys marketing activities. 2. It includes a description of the value-generating parts that make up the cost structure. A companys value proposition is created through the application of its key functions and abilities, through a configuration of operational activities that includes input and interaction with a partner network. For more information on the process of designing a business model, see the article entitled Business Model Design.

Creating an innovative business model

Companies that innovate on a business-model level experience greater growth rates than companies that focus on innovation in products and operations. There are several methods that start-ups can use to create an innovative business model:
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Business models - MaRS Discovery District

revenue/pricing model: change how revenue is generated through new value propositions and new pricing models (to take advantage of economies of scale) enterprise model: specialize and configure the business to deliver greater value by rethinking what is done in-house and through collaboration industry model: redefine an existing industry, move into a new industry or create a new industry For more information about developing a business model, download the MaRS workbook, Market Strategy Workbook 3: Strategic Marketing Approach. The information and exercises will help you design a business model by working through the key variables in executing a market strategy competition, partnership, distribution, pricing and positioning.

References
Kurtzman, J., and Rifkin, G. (2005). Startups That Work. London: Penguin Group. IBM Global Services. (2006, September). Business model innovationthe new route to competitive advantage. Whitepaper. IBM Global Services. (2008). The Enterprise of the Future. Whitepaper. Tags: business model, market strategy, strategy, value proposition

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Business models - MaRS Discovery District

One of the most critical decisions that early-stage technology entrepreneurs must make is to dete Customer discovery (phase 4): Evaluate customer feedback and determine next steps Evaluating customer feedback about your target market and product solution will help you determin Developing your value proposition: An overview of customer discovery Creating a clear, meaningful value proposition is one of the first challenges any entrepreneur fa

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Business models - MaRS Discovery District

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