- Define the business model
- Identify the four core areas of a business model


[SLIDE 1]

A business model is a conceptual framework that describes the way that a firm creates, delivers and extracts value. It includes a network of activities and resources to create a sustainable and scalable business that delivers value to target customers. Business models help entrepreneurs generate value and scale. They do this in several ways: by fulfilling unmet needs in an existing market, by delivering existing products and services to existing customers with unique differentiation, and by serving customers in new markets.

It is important to note that a business model is not the same as a business plan, although people often confuse the two. A business plan is a formal document that provides background and financial information about the company, outlines your goals for the business and describes how you intend to reach them. A business plan supports the business model and explains the steps necessary to achieve the business model's goals. 


[SLIDE 2]

New entrepreneurs have the freedom to create, test and adapt their business models until they find a compelling value proposition that meets the needs of most customers.  Because new businesses tend to be small in the beginning, it is much easier to be agile and make quick, efficient changes to the business model during the start-up stage. Then, if successful, the business can scale as the young business model is tested and validated through early action. Equally, if the changes don't seem to work, then it is easy to spot the flaws and adjust them accordingly before large-scale investments are made. 

This is the logic behind the often-quoted saying from Steve Blank, a Silicon Valley entrepreneur and professor: "A start-up is a temporary organization in search of a scalable business model."


[SLIDE 3]

The key to a successful business model is focusing on what customers want and where they are going. In the last lesson, we looked at the rise of Amazon, whose founder Jeff Bezos excelled at experimenting with new business opportunities to test assumptions behind various business models. Amazon is a great example of a company that continually invents new business models to stay relevant, moving from selling books to other products to brokering sales for other companies to selling cloud computing, and then to selling hardware like the Kindle (and more recently, through cashless grocery concepts). As Bezos says, "I really look where the customer is going and where I need to deliver value for that customer, and I don't care about legacy".


[SLIDE 4]

The business model consists of four main interlocking parts that together create the business. These are as follows: the offering, the customers, the infrastructure, and the financial viability. Without these four parts, there is no business, no company, and no opportunity. All must coexist and none can be ignored. However, each can be a source of innovation and advantage over the competition. In other words, competitive advantage doesn't always come from the product or service you are offering. It can come from the other areas of the business as well.


[SLIDE 5]

The first part of the business model is the offering, which identifies what you are offering to particular customer segment, the value generated for those customers, and how you will reach and communicate with them. The offering includes the customer value proposition, or the CVP, which describes exactly what products or services your business offers and sells to customers. It explains how you can help customers do something more inexpensively, easily, effectively or quickly than before. 


[SLIDE 6]

Customers include the people who populate the segment of the market that your offering is serving. Entrepreneurs typically can't serve everyone in the market so you have to choose whom best to target. In addition you have to determine how you will reach their segment and how you will maintain a relationship with the customer. 


[SLIDE 7]

The infrastructure generally includes all the resources (people, technology, products, suppliers, partners, facilities, cash, etc.) that an entrepreneur must have in order to deliver the CVP. For example, when Anna Haupt and Terese Alstin wanted to make their idea for the invisible bicycle helmet become a reality, they enlisted investors, cycling experts, designers, suppliers, and retailers to support the creation promotion and sale of the product. 


[SLIDE 8]

Financial viability defines the revenue and cost structures a business needs to meet its operating expenses and financial obligations.  In other words, it is designed to answer the question: how much will it cost to deliver the offering to customers?

People often mistakenly believe that the business model is just about revenue and costs, but a business model is more than just a financial model. It has to describe more than how you intend to make money; it needs to explain why a customer would give you money in the first place, and what is in it for the customer. This is where the CVP comes in. We'll discuss the CVP in the next lesson.