The concept of entrepreneurship has a wide range of meanings. On 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.
Sample Business Plan Outline
1) Company Description : About the Company
2) Industry Analysis : Entry Barriers, Economic & Technological factors and Regulatory Issues
3) Market Analysis : Market Potential and scope, Trends in the market, Segmentation, Product positioning.
4) Competition : Competitor’s profile, Evaluation of their product, SWOT Analysis
5) Marketing Strategy : 4 P’s (Product, Price, Place and Promotion)
6) Milestones : Product Development, Break-even Performance, Expansion
7) Risks and Contingencies : Some common risks include increased competition, Suppliers' failure to meet deadlines, Regulatory changes.
The Business Model
To extract value from an innovation, a start-up needs an appropriate business model. Business models convert new technology to economic value.
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.
Role of the Business Model
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 listed the following six components of the business model:
- Value proposition - a description the customer problem, the product that addresses the problem, and the value of the product from the customer's perspective.
- 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.
- 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.
- Revenue generation and margins - how revenue is generated (sales, leasing, subscription, support, etc.), the cost structure, and target profit margins.
- Position in value network - identification of competitors, complementors, and any network effects that can be utilized to deliver more value to the customer.
- 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:
- 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.
- 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.
- 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.
Business Model for the Xerox Copier
Chesbrough and Rosenbloom illustrate the importance of the business model with a case study of Xerox Corporation's early days in the copy machine business with its Xerox Model 914 copier. (Before changing its name to Xerox Corporation, the company was known as the Haloid Company and then Haloid Xerox Inc.)
The Model 914 used the relatively new electrophotography process, which is a dry process that avoids the use of wet chemicals. In seeking potential marketing partners, Haloid repeatedly was turned down by the likes of Kodak, GE, and IBM, who had concluded that there was no future in the technology as seen through the lens of the then-prevalent business model. While the technology was superior to earlier copy methods, the cost of the machine was six to seven times more expensive than alternative technologies. The model of selling the equipment below cost and making up the difference by large margins in the sale of supplies was not viable because the cost of the supplies was about the same as that of the alternatives, so there was little room to maneuver.
Xerox then decided to market the new product itself and developed a new business model to do so. The new model leased the equipment to the customer at a relatively low cost and then charged a per copy fee for copies in excess of 2000 copies per month. At that time, the average business copier produced an average of only 15-20 copies per day. For this model to be profitable to Xerox, the use of copies would have to increase substantially.
Fortunately for Xerox, the quality and convenience of the new copy technology proved itself and companies began to make thousands of copies per day. As a result, Xerox sustained a compound annual growth rate of 41% over a 12 year period. Without this business model, Xerox might not have been successful in commercializing the innovation.
