People will always stress that having a well researched business plan is key before you start your

business. Although creating a business plan is often an important step in the evolution of a
business, particularly if you need financing or you are not experienced at running a business, it is
not necessarily the essential first step. There are two key elements that should be completed prior
to the business plan:

The business model

The strategy

What is a Business Model?

While the word model often stirs up images of mathematical formulas, a business model is in
fact a story of how a business works. In general terms, a business model is the method of doing
business by which a company can generate revenue. Both start-up ventures and established
companies take new products and services to the market through a venture shaped by a specific
business model. In their paper, The Role of the Business Model in Capturing Value from
Innovation, Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a
business model:

1. Articulate the value proposition the value created to users by using the product

2. Identify the market segment to whom and for what purpose is the product useful;
specify how revenue is generated by the firm.

3. Define the value chain the sequence of activities and information required to allow a
company to design, produce, market, deliver and support its product or service.

4. Estimate the cost structure and profit potential using the value chain and value
proposition identified.

5. Describe the position of the firm with the value network link suppliers, customers,
complementors and competitors.

6. Formulate the competitive strategy how will you gain and hold your competitive
advantage over competitors or potential new entrants.

Joan Magretta in her article Why Business Models Matter took the concept of the business model
a little further. Magretta suggests every business model needs to pass two critical tests, the
narrative test and the numbers test. The narrative test must tell a good story and explain how the
business works, who is the customer, what do they value and how a company can deliver value
to the customer. The numbers test means your profit and loss assumptions must add up. At the
most basic level, if your model doesnt work, then your model has failed one of the two tests.
To begin the modeling process you need to articulate a value proposition on the product or
service being provided. The model must then describe the target market. The customer will then
value the product on its ability to reduce costs, solve a problem or create new solutions. A market
focus is needed to identify what product attributes need to be targeted and how to resolve product
trade-offs such as quality versus cost. You also need to identify how much to charge and how the
customer will pay.

Think of business modeling as the managerial equivalent of the scientific method - you start with
a hypothesis, which you then test in action and revise when necessary. The business model also
plays a part of a planning tool by focusing managements on how all the elements and activities
of the business work together as a whole. At the end of the day, the business model should be
condensed onto one page consisting of: a diagram outlining how the business generates revenue,
how cash flows through the business and how the product flows through the business and; a
narrative describing the product/ service components, financial projections or other important
elements not captured in the diagram.

Business Models and Strategy

It is important to note that completing a business model does not constitute strategic planning.
Strategic planning factors in the one thing a business model doesnt; competition.

What is strategy?

According to the Collins English Dictionary, strategy is a particular long-term plan for success.
For our purposes, we will consider the essence of strategy as a formula for coping with the
competition. Competitive strategy is about being different and the goal for a corporate strategy is
to find a position in the industry where the company is unique and can defend itself against
market forces. To do this the company must choose a set of activities that can deliver a unique
mix of value.

Market Forces and Strategy

The determination of a strategy is rooted in determining how a company stacks up against basic
market forces, how it can defend itself against these forces and how it can influence these forces.
Fortunately, Michael E. Porter in his article How Competitive Forces Shape Strategy defined
these market forces for us. Known as Porters 5 forces they consist of:

1. The industry this is the jockeying for position among current competitors, this can
consists of price competition, new product introduction or advertising slugfests.

2. The threat of new entrants - the seriousness of the threat of entry depends on the barriers
to entry and reaction from existing companies. There are 6 major barriers to entry: 1)
economies of scale 2) product differentiation 3) capital requirements 4) cost
disadvantages independent of size 5) access to distribution channels 6) government
policy. A new company will generally have second thoughts about entering an industry if
 the incumbent has substantial resources to fight back, the incumbent seems likely to cut
prices or industry growth is slow.

3. The threat of substitute products/services - substitutes can place a ceiling on prices that
are charged and limit the potential of an industry.

4. The bargaining power of suppliers - suppliers can squeeze profitability by increasing

prices or lowering the quality of the goods.

5. The bargaining power of buyers (customers) - customers can force down prices, demand
better quality, more service or play competitors off on each other.

Once you assess how the market forces are affecting competition in your industry and their
underlying causes, you can identify the underlying strength and weaknesses of your company,
determine where it stands against each force and then determine a plan of action. Plans of action
may include:

Positioning the company match your strengths and weaknesses to the companys
industry, build defenses against competitive forces or find a position in the industry
where forces are the weakest. You need to know your companys capabilities and the
causes of the competitive forces

Influencing the balance take the offensive, for example innovative marketing can raise
brand identification or differentiate the product.

Exploiting industry change an evolution of an industry can bring changes in

competition. For example, in an industry life-cycle growth rates change and/or product
differentiation declines; anticipate shifts in the factors underlying these forces and
respond to them.

The framework for analyzing the industry and developing a strategy provides the road map for
answering the question what is the potential of this business?

Reconciling the Business Model and Strategy

I will use a short example to illustrate the difference between a business model and strategy.
Although you may think that Wal-Mart pioneered a new business model on its road to success,
the reality is that the model was really no different than the one Kmart was using at the time. But
it was what Sam Walton chose to do differently than Kmart, such as focusing on small towns as
opposed to large cities and everyday low prices, that was the real reason for his success.
Although Sam Waltons model was the same as Kmart's, his unique strategy made him a success.
Business model and business strategy are closely related concepts. Some business people
define the business model simply as the concrete illustration of the strategy at work. In any case,
both the business model and the business strategy describe how the company succeeds: How it
creates customer value, how it competes with others in the same industry, and how it generates
revenues and spends to create good margins.

Many different strategies and models are possible, even for companies in the same industry
selling similar products or services. Southwest Airlines (in the US) and Ryan Air (in Europe), for
instance, have strategies based on providing low cost transportation. Singapore Airlines, by
contrast, has a strategy based on brand image for highest quality luxury customer service.

A strategy is judged successful if it leads to a strong competitive position, business growth, and
good margins. This article further describes business strategy and business model, in the context
of related terms including strategic objective and business plan.

What does the business model at the heart of the strategy

look like?
The business strategy is implemented, communicated, and ultimately tested and evaluated by
business management through a business model. Moreover, It is accurate to say that the business
model is the heart of the company's business plan. The business plan explains in more detail and
depth how the business strategy and model will be implemented, what will impact business
performance for better or worse, and what implementing the business model should lead to in
terms of the company's financial performance and financial in the next year and beyond.

A business model typically includes at a minimum four major components:

1. The company's offering and value proposition.

The business model includes a statement of the company's value proposition. This describes
the company's offerings in goods and services in terms of the value they offer to the customer.

For instance, Dell was founded in 1984 with an innovative value proposition that was unique at
the time. Dell promised to build a computer, exactly as and when a customer orders it, and
deliver it at a very competitive price. As another example, Boeing states the customer value
proposition for its 747-8 aircraft very simply: "...more range, better fuel efficiency, and lower
operating costs."

In brief, the value proposition states why customers would buy from this company instead of
from the competition.

2. The company's customers.

Regarding customers, the business model typically spells out clearly ...
 The target market, or audience for the company's products and services. The market may
be defined in terms of such factors as gender, age, occupation, economic status,
experience or education, geographic location, or special interest, for example.

The company's approach to customer relationship management (CRM), including plans

and objectives for customer service, customer satisfaction, and customer retention.

The selling and distribution strategy. The company may plan to deliver directly to
customers directly through retail shops, through visits from a direct sales force, through
catalog or online orders shipped directly to customers, or through third party distributors
or resellers.

The marketing strategy and marketing plan, which explain how the value proposition will
be communicated and promoted, through product positioning, branding, and through
application of a pricing model.

3. The company's infrastructure and operations.

This section of the model spells out clearly ...

Key activities performed by the company in order to implement the business model (such
as market analysis, product design, manufacturing, and so on). Also described are key
activities that will be performed by business alliance partners, supply chain partners,
channels partners, and others.

Key resources and assets necessary for the creation of customer value. These can range
from buildings and equipment, to critical employee skills, to patents and intellectual
property, for instance.

4. The company's finances.

For many people, the section on company finances is the business model's most important
content and its reason for being. This section describes in the following in quantitative terms:

The company's revenue sources and cost structure. This part of the business model is
often summarized and presented in descriptions that have the form of (a) the company's
income statement, and (b) the company's operating budget and capital budget.

The company's financial position, including sources of funding and degree of leverage
(the extent to which funding is provided by lenders compared to funding provided by
owners).
How does the industry life cycle affect business strategy? Detail your answer based on each
stage: introduction, growth maturity, and decline.

The industry life cycle refers to the four different stages introduction, growth, maturity, and
decline that occur in the evolution of an industry over time (Rothaermel, 2013, p. 173).
Depending on the stage an industry is in, a company will need to adjust their strategy
accordingly. For instance, in the introduction stage, a focused strategy will allow a company to
appeal to and begin to develop a new customer base. As a result, the company will need to
emphasize the individuality and necessity of the new product or service they offer the customer
to help meet the customers needs. In the growth stage, it is important for a firm to show how
their goods and service are a superior choice to their competition. A focused approach will allow
the firm to conduct the type of marketing campaign necessary to meet these goals. During the
maturity stage, a company recognizes there are less radical innovations than in the growth stage
and therefore, a cost leadership strategy could be ideal during this stage of the industry life cycle.
As a result, the company may be able to increase their sales volume as a result of appealing to
the consumers desire for a more cost effective product. Lastly, in the decline stage of the
industry life cycle, it is likely that sales will be decreasing significantly for a company. As a
result, it is very important for the company to reduce costs and to also seek to maintain their
current market share. As a result, a cost leadership strategy or a integration business-level
strategy may be needed in order to remain within the industry. Discussion Question 7.4 Why
are standards important in many industries? As standards get adapted and become dominate, how
does this process influence the competitive nature of the industry? According to Rothaermel
(2013), a standard is an agreed upon solution about a common set of engineering features and
design choices; also known as dominant design (p. 175). The development if standards are
commonly developed within the growth stage of the industry life
cycle. Industry standards help to ensure products and services work as intended and also helps to
ensure customer safety. Additionally, industry standards help to ensure goods and services are
compatible with one another so they can be used with other goods and services. When a
company is able to be a forerunner in the development of an industry standard, they are more
likely to have a larger market share than other companies. As a result, the companys goods and
service can become known as the standard by which competing companies goods and services
are compared to.