How To Create A Business Model

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For entrepreneurs, a business model is a critical component of the preparation stage of a business.  A business model is a design that illustrates how a business will operate, including how it will generate revenue, who it will sell its products to, and how it will handle production.  There are many kinds of business models, and many businesses use hybrids of multiple business models. There are countless routes to success for entrepreneurs, so narrowing the focus to a specific design is extremely helpful, and an important step in actualizing the idea that got it all started. 

A business model is the conceptualization of the core functions of a business that can be used to pitch the business to potential business partners, investors, or employees.  Every business should also develop a unique selling proposition. A unique selling proposition (USP) is a reason that a business' product is better than the competition for consumers.  Having a USP makes marketing and sales far easier for a business.


One of the most important aspects of strategic planning is determining what is and what is not worth the time and money necessary to reach a goal.  First, it is important for management to assess the capabilities of the business. To know which goals are attainable, one must first know what a business is capable of.  A business’ capabilities can also be referred to as internal factors. Internal factors are the various aspects of a business that affect its performance.  The most important internal factors to consider are a business' core competencies.  Core competencies are those processes that a business performs well or other notable strengths of the business.  A business must be able to exploit its core competencies to create an advantage over their competitors in order to succeed.


When determining what factors are most important for achieving a goal, there all kinds of questions to ask.  What type of equipment does the business own? Will the business need to acquire more equipment to reach its goals?  Can some work be outsourced in order to save time and/or money? What level of skill does the workforce have? Does the business have enough skilled and unskilled labor to achieve its objective?  What limitations or constraints might hinder efforts to reach the goal? These are all important questions that must be answered about the business itself in the planning stage of a project. 


For a business to stand out in the crowd, it needs to create a value proposition.  A value proposition is a statement of the benefits that a business or its products can deliver to customers.  A value proposition can actually become a competitive advantage if it encourages customers to choose a business or a product over the competition.  A competitive advantage can be any factor, like a low price or a higher quality product, that elevates a business above its competitors.  By analyzing both a business and its competition one can see where opportunities exist to develop a competitive advantage.  In order to thrive in a competitive market, your business must have something to differentiate itself from the competition, and something that clearly makes your business better.  There are many ways a business can create competitive advantage.


Strategic pricing is one way to create an advantage.  Premium products are marketed as being superior in quality compared to what is available in the market which is why the market will respond to it, even at a higher price point.  This happens because the product has a higher perceived value. On the other hand, a lower price is not necessarily indicative of a weaker product. Discount products, which are marketed as being less-expensive and yet comparable in quality to similar products in the market, can still be quite popular with consumers.   


Cost leadership is a business' ability to produce a product at a lower cost than other competitors.  If a business is able to produce the same product quality but sell it for less, then this gives them a competitive advantage over other businesses in the industry.  Lower costs can actually result in higher profits, as businesses will sell more units at the lower price. However, if lower prices are resulting in a business seeing less than desirable profits, then it can attempt to recoup lost profits elsewhere by moving to a less expensive facility, finding cheaper raw materials, or hiring cheaper labor.  With lowered expenses and manufacturing costs, a business can continue to compete on price.


Another type of competitive advantage that a business can gain is a differential advantage.  This occurs when a business' products are distinct from those of the competition.  In other words, a differential advantage occurs when a business' products stand out from the crowd.  This is a valuable competitive advantage to hold, especially in industries or markets with a high level of competition.  It takes a great deal of research and innovation to create a product that truly stands out, which makes it difficult to gain a differential advantage.  Businesses can gain differential advantages by either improving existing products or developing new products that satisfy the same consumer needs. The process of marketing a product as distinct from competitors’ offerings to increase its perceived value is referred to as differentiation.  Businesses can be more creative in their efforts to create a differential advantage by using experience differentiation.  Experience differentiation is the process of engaging consumers with a product using sensory appeals to create positive associations and set the product apart from the competition.  By providing a new or innovative solution to consumers’ needs a business can create demand for its product and increase the product’s value to consumers.  


Focus strategy is another way in which a business can gain a competitive advantage.  The goal of focus strategy is for a business to focus its marketing efforts at a few smaller target markets, or niches, rather than a blanket marketing strategy.  This strategy is often used for smaller businesses, as they may not have the appropriate resources or ability to mass-market. By focusing on smaller markets a business does not have to overextend itself, and it can much more easily create a relationship with consumers.  Businesses that utilize focus strategy are often customer-centric, taking consumer interests and attitudes into account when developing and marketing products. This allows businesses the ability to better understand consumers and their needs. 


Designing a business model involves the identification of desirable business ethics, target markets, supply and distribution methods, core competencies, product values, competitive advantages, and revenue streams.  Having selected or developed a business model, the next step for the entrepreneur is to use a business model to develop a business strategy. A business strategy is the method by which a business will actualize its business model.  In other words, the business model is like the blueprint for a house, and the business strategy is like the actual construction plan.  A set of blueprints cannot become a house without meticulous planning, scheduling, and allocation of resources. Toilets cannot be placed before the foundation is poured, and the windows cannot be installed without walls in which to anchor them.  Much in the same way, once a business model has been decided upon a business strategy must be developed to make that model a reality.  

In order to achieve its objectives, a business's strategy must lay out the steps to get there.  Once you know what your business does well, and where it has an edge on the competition, you can create a strategy to maximize those traits.  The strategy will determine how a business markets itself, whom it markets to, how it sources production, and even how it scales up as the business grows.  The size of a business is an important factor in business strategy development. A small business is defined as having 50 or fewer employees, a medium business has 51 to 250 employees, and a large business will have over 250 employees.  A business's size can dictate many other aspects of the business. So, accurately projecting the size of a fully-functional business is essential to the development of both the business model and the business strategy. 


Coming up with a great business idea is merely the first step of the process of starting a business.  Once you have your idea, you need to flesh it out into a more meaningful design. The business model that you develop around your idea will dictate everything from how the business is run, to how it is marketed, to how products are sold.  Your business model can then be used to create a business strategy, which will take your idea one step closer to actualization.  

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