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Entrepreneurship

11.2 Designing the Business Model

Entrepreneurship11.2 Designing the Business Model
  1. Preface
  2. 1 The Entrepreneurial Perspective
    1. Introduction
    2. 1.1 Entrepreneurship Today
    3. 1.2 Entrepreneurial Vision and Goals
    4. 1.3 The Entrepreneurial Mindset
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  3. 2 The Entrepreneurial Journey and Pathways
    1. Introduction
    2. 2.1 Overview of the Entrepreneurial Journey
    3. 2.2 The Process of Becoming an Entrepreneur
    4. 2.3 Entrepreneurial Pathways
    5. 2.4 Frameworks to Inform Your Entrepreneurial Path
    6. Key Terms
    7. Summary
    8. Review Questions
    9. Discussion Questions
    10. Case Questions
    11. Suggested Resources
  4. 3 The Ethical and Social Responsibilities of Entrepreneurs
    1. Introduction
    2. 3.1 Ethical and Legal Issues in Entrepreneurship
    3. 3.2 Corporate Social Responsibility and Social Entrepreneurship
    4. 3.3 Developing a Workplace Culture of Ethical Excellence and Accountability
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  5. 4 Creativity, Innovation, and Invention
    1. Introduction
    2. 4.1 Tools for Creativity and Innovation
    3. 4.2 Creativity, Innovation, and Invention: How They Differ
    4. 4.3 Developing Ideas, Innovations, and Inventions
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  6. 5 Identifying Entrepreneurial Opportunity
    1. Introduction
    2. 5.1 Entrepreneurial Opportunity
    3. 5.2 Researching Potential Business Opportunities
    4. 5.3 Competitive Analysis
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  7. 6 Problem Solving and Need Recognition Techniques
    1. Introduction
    2. 6.1 Problem Solving to Find Entrepreneurial Solutions
    3. 6.2 Creative Problem-Solving Process
    4. 6.3 Design Thinking
    5. 6.4 Lean Processes
    6. Key Terms
    7. Summary
    8. Review Questions
    9. Discussion Questions
    10. Case Questions
    11. Suggested Resources
  8. 7 Telling Your Entrepreneurial Story and Pitching the Idea
    1. Introduction
    2. 7.1 Clarifying Your Vision, Mission, and Goals
    3. 7.2 Sharing Your Entrepreneurial Story
    4. 7.3 Developing Pitches for Various Audiences and Goals
    5. 7.4 Protecting Your Idea and Polishing the Pitch through Feedback
    6. 7.5 Reality Check: Contests and Competitions
    7. Key Terms
    8. Summary
    9. Review Questions
    10. Discussion Questions
    11. Case Questions
    12. Suggested Resources
  9. 8 Entrepreneurial Marketing and Sales
    1. Introduction
    2. 8.1 Entrepreneurial Marketing and the Marketing Mix
    3. 8.2 Market Research, Market Opportunity Recognition, and Target Market
    4. 8.3 Marketing Techniques and Tools for Entrepreneurs
    5. 8.4 Entrepreneurial Branding
    6. 8.5 Marketing Strategy and the Marketing Plan
    7. 8.6 Sales and Customer Service
    8. Key Terms
    9. Summary
    10. Review Questions
    11. Discussion Questions
    12. Case Questions
    13. Suggested Resources
  10. 9 Entrepreneurial Finance and Accounting
    1. Introduction
    2. 9.1 Overview of Entrepreneurial Finance and Accounting Strategies
    3. 9.2 Special Funding Strategies
    4. 9.3 Accounting Basics for Entrepreneurs
    5. 9.4 Developing Startup Financial Statements and Projections
    6. Key Terms
    7. Summary
    8. Review Questions
    9. Discussion Questions
    10. Case Questions
    11. Suggested Resources
  11. 10 Launch for Growth to Success
    1. Introduction
    2. 10.1 Launching the Imperfect Business: Lean Startup
    3. 10.2 Why Early Failure Can Lead to Success Later
    4. 10.3 The Challenging Truth about Business Ownership
    5. 10.4 Managing, Following, and Adjusting the Initial Plan
    6. 10.5 Growth: Signs, Pains, and Cautions
    7. Key Terms
    8. Summary
    9. Review Questions
    10. Discussion Questions
    11. Case Questions
    12. Suggested Resources
  12. 11 Business Model and Plan
    1. Introduction
    2. 11.1 Avoiding the “Field of Dreams” Approach
    3. 11.2 Designing the Business Model
    4. 11.3 Conducting a Feasibility Analysis
    5. 11.4 The Business Plan
    6. Key Terms
    7. Summary
    8. Review Questions
    9. Discussion Questions
    10. Case Questions
    11. Suggested Resources
  13. 12 Building Networks and Foundations
    1. Introduction
    2. 12.1 Building and Connecting to Networks
    3. 12.2 Building the Entrepreneurial Dream Team
    4. 12.3 Designing a Startup Operational Plan
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  14. 13 Business Structure Options: Legal, Tax, and Risk Issues
    1. Introduction
    2. 13.1 Business Structures: Overview of Legal and Tax Considerations
    3. 13.2 Corporations
    4. 13.3 Partnerships and Joint Ventures
    5. 13.4 Limited Liability Companies
    6. 13.5 Sole Proprietorships
    7. 13.6 Additional Considerations: Capital Acquisition, Business Domicile, and Technology
    8. 13.7 Mitigating and Managing Risks
    9. Key Terms
    10. Summary
    11. Review Questions
    12. Discussion Questions
    13. Case Questions
    14. Suggested Resources
  15. 14 Fundamentals of Resource Planning
    1. Introduction
    2. 14.1 Types of Resources
    3. 14.2 Using the PEST Framework to Assess Resource Needs
    4. 14.3 Managing Resources over the Venture Life Cycle
    5. Key Terms
    6. Summary
    7. Review Questions
    8. Discussion Questions
    9. Case Questions
    10. Suggested Resources
  16. 15 Next Steps
    1. Introduction
    2. 15.1 Launching Your Venture
    3. 15.2 Making Difficult Business Decisions in Response to Challenges
    4. 15.3 Seeking Help or Support
    5. 15.4 Now What? Serving as a Mentor, Consultant, or Champion
    6. 15.5 Reflections: Documenting the Journey
    7. Key Terms
    8. Summary
    9. Review Questions
    10. Discussion Questions
    11. Case Questions
    12. Suggested Resources
  17. A | Suggested Resources
  18. Index

Portions of the material in this section are based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.

Learning Objectives

By the end of this section, you will be able to:

  • Define a business model and its purpose
  • Describe a business model canvas
  • Describe a lean model canvas
  • Describe a social business model canvas

According to Alexander Osterwalder and Yves Pigneur, the authors of Business Model Generation, a business model “describes the rationale of how an organization creates, delivers and captures value.” Nevertheless, there is no single definition of this term, and usage varies widely.29

In standard business usage, a business model is a plan for how venture will be funded; how the venture creates value for its stakeholders, including customers; how the venture’s offerings are made and distributed to the end users; and the how income will be generated through this process. The business model refers more to the design of the business, whereas a business plan is a planning document used for operations.

Each business model is unique to the company it describes. A typical business model addresses the desirability, feasibility, and viability of a company, product, or service. At a bare minimum, a business model needs to address revenue streams (e.g., a revenue model), a value proposition, and customer segments. In non-jargon English, this means you want to address what your idea is, who will use it, why they will use it, and how you will make money off it.

A canvas is a display that would-be entrepreneurs commonly use to map out and plan different components of their business models. There are several different types of canvases, with the business model canvas and the lean canvas being the most commonly used. There are hard-copy canvases modeled after an art canvas as well as digital versions. The original physical canvases are meant to serve as visual tools, used with sticky notes and sketches.

As developed by Osterwalder and Pigneur, the business model canvas has nine components, as shown in Figure 11.6.

The business model canvas consists of key partners, key activities, key resources, value propositions, customer relationships, channels, customer segments, cost structure, and revenue streams.
Figure 11.6 The business model canvas can be used to map or lay out the initial concept of your business. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

Osterwalder and Pigneur wrote Value Proposition Design as a sequel to Business Model Generation. Their value proposition canvas is a plug-in that complements the business model canvas, going in depth on activities such as encouraging entrepreneurs to address and tackle customer pains, gains, and jobs-to-be-done trigger questions, and designing pain relievers and gains. The complementary and accompanying activities and resources can be useful for a deeper dive into and understanding of customer value creation in the form of value proposition, although there are other approaches to conceptualizing your value proposition. For Christensen, the originator of the disruptive innovation and jobs-to-be-done theories, a value proposition is a product that helps customers do a job they’ve been trying to do more effectively, conveniently, and affordably.

Finding the intersection of your customers’ problems and your solutions is how you create a unique value proposition, according to the entrepreneur Ash Maurya, the author of Scaling Lean and Running Lean. In Running Lean, Maurya offers the following formula for creating an initial value proposition in the canvas, as shown in Figure 11.7.

Formula showing that the end result that the customer wants plus a specific period of time plus addressing objections equals the initial value proposition.
Figure 11.7 Maurya’s formula to determine value proposition considers customer needs and potential objections within a specific period of time. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

Maurya deviated from the standard business model canvas to create the lean canvas. It overlaps the business model canvas in five of the nine components: customer segments, value proposition, revenue streams, channels, and cost structure (Figure 11.8]. Rather than addressing key partners, key activities, and key resources, the lean canvas helps you tackle problems, solutions, and key metrics instead.

The lean model canvas consists of problems, solutions, metrics, value propositions, customer relationships, channels, customer segments, cost structure, and revenue streams.
Figure 11.8 The lean model canvas is a modification of the Business Model Canvas. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

While the business model canvas and the lean canvas are similar in format, there are differences in how they are used. It is generally accepted that the lean canvas model is a better fit for startups, whereas the business model canvas works well for already established businesses. The lean canvas is simpler; the business model canvas provides a more complete picture of a mature business.

Both the business model canvas and the lean canvas are designed for constant iterations, allowing for multiple versions and changes throughout the entrepreneurial process. Part of that process involves customer discovery; thus, the canvases invoke customer-focused design. The target customer is integrated into the canvas from the start through the use of a customer empathy map and a number of design-thinking ideation activities.30 The customer empathy map is a portrayal of a target customer—the most promising candidate from a business’s customer segments—that explores the understanding of that person’s condition from their perspective to understand his or her problems and needs (Figure 11.9). Osterwalder and Pigneur used a customer empathy map as part of the design ideation phase of developing a business model canvas. There are differing versions of customer empathy maps, but most seek to answer common questions pertaining to the customer, such as:

  • With whom are we empathizing?
  • What do they need to do?
  • What do they see?
  • What do they say?
  • What do they do?
  • What do they hear?
  • What do they think?

Phillips, Proctor & Gamble, Microsoft, and Yeti are examples of well-known companies that make use of customer empathy mapping because, according to the journal Entrepreneur, every transaction can be turned into a meaningful and valuable customer interaction.31 Once a company analyzes the results of customer mapping exercises, it may very well lead to new products that serve customer needs and/or wants.

For example, Philips used empathy mapping to detect a high level of fear in young patients immediately before an MRI medical procedure, so it invented a miniature version of the CAT scan equipment used in the procedure called the “kitten scanner” along with toy animal characters that were used to dispel the fear of MRIs among children. Proctor & Gamble created a new advertisement that was released for the 2012 Olympics visualizing the trials and tribulations of mothers raising young athletes, demonstrating Proctor and Gamble’s awareness that some of its customers wanted or needed empathy for the sacrifices they had made to help their children succeed. Likewise, Microsoft has attempted to demonstrate empathy with customers’ privacy concerns by developing an interactive website that explains not only how data is stolen but also how we can better protect our own data.32

On their company website, the now-famous Yeti cooler company publicly extols the value of empathy mapping, explaining that it leads to better products. Yeti doesn’t just create one on its own, it actually asks its clients to work with the company to create an empathy map.33 Thus, empathy mapping for Yeti is part of its product development process.

Customer empathy maps also strive to address customer pains (in this case, fears, frustrations, and anxieties) and gains (wants, needs, hopes, and dreams).34

With the customer shown in the middle, the empathy map shows the customer connected to the words see, say, do, hear, and think.
Figure 11.9 An empathy map portrays the target customer in order to understand the market needs. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

Business Model Canvas35

As Osterwalder and Pigneur describe it, according to Media Innovation and Entrepreneurship, their business model canvas blocks include revenue streams, customer segments, value propositions, cost structures, channels, key activities, key partners, key resources, and customer relationships.

Early on, your greatest focus should be on the right side of the canvas because:

  • These are, in many ways, the most critical aspects of starting a new venture (customer segments, value propositions, channels, and revenue streams).
  • The most fluid (revenue streams, channels, and value propositions will likely differ for the differing customer segments and, as you iterate and adapt throughout the customer discovery process, could likely change).
  • These follow a logical temporal order (there’s no need to focus on the costs of building a company if you won’t have customers).

In a follow-up to business model generation, the Strategyzer team created a second canvas, the value proposition canvas: https://www.strategyzer.com/canvas/value-proposition-canvas. The value proposition canvas is a new tool that pulls out the customer segment and value proposition blocks of the business model canvas, and encourages more in-depth exploration of those blocks to achieve a good fit between the two. The value proposition canvas tool looks at customer pains, gains and jobs to be done on the customer side and painkillers, gain creators, and products and services on the value proposition side.36

When you peel away the language used to describe business models, the early startup planning stages come down to a series of questions. When it comes to formulating a business model for a startup concept, another popular framework used in entrepreneurial circles is that of desirability-feasibility-viability Figure 11.10). This framework forces the entrepreneur to address broad questions about the startup concept:

  • Desirability: How desirable is the product? Who will use it and why?
  • Feasibility: How feasible is this idea? What are the costs of making it? How practical is the concept?
  • Viability: Will this idea remain viable? How will it make money? How will it be sustained over time?

These questions then begin to connect to form a narrative about where the startup concept came from, whom it serves, why it’s needed, how it will make money, and how it will be sustained in the future.

A triangle showing the words desirability, viability, and feasibility at the corners, with double-headed arrows between them as the sides of the triangle.
Figure 11.10 The framework of desirability, feasibility, and viability form a story about a company’s startup. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

The value propositions, customer relationships, customer segments, and channels address the assumptions that will create customer value (desirability). The cost structure and revenue stream blocks are aimed at viability, or overcoming flawed business models. The key partners, key activities, and key resources are about execution and address feasibility. The risk of poor execution can undermine your assumptions that you chose the right infrastructure to execute your business model (feasibility). The risk of solving an irrelevant customer job (sometimes derisively labeled “a solution in search of a problem”) undercuts desirability in your business. The risk of a flawed business model would hamper the financial assumption that your business will earn more money than you spend (viability). Adaptability is about the assumption that you chose the right business model within the context of external factors such as technology change, competition, and regulation.

The business model canvas is not an exhaustive planning tool by any means.37,38 The risk of such external threats is not specifically addressed on the canvas blocks. The external threats not specifically covered by the canvas blocks can be designed for adaptability, that is, the business model canvas is a necessary but insufficient component of determining the viability of the business idea/concept. There are many elements not included in the canvas that entrepreneurs must address. Industry analysis, including a competitive analysis, for example, falls “off canvas” but is important nonetheless.

The Lean Model Canvas

The lean model canvas is Ash Maurya’s adaptation of the original business model canvas. As we noted earlier, gone are the customer relationships, key activities, key partners, and key resources blocks. Instead, a problem block is added, because as Maurya explains, “Most startups fail, not because they fail to build what they set out to build, but because they waste time, money and effort building the wrong product. I attribute a significant contributor to this failure to a lack of proper ‘problem understanding’ from the start.” Maurya next added a solution block to the lean model canvas, which corresponds well with features on a minimum viable product (MVP), which you will recall was covered in depth in Launch for Growth to Success. The lean model canvas also adds an “Unfair Advantage” block, similar to the block for competitive advantages or barriers to entry found in a business plan.39

Social Business Model Canvas

As you’ve noticed by now, the core canvas components are common throughout the various versions. Many of the blocks of the social business model canvas are similar to those used in the business model canvas and the lean model canvas.40 A few differences, as developed by Tandemic, focus on areas unique to social entrepreneurship ventures. For example, the new areas added include measures of what kind of social impact you are creating or developing, measures of surplus to address what happens with profits and where you intend to reinvest them, and measures of beneficiary segments, and social and customer value propositions.41 These could be measures such as the number of trees planted, number of refugees housed and fed, jobs created, or investments made—depending on the venture. Social impact looks at an organization’s social mission beyond the bottom line. Measurement can differ among social entrepreneurs, but in terms of the canvas, impact measures are an effort to establish quantifiable metrics.

Social impact can be hard to measure, but nonetheless, many social entrepreneurs aim for long-lasting impact.42 A 2014 report by the think tank, consultancy, and member network SustainAbility lists cooperative ownership, inclusive sourcing, and the “buy one, give one” model as three forms of social impact.43 In addition to the Tandemic social business model canvas, there are other versions of similar canvases used for social entrepreneurship. For instance, Osterwalder adapted the business model canvas for mission-driven organizations into a mission model canvas.44 There’s also a social lean canvas that adds purpose (explaining your reason for creating the venture in terms of social or environmental problems) and impact sections (describing the intended social or environmental impact).45

What Can You Do?

TOMS Shoes

Toms Shoes is perhaps one of the best-known companies for adopting a social entrepreneurship purpose into its business model. Part of its early success hinged on the fact that for every pair of shoes a customer bought, the company donated a pair of shoes to someone in need. The company won a prize in 2006 for its innovative solution to poverty. This “1-for-1 business model,” sometimes commonly called the “Toms model” after the shoe company that popularized it, gained traction among other companies that followed suit in similar fashion, seeing both the social and the financial successes in the Toms model. Warby Parker is another example of a company that does essentially the same: A customer purchases a pair of eyeglasses, and the company donates a pair (although Warby Parker pays a third party to procure the glasses, as eyeglasses require an individual prescription, whereas shoes do not).

  • Can you think of an innovative social entrepreneurship business model?

What Can You Do?

The Birthday Party Project

Photo of a table set for a party, with fancy party hats, napkins, and platters of cookies.
Figure 11.11 The Birthday Party Project helps provide celebrations to honor the birthdays of homeless children. (credit: modification of "children's birthday table" by "Efraimstochter"/Pixabay, CC0)

Paige Chenault wanted homeless children in Dallas to feel special on their birthdays. Many have never experienced a birthday party. So this professional event planner sprang into action in January 2012. She launched the Birthday Party Project (https://www.thebirthdaypartyproject.org/), a nonprofit group whose mission is to celebrate the lives of homeless children (ages one to twenty-two). The group organizes monthly birthday parties with partner shelters. Since its inception, the concept has spread beyond Texas to cities across the United States, including Atlanta, Chicago, Los Angeles, New York, and San Francisco. In six years, the Birthday Party Project has celebrated 4,800 birthdays with 30,000 kids in attendance, eaten 40,000 cupcakes, cracked 30,000 glow sticks, and performed 1,100 renditions of “Happy Birthday.”

  • Identify a need in your community that could become a social entrepreneurship business, as Paige discovered with an initial passion project.

Footnotes

  • 29Alexander Osterwalder and Yves Pigneur. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Hoboken, NJ: Wiley, 2010.
  • 30Charlene Perrin. “Create A Customer Empathy Map in 6 Easy Steps!” Conceptboard. March 28, 2019. https://conceptboard.com/blog/create-a-customer-empathy-map-in-6-easy-steps/
  • 31Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur. June 28, 2019. https://www.entrepreneur.com/article/335987
  • 32Vineet Arya. “How to Infuse Empathy in Your Marketing?” Entrepreneur. June 28, 2019. https://www.entrepreneur.com/article/335987
  • 33Mike Godlewski. “The Secret to Knowing What a Client Is Thinking? Empathy Maps.” Yeti. February 8, 2016. https://yeti.co/blog/the-secret-to-knowing-what-your-client-is-thinking-empathy-maps/
  • 34Germán Coppola. “What Is an Empathy Map, and Why Is It Valuable for Your Business?” Medium. November 28, 2017. https://medium.com/swlh/what-is-an-empathy-map-and-why-is-it-valuable-for-your-business-14236be4fdf4
  • 35This material is based on original work by Geoffrey Graybeal and produced with support from the Rebus Community. The original is freely available under the terms of the CC BY 4.0 license at https://press.rebus.community/media-innovation-and-entrepreneurship/.
  • 36Michelle Ferrier and Elizabeth Mays. Media Innovation and Entrepreneurship. The Rebus Foundation, 2017. https://press.rebus.community/media-innovation-and-entrepreneurship/.
  • 37Jennifer van der Meer. "Do You Suffer from Value Proposition Confusion?" Linkedin. October 19, 2016. https://www.linkedin.com/pulse/do-you-suffer-from-value-proposition-confusion-jennifer-van-der-meer/
  • 38“The Value Proposition Canvas.” Strategyzer. n.d. https://strategyzer.com/canvas/value-proposition-canvas
  • 39Ash Maurya. “Why Lean Canvas vs Business Model Canvas?” Medium. February 27, 2012. https://blog.leanstack.com/why-lean-canvas-vs-business-model-canvas-af62c0f250f0
  • 40"Social Business Model Canvas.” Business Model Toolbox. 2013. https://bmtoolbox.net/tools/social-business-model-canvas/
  • 41“The Business Model Canvas Reinvented for Social Business.” Tandemic. n.d. http://www.socialbusinessmodelcanvas.com
  • 42Ayse Guclu, J. Gregory Dees, and Beth Battle Anderson. “The Process of Social Entrepreneurship: Creating Opportunities Worthy of Serious Pursuit.” Duke/Fuqua case. 2002. https://centers.fuqua.duke.edu/case/knowledge_items/the-process-of-social-entrepreneurship-creating-opportunities-worthy-of-serious-pursuit/
  • 43Lindsay Clinton and Ryan Whisnant. “Model Behavior: 20 Business Model Innovations for Sustainability.” SustainAbility. February 2014. https://sustainability.com/wp-content/uploads/2016/07/model_behavior_20_business_model_innovations_for_sustainability.pdf
  • 44Alexander Osterwalder. “The Mission Model Canvas: An Adapted Business Model Canvas for Mission-Driven Organizations.” Strategyzer. February 25, 2016. https://blog.strategyzer.com/posts/2016/2/24/the-mission-model-canvas-an-adapted-business-model-canvas-for-mission-driven-organizations
  • 45Social Lean Canvas. n.d. https://socialleancanvas.com/
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