Even a small home business needs to develop a clear business model.
The term business model refers to the method by which an organization creates value in products or services, distributes them to consumers and earns profit. A business model is essential before launching ventures with high financial stakes. When the new venture includes innovative products or services, for which there is no previous experience of relevant product performance on the market, a clear business model can maximize the profits or at least minimize the costs.
Value for Users and Target Market
In their study "The Role of the Business Model in Capturing Value from Innovation," professors Henry Chesbrough and Richard S. Rosenbloom identified value proposition and market segment as two core components of a business model. Value proposition refers to the value a product offers consumers by addressing their needs. Furthermore, identifying a market segment to whom the product will be more useful (laser printers are more useful to companies than households, for example) is a factor in success as it can lead to increased sales.
Cost and Profit Estimation Based on Value Chain
The value chain includes all the activities of acquiring the supplies necessary to create value and the selling process, including support and services provided after purchase. According to Chesbrough and Rosenbloom, a basic component of the business model is defining the structure of the value chain within which organizations must create and distribute value. Another business model component is the estimation of the cost of production and the potential profit in accordance with the value chain's facts and the aforementioned value proposition.
Position Within Value Network
An organization must identify its position in the so-called "value network," the web of links between the company, its suppliers and customers. Through this process, organizations can also identify existing or potential complementors and competitors. Complementors are businesses that provide complements of products of other businesses; for example, companies that produce printer ink are complementors of printer manufacturers. Through the process of identifying their position within the value network, organizations can also come up with plans to use the network's structure to provide more value to customers.
Dealing With Competition
Chesbrough and Rosenbloom describe the last component of the business model as "formulating competitive strategy." This includes an ongoing attempt at gaining and holding the advantage over competitors. This includes minimizing the cost of production, improving the value provided or even introducing innovative methods of distribution and/or marketing of a product or service. The competitive strategy is set beforehand, but it is prone to changes, according to the initial market performance of a value and the rival's response.
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