CHAPTER 4
Developing and Testing a Business Model
SUMMARY AND AUTHOR’S NOTE
One of the most critical stages of the entrepreneurial process is the development of a
business model. Business models address all aspects of the building, including the pricing
model, revenue model, value proposition, business process, and Internet commerce. This
chapter explains how to turn an idea into an effective concept for a new business, position that
business in a value chain, and develop a business model that creates and captures value for the
customer and insures that the business is sustainable.
It is important to spend sufficient time to make sure the students understand the components of
the business concept, in particular the customer definition and the benefit to the customer. The
I have found that asking students to distill their concept into two concise sentences that express
the four elements is a very effective way to get them to focus on the core aspects of their
business idea. Then I ask them to present the two sentences in front of the class to see whether
CHAPTER OBJECTIVES
After reading this chapter, students will be able to:
• Explain what a business model is and what it accomplishes.
Chapter 4: Developing a Business Model 17
CHAPTER OUTLINE
OPENING CASE: In China the Business Model Is Everything
I. The Business Model—the definition and importance of the business model
• Table 4.1—The Business Model Components
a. Why Business Models Fail—four major problems that cause business models to fail:
i. Flawed Logic
II. Developing a Concept for a New Business—the elements of a business concept
a. The Value Proposition—the benefit to the customer of the product or service
• Table 4.2—Features Versus Benefits for Premium Horse Feed for
Thoroughbred Racehorses
III. Building a Business Model from a Concept—the process of creating and capturing value
to make a profit
• Figure 4.1—Building a Business Model
a. Stage 1: Identify the New Venture’s Position in the Value Chain
f. Stage 6: Test the Model through Feasibility Analysis
GLOBAL INSIGHTS—Business Models for the Developing World
IV. Analyzing the Feasibility of a Business Model—using feasibility analysis to assess and
reduce risk
a. Feasibility and the Business Plan—executing an action plan for a feasible business
V. Quick Screen for Multiple Options—doing a quick screen of multiple business ideas to
eliminate one or more ideas early in the process
18 Chapter 4: Developing a Business Model
RELEVANT CASE STUDIES
Case 1 Command Audio
Case 8 Demand Media
ANSWERS TO QUESTIONS ON KEY ISSUES
1. What is the role of the compelling story in defining the value proposition of the business?
The compelling story presents the reason why customers would want to buy from your
2. What is the relevance of identifying where on the value chain the new venture lies?
Position in the value chain determines who the customer is (the one who pays you). It also
3. What is the purpose of the business model and why do business models typically fail?
The business model addresses the issues of how the company will make money and how it
4. What are the characteristics of an effective business model?
5. What is the purpose of feasibility analysis?
Feasibility analysis enables the entrepreneur to reduce some of the risk of the unknown in
SUGGESTIONS FOR EXPERIENCING ENTREPRENEURSHIP
1. Define a concept for a new venture using the four components discussed in the chapter:
product/ service, customer, benefit, and distribution. Conduct a quick test on some potential
customers through a focus group or by conducting interviews. Did you secure enough
information to make a decision to move forward to conduct a feasibility study? Why or
why not?
Chapter 4: Developing a Business Model 19
Besides doing a quick test on the customer, it would be important to decide whether this is
2. Suppose you intend to start a theme restaurant that can be replicated and franchised. Based
on an analysis of some existing theme restaurants, what types of revenue streams could this
business generate?
Students will come up with a variety of typical revenue sources: catering, selling gift items,