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Patterns of Entrepreneurship Management 5th Edition, Chapter 3

Designing Business Models Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Presentation Outline

• Definition of Business Models

• Tools for Development

• Examples

• Licensing and Franchising

• Outsourcing

• Models Based on Networks

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Business Model Definitions

• With the business environment evolving in such a

dynamic and rapid way, it is no longer sufficient for a

company to build a company solely around a new

product or service idea.

• A business model is a description of how your

company intends to create value in the marketplace. It

includes that unique combination of products,

services, image and distribution that your business

carries forward. It also includes the underlying

organization of people, and the operational

infrastructure that they use to accomplish their work.

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Business Models

More Simply:

“A business model is the way a company

applies knowledge to capture value.”

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Business Model Components

Requires blending of multiple business aspects:

• Manufacturing

• Finance

• Marketing

• Information

• Suppliers and Customers

• Product and Service development

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

•A Business Model states how a company creates VALUE in the

market

•A Business Model is more than just strategy – it is the fundamental

architecture of a business

• Good Business Models are:

- SCALABLE

- Create BARRIERS TO FOLLOWSHIP

- Align the Interests of ALL STAKEHOLDERS

- Provide VALUE to ALL STAKEHOLDERS

- Use NETWORK effects

- Are CAPITAL efficient

- Provide sustainable high GROSS MARGINS

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Attributes of a Good Business Model

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Business Model Canvas (Osterwalder Model)

• We are part of a complex supply chain. Who are our

key partners? Why do we need them and vice versa?

• What is unique about what we can do better than

others? What are our key activities? How do we

contribute to the value proposition?

• What are the needs for each subgroup of customers?

What value are they seeking?

• What key resources do we need to perform our

activities—human, intellectual, financial, and

physical?

Canvas Components -1

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Canvas Components -2

• Who are our customers, and how do we

contribute to the value proposition?

• How do we relate to these selected

customers?

• How do we segment these customers,

and which are the most valuable to us?

• How do we get to these customers?

• Where are the major costs? For our

resources? For our activities?

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Minimum Viable Product

• Minimum Viable Product (MVP) is the

product with the highest return on investment

versus risk.

• MVP’s help start-up companies test

customers’ reactions early and use the results

to guide product development

• MVP’s reduce the need for funding

• MVP’s reduce risk in product development

and improvements

• MVP’s should be a component of a business

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Example - Disrupting the Supply Chain

• Used pioneering “Direct Model” in this industry that allows them to provide a customized product, superior technology, and superior service, for a low-cost.

• Model based on: One-to-one customer contact, Accountability, Made-to-Order, and Non- Unique Products (modularity)

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Greif

Bros.

IBC

Vendor

Management/

Software/Models

GPS

(Drum

Cleaners)

Delta Chemical

Services

(Environmental

Analyses)

Palex

(Pallet and

Drum

Refurbishers)

Greif becomes Center of Synergistic Supplier Network

Shifts from a Product Supplier to a Problem Solver

New

Truckers

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Example – Re-structuring

the Supply Chain

Example – Netflix Use of Data-Mining

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Example – Netflix, (contd.) Early-mover Advantage and Accumulation of Customer

Data Provides Sustainable Business Model

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Example - DBI Inc. Using Accumulated Data

to Build Customer “Lock-in”

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

On-Off Road/Rail Truck with Robotic “Spot” Sprayers, GPS

Mapping of Vegetation Types Allows Continuous Efficiency

Improvements. Database Maps Create Customer Lock-in.

Example - DBI Inc. Unique Vehicle + Database of Vegetation

Allows Fast Service – Important for Railroads.

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Licensing and Franchising

• Licensing and Franchising are two valuable

components of a business model

• Both are agreements between an issuer—a

licensor or franchisor—and a receiver—a

licensee or franchisee.

• These contracts grant the receivers certain

rights to access certain “intellectual properties”

such as patents, trademarks, trade secrets, and

copyrights

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

License Agreements

License agreements allow a licensee to

use intellectual property under certain

conditions as spelled out in the

agreement.

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

License Agreements: Key Issues

1. Licensee and Licensor are identified together

on the basis of their reasons for entering into

an agreement

2. The licensed Intellectual Property (IP) is

precisely defined

3. The granted rights to the IP are carefully

defined

4. The “territory” allowed for practice of the

rights is defined

5. The level of exclusivity is defined

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

License Agreements: Key Issues

6. In exchange for gaining certain rights, the

licensee pays fees to the licensor. These

usually include up-front fees, running

royalties, or periodic payments

7. Other items considered: term of the

agreement, confidentiality, payment

scheduling, need for audit, treatment of

breaches of contract, warranties, liabilities,

indemnifications, and other general legal

requirements

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Example: James Dyson Licensed Asian Rights to “Bootstrap” his Company. He Later Bought Them Back.

Hoover Turned Down his Licensing Offer!

Picture Copyright Dyson Inc.

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Example-Ultrafast’s Business Model with Multiple Licenses to Complementary Tool Companies Solving

both Marketing and Funding Problems

Ultrafast Inc. Technology Development

Applications Engineering

Licensing Office

Assembly Tool

Companies

After Market Tool

Companies

Fastener Makers

Car Assembly

Plants

Segmented Licenses

Coating

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Franchise Agreements

A franchise is a legal and commercial

relationship between the owner

(franchisor) of a trademark, service

mark, trade name, or advertising symbol

and an individual or group (franchisee)

wishing to use that identification in a

business.

Example:

Chapter 3

Business Models

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Outsourcing

Network Models

Franchise Agreements: Key Issues

1. Franchisee and franchisor are defined

together for the reason they are entering into

the agreement

2. The business of the franchise is stated, and

the deliverables that the franchisor must

provide to the franchisee are specified

3. The franchisor my offer to fund part of the

start-up costs

4. The commitments of the franchisee are

defined

Chapter 3

Business Models

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Outsourcing

Network Models

Franchise Agreements: Key Issues

5. In exchange for entering into the agreement

and receiving support from the franchisor,

the franchisee pays fees to the franchisor

6. Items stating under what terms a franchisee

can sell its business

7. Other terms: term of agreement, conditions

for renewal, confidentiality, payment

scheduling, need for audit, treatment of

breaches of contract, warranties, liabilities,

indemnifications, other legal requirements

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Example - Chemstation’s Unique Business Model Built on Regional Franchises

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Outsourcing

Has become a viable option due to the following:

• To realize cost efficiencies/economies of scale

• To realize core competencies

• To leave specialized tasks to the specialists

• To free up essential resources from non-core

functions

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Outsourcing: The Choice

Checklist for whether you should outsource:

• Is the activity central to the company’s

success?

• Can the outsourcing lead to a loss of

intellectual property rights or a leakage of

valuable trade secrets to competitors of their

suppliers?

• Is the task routine and wasteful of your staff’s

time?

• Is this a one-off or periodic need?

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Outsourcing: The Choice

Checklist (continued):

• Is it less expensive to have an outsider do it rather than in-house?

• Alternatively, will the task cost less in-house BUT use resources that are more valuable elsewhere?

• Is the skill so specialized that it’s impractical to have a full-time employee provide the best input?

If none of these questions elicit concern, you should consider outsourcing the task.

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Outsourcing: The Choice

Tips for finding an external resource:

• Ask around for recommendations

• Choose a company that understands your

needs and can meet them

• Outsourcing implies a loss of direct control, so

clearly communicate the performance

standards

• Meet regularly

• Have a backup plan

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Threadless.com – customers design products for free, sales generated

prior to manufacture.

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Social Networks in Business Models

Social Networks in Business Models. Example - Threadless

P&G’s Social Network for Moms with Kids

provides new ideas and viral marketing.

Social Networks in Business Models. Example - Vocalpoint

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models

Idea and Initial Market Research undertaken via Vocalpoint

Social Networks in Business Models.

P&G Launches eStore to sell Tide direct to

Customers

Chapter 3

Business Models

Licensing & Franchising

Outsourcing

Network Models