Entrepreneurship
and Business Venturing
Introduction
The
willingness and capacity of an individual to develop, organize and manage a
business venture alongside the risks involved in order to make a profit, is
what we refer to as entrepreneurship. A
common and simple example of entrepreneurship is the starting of a new
business. In the world of economics, it is one of the units of production and
when combined with capital, labour, land and natural resources it yields a
profit. The global market is very dynamic and challenging as it keeps on
changing with time (Lehman, 2011). To make matters worse, it is increasingly
competitive thus an entrepreneur should be innovative and a risk-taker so as to
navigate through it.
A
business venture is an entity developed by an individual or a group of persons
with the intent of making financial gains. The creation of a business
enterprise is brought about by high demand and low supply for a product or
service. Consumer needs are identified, and the entrepreneur develops the idea,
markets it and eventually sells the product or service he/she has developed.
It
may be very simple to define what entrepreneurship is but to execute it is much
more of a task. Entrepreneurship in not just about coming up with an idea, this
is just the tip of the iceberg. An entrepreneur should come up with practical
and affordable ways to reach interested customers (Elfring, 2005), and this is
where the issue of a business model comes about. In this report, my focus is
solely on how a business model works and its importance in making a business
venture valuable.
What
is a business model?
A
business model describes all the means and methods that a company employs so as
to earn revenues as projected in its plans. According to it, a business is a
system with many processes within it, and all of them must work at par with
each other so as to realize a profit in the end. A good business model provides
a business venture with ways to survive and grow in the ever competitive market
(Haslam, 2015). A business model contains many untested assumptions, and as the
model is implemented, the assumptions are tested and refined, that is why it is
referred to as a work in progress.
A business model is just but a
hypothesis that gets applied as the business sees the light of day. It shows
the viability of a business venture and everything that should be done to make
it profitable. A business model is just like a new story and it takes on a life
of its own. It contains a long and detailed information coupled with large
amounts of financial predictions that are all based on assumptions rather than
knowledge (Osterwalder, 2010). The ratio of assumptions to knowledge is very
crucial and should be well balanced so as to make the business model practical
and real.
Business
models are developed to elaborate how enterprises work. They addresses the
following key issues in a business such as who a customer is and what they
value, how a business makes money and the underlying logic that explains how a
business can deliver value to its customers at a cost that is appropriate. A
business model reminds the stakeholders and employees of a company about their
goals and future plans in making their business profitable. This being so, it
should be documented so that it can be easier to refer to in the course of the
business and make necessary amendments to it when necessary.
Purpose
of developing a business model
A
business model exists so that it can be determined whether the ongoing business
is making any sense, in other words, whether it is profitable. It answers the
following interdependent core strategy questions: what is the target market and
how are the members reached and related to? What is the margin of a business’
entire offering and what is outside the margin? What is the value promise that
leads the customers to choose a company over another? What key competencies and
partnerships prevents other competitors from copying another company’s promise?
And finally, what essential factors are there to make sure that a business is
profitable while delivering on their promise?
Like
mentioned earlier before, a business works like a system where many different
factors or components work in unison for the benefit of the entire business. A
business model focusses on how all the elements of a company are interwoven
together to make a working whole.
All
stakeholders and all employees need to understand fully the core logic of a
company and how it stands out from other firms. It is the purpose of a business
model to show and remind them of this. For a business venture to be successful,
the business model being used must be very innovative so as to keep the company
above its competitors (Garrido, 2008). A company without an innovative model
will find it very difficult to remain profitable in the ever competitive market
and will most likely get bankrupt.
How a business
model works in creating and capturing value
Companies and firms adopt different
business models depending on the products and services they are dealing in. The
model that generates most profits is the one that is adopted. Business model
differentiation has remained to be the only way that companies can be able to
protect and maintain their profit margins in the ever competitive market.
Through this, a company is able to have a core competency that will serve as
its competitive advantage over its rivals. A core competency is difficult to
imitate and it greatly contributes to the customer’s perceived benefit
(Freedberg, 1997). A company like Honda has a core competency in the
manufacturing of engines and power trains and that is why it has made a name
for itself and remain relevant and dominant in the market all along.
The new
basis for competition in the emerging markets is business modelling (Plantes,
2009). It has come to replace product features and benefits that were the
playing field for companies to emerge as dominant or inferior. The most
challenging factor is that the traditional methods such as product innovations
and branding among others, used in maintaining margins are becoming far less
effective today. This is because they do nothing in offsetting the numerous
forces increasing market commoditization thus price competition. The most
important aspect of a business is its customers, the customer value proposition
is the reason behind customer’s preference of one company over another. It
gives a customer the utility that they seek
As
a result of all this, the only way remaining for companies to protect their
margins is through business model differentiation (Carlori, 1988). Businesses
may operate in similar industries but with entirely different business models,
however, with the passage of time the business models that are most successful
dominate the industry. Some other companies succeed by copying the dominant
industry's model, like the RyanAir business model, but this is a very dangerous
move as they may miss out on the core competency and finally face bankruptcy.
RyanAir innovated the general business model for aviation by having their own airport
and including within it their own shopping malls and hotels. They also offered
car hire services and parking, thus attracting more customers and increasing
their revenues other than those they got from their passengers. The key factor
in maintaining profitability is to innovate your business models to suit the
customer in the perfect way (Haslam, 2015).
A
relevant example is seen in the mobile phone sector. Mobile phone carriers
prefer to sell their mobile phones sets at relatively low prices so that they
can generate most of their revenues from the plans based on the services
consumed like the minutes people spend on calls. Investors find such a model as
very attractive because it creates a continuous flow of revenues plus it has
the potential to offer more new services and features in the coming future
which means the revenues will continue plummeting.
Wal-Mart
can also be used to explain another business model. Its business models works
this way. It offers the lowest possible price for its product so that it can
sell more of them and capitalize on this so as to maximize its profits. By
doing so it maintains its profit margins. In contrast, another company like
Apple opts to follow a business model of selling fewer but high-quality
products and earning a higher profit on each product.
Technological
advances have also given rise in new business models and most of them have been
pioneered by leading companies such as Apple, e-Bay and Google (Duening, 2014).
Apple came up with iTunes, which is a software for easily downloading music
online but only usable on their hardware, that is, iPhones, iPods and iPads. By
adopting the iTunes model, the company was able to combine its hardware,
software and service at once. Downloading music from iTunes was not very
profitable, but it greatly prompted its customers into purchasing the expensive
iPods, iPads and iPhones and making huge profits from that.
Business
models also greatly attribute to how product delivery brings revenue (Hisrich,
2002). In order to see how business model innovation works, we will take the
example of the P&G-Gillette Company. Most of the revenue for this company
is achieved through product delivery by selling its razor handle at a cost or
even lower so that it can continue selling its high-margin razorblades over and
over. By this it maintains a steady stream of revenue all through. Still in the
shaving industry, we have companies that produce electric shavers. Such
companies have a different business model. The electric shavers cost a lot more
than the Gillette handle and, therefore, a company like Remington, which
manufactures electric shavers, make their money upfront other than from a
stream of blade refills like Gillette. In general, a company should adopt the
model that brings the most revenues
Scalable
business models
In
the current time, we are in the information age where everything revolves
around computers. Most of the companies now are computer-based meaning that the
software industry is booming. In this industry, the scalable business model is
adopted. Scalability explains how simple it is to expand a business model and
increase its revenues significantly and maintaining a constant cost base
(Kanungo, 1998). Scalable business models are considered because of their
long-term advantages. Even though the cost base remains fixed, the revenues
have the capacity to grow exponentially over time making scalable businesses
more profitable and full of enormous growth opportunities. Most of this models
are internet based (Owens, 2014)
The
optimal design of a scalable business model is to ensure increased
profitability in the long run with no linear relationship between cost and
revenue (Zhao, 2008). For example, a company like Microsoft incurs high costs
in software development for computers. Afterwards, it only makes copies of the
high-margin software at very lows costs or even at no costs at all but
continues to earn more revenue from the software. This also applies to other
big companies like Facebook and Google. The founder of Facebook incurred
considerable costs in developing it, but afterwards he didn't have to do
anything but to continue selling his product to more and more customers at no
cost at all.
Assessing
the model
To
know whether a business model is any good, one simply has to ask themselves
whether it is making any sense, and by this it is whether it is profitable or
not. If the profit numbers don’t add up then the model is not good (Magretta,
2002). Many businesses have suffered heavy losses and have even gone bankrupt
because their business models did not make any sense at all.
An
example of failed business models can be explained by US automobile companies
Ford, General Motors and Chrysler, in their competition against foreign
manufacturers. To attract customers, they offered them deep discounts and
interest-free financing making them sell their vehicles at a lower cost than it
cost them to manufacture them. This move significantly reduced their profit
margins. For them to dominate the industry again, the companies had to change
their business models. A model should never be seen as fixed, rather it should
always be viewed as a work in progress. If it doesn't produce the desired
results, another one should be adopted (Magretta, 2002). Models that are
successful do not remain that way for long; they should be changed with the
passage of time because the external environment also changes.
Conclusion
In
order to evaluate the profitability of a company, one should always learn how
it makes its money. A thought should then be given on how it sustains,
maintains and multiplies its profitability (Keynes, 2001). That is what would
make a sound business model.
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