Description
At its essence, a well-formulated business model must address six key questions.
Understanding the Business Model of the Entrepreneur
Michael H. Morris, Ph.D.
University of Florida
There is a need for a standard framework for characterizing an entrepreneur’s business model.
Without a relatively consistent approach, it will be difficult to determine whether standard model
types exist, the conditions that make a particular model appropriate, the ways in which models
interact with organizational variables (e.g., management styles, structures, cultures), and other
critical questions. To be of value, such a framework should have certain qualities. Chief among
these are the need for it to be reasonably simple, logical and measurable, while at the same time
being comprehensive and operationally meaningful.
If the purpose is to model a viable business, then what is the essence of a viable business? For
simplicity, let us assume that it is an entity that makes available a product or service to a customer
in a manner that allows it to charge more than its expenses while distinguishing itself from others
who sell the same thing, in the process generating an acceptable return on investment. Inputs are
translated into outputs, and this is accomplished in a way that makes economic sense and is
sustainable.
It would appear that, in seeking generalizability, most of the extant perspectives attempt to
oversimplify a firm’s business model. The challenge is to produce a framework that is applicable
to firms in general, but that serves the needs of the individual entrepreneur and the unique
combinations behind his/her venture that make it sustainable. Accordingly, a framework is
proposed that consists of three levels, or sets of decisions, and these are termed the ‘foundation’,
‘proprietary’, and ‘rules’ levels. Further, at each level, six basic components are considered.
The Foundation Level: Defining the Basic Components
At its essence, a well-formulated business model must address six key questions. These questions
reflect commonalities among the various perspectives found in the literature (see Table 4).
Specifically, the most consistently mentioned components of business models concern the value
proposition, the customer, internal processes and competencies, and how the firm makes money.
To these four, a competitive strategy element has been added, which captures the need to translate
core competencies and the creation of value into differentiation within the marketplace. The
inclusion of differentiation reflects an emphasis on competitive strategy by a number of
researchers (e.g., Hamel, 2001). It also reflects the almost universal emphasis on resource
combinations that are perceived to be unique relative to competitive offerings (e.g., Afuah and
Tucci, 2001; Amit and Zott, 2001). Finally, a useable framework should apply to all types of
ventures, ranging from lifestyle or managed growth ventures to high potential and speculative
ventures. Different models are likely to accommodate different levels of growth, and shorter
versus longer time horizons. Thus, the sixth decision area concerns the growth and time
objectives of the entrepreneur. Let us examine each of these components in more detail.
1. How will the firm create value? This first question is concerned with the value offering
of the firm. It includes the particular products or services being sold, the nature of the
product/service mix, and the relative depth and breadth of this mix. In addition, the value
proposition is defined by whether the firm provides access to the product or service, or sells the
actual product or service by itself, or sells the product or service as part of a bundle or total
system. Other issues include whether the firm makes the product or service, outsources product
manufacture or service delivery, licenses others to make and sell, acquires the product and re-
sells it, or acquires the product and then modifies and re-sells it. Finally, the value proposition is
affected by whether the product or service is provided directly by the firm or through an
intermediary.
2. For whom will the firm create value? This question focuses on the nature and scope of
the market in which the firm will compete. Of importance is whether the firm will principally sell
to consumers (b-to-c), businesses (b-to-b), or both, and where it falls in the value chain. When
selling to businesses, the entrepreneur must further distinguish where in the value chain the firm’s
customers will be, such as upstream (mining, agriculture, basic manufacturing), downstream
(final manufacturing, assembling), wholesaling, retailing, or some combination. The geographic
scope of the market should also be specified, such as local, regional, national or international.
Ventures also vary in the extent to which their success is driven by a focus on discrete
transactions to a range of customers, or by ongoing relationships with particular accounts.
3. What is the firm’s internal source of advantage? The term core competency is used to
capture an internal capability or set of skills that enables the firm to provide a particular benefit to
customers. Hence, Federal Express delivers a benefit of on-time delivery based on its competency
at logistics management. While a firm might attempt to build operations around any number of
competencies, sources of advantage can be organized into seven general areas. These include the
firm’s production/operating system, capabilities in technology development/innovation,
selling/marketing expertise, information management/mining/packaging prowess, competence in
financial management/arbitrage, mastery of supply chain management, and skills at managing
networks and leveraging resources.
4. How will the firm differentiate itself? Explain how you are different. Depending on
how they are applied, core competencies can enable the firm to differentiate itself, or produce
something perceived to be unique in the marketplace. The challenge of differentiation is to
identify salient points of difference that can be maintained over time. Given the ability of
companies to quickly imitate one another, the entrepreneur seeks bases for differentiation that are
more than cosmetic or transitory. Sustainable strategic positions tend to be designed around one
of the following five bases of differentiation: operational excellence, product
quality/selection/availability/features, innovation leadership, low cost, or intimate customer
relationships/experiences.
5. How will the firm make money? How do we monetize? A core element of the firm’s
business model is its economic model. The economic model provides a consistent vehicle for
earning profits. It has four sub-components. The first of these is the firm’s operating leverage, or
the extent to which the underlying cost structure is dominated by fixed costs, or is driven more by
variable costs. The second sub-component is volumes, and whether the firm is organized for
high, medium or low volumes in terms of both the market opportunity and internal capacity. The
third consideration is whether the firm will be able to charge high, medium or low margins.
Finally, the economic model considers whether the revenue sources are fixed or flexible. An
example of the former would be a company that sells ten items based on a fixed price list.
Alternatively, a firm that sold a number of value-added services at varying prices depending on
the customer segment and market conditions has more flexible revenue sources. This latter factor
is the source of many of the creative revenue models found in dot.com businesses.
6. What are the entrepreneur’s time, scope and size ambitions? What is the intended
magnitude of the business? The business model must capture the entrepreneur’s objectives and
ambitions. As such, the entrepreneur views the business in terms of an investment model. Four
such models can be used characterize most ventures: subsistence, income, growth, and
speculative. With the subsistence model, the goal is to survive and meet basic financial
obligations. When employing an income model, the entrepreneur invests to the point that the
business is able to generate on ongoing healthy income stream for the principals. A growth model
finds not only significant initial investment, but substantial reinvestment in an attempt to grow the
value of the firm to the point that it eventually generates a major capital gain for the initial
investors. The speculative model is employed where the entrepreneur’s time frame is shorter, and
the objective is typically to demonstrate the potential of the venture and then sell it.
These six components of the business model that are addressed at the foundation level, and the
specific decision variables within each component, are summarized in Table 5. For three of these
components, the entrepreneur or analyst must select one factor from a set. For the other three
components, one factor must be selected from each set of factors making up a given sub-
component.
The Proprietary Level: Creating Unique Combinations
While the foundation level is adequate to capture the essence of any firm’s business model,
venture sustainability is ultimately dependent on the ability of the entrepreneur to apply unique
approaches to one or more of the foundation components. Thus, having determined that the firm
will sell some combination of products and services directly to customers, or that it will sell in
business-to-business markets at high margins and low volumes, the entrepreneur defines ways to
implement such decisions in a novel manner. This is referred to as the proprietary level of the
business model, as it entails innovation that is unique to a particular entrepreneur and venture.
Consider the earlier-cited example of Dell Computer. At the foundation level, the company sells a
mix of products and services, with a heavier product focus. The product offering is customizable,
and is sold through a direct channel in both business and consumer markets. However,
competitive advantage derives from unique approaches that are applied to two of the foundation-
level components. The so-called ‘Dell Direct Method’ is the result of proprietary approaches both
to defining the value proposition and to organizing internal logistical flows. It is these proprietary
concepts that enable the firm to consistently deliver speed and customization at a moderate price,
which translates into a sustainable marketplace position.
The Rules Level: Establishing Guiding Principles
When a business model is operationalized, its success may also be tied to a basic set of operating
rules. These are guidelines that ensure the foundation or core components of the business model
are reflected in the ongoing strategic actions of the firm. Eisenhardt and Sull (2001) refer to a
similar notion in discussing “strategy as simple rules”. For instance, they discuss “priority rules”
that determine how Intel allocates manufacturing capacity, and “boundary rules” that govern the
types of movies that Miramax decides to make. In the Dell Computer example, examples of rules
might include turning inventory over in four days or less, or delivering replacement parts to the
customer’s home or business by the next business day. Through such rules, the business model
will influence which new product and market opportunities are pursued, as well as any
fundamental changes to basic operating methods (e.g., pricing, logistics, service delivery) within
the organization.
Applying the Framework in a Mainstream Industry
Table 6 illustrates the application of the integrative framework to Southwest Airlines. Southwest
has a unique business model that has sustained the company’s growth for thirty years. Not only
has the company achieved profitability every year since 1972, including years when most airlines
incurred losses, but it is consistently ranked in the top five among the most desired companies to
work for by Fortune magazine. The airline has won the so-called triple crown of the industry, for
best on-time record, best baggage handling, and fewest customer complaints, in five different
years.
The Southwest business model is first captured at the foundation level. Here, the focus is on what
the firm is doing, as opposed to how. This level gets at the essence of the firm’s approach, and
represents a standardized set of questions that can be quantified. Accordingly, comparisons across
firms are relatively easy to make at the foundation level, such that standard models can be
identified. This ability will be demonstrated below.
At the proprietary level, Southwest has innovated in a manner that has not only produced
sustained profits, but has changed the manner in which other airlines operate. From Table 6 it can
be seen how they tailor each of the basic components of the model, and how each of the elements
is intertwined and internally consistent with the others. Arguably, their model centers on the
firm’s core competency, which is their production/operating system. It is their unique operating
system (e.g., employee hiring, selection of airports and routes, no code sharing, independent
baggage handling, standardization of aircraft, etc.) that make possible their unique value
proposition (short haul, low-fare, on-time, direct service that is on-time and fun).
Finally, it would be easy to deviate from this model, especially given the competitive, regulatory,
and market pressures in the airline industry. However, a number of ‘rules’ help ensure that
Southwest does not make strategic or tactical moves that are inconsistent with their business
model. Rules regarding maximum fares, flight turnaround times, or on-time performance
effectively delimit courses of action management might consider, while also reinforcing in the
minds of operating personnel the strategic intent of the company.
As can be seen with this example, the proposed framework is reasonably simple to apply, and
each element is measurable. Further, the framework is comprehensive in nature, capturing the
essence of a sustainable business in terms of strategy, operations, and financial performance.
Sustainability further requires that the components of the model be internally consistent, as can be
seen with the Southwest example. This consistency must be found within and between sub-
components. Thus, an economic model with high operating leverage, low margins, moderate
volumes and fixed revenue sources may, by itself, be untenable. Further, the economics must fit
with the customer model. Thus, a given economic model might not be workable when selling in a
regional b-to-b market, where significant investment in the development of customer
relationships is required. Finally, it should be noted that the framework applies to ventures of all
types and sizes. However, firms with multiple divisions or strategic business units may have
different models for different divisions.
The Core Components of a Business Model
Michael H. Morris, Ph.D.
Component one:
How do we create value? (select 1 from each set) (factors related to the offering)
• offering: primarily products/primarily services/heavy mix
• offering: standardized/some customization/high customization
• offering: broad line/medium breadth/narrow line
• offering: deep lines/medium depth/shallow lines
• offering: access to product/ product itself/ product bundled with other firm’s product/service
• offering: internal manufacturing or service delivery/ outsourcing/ licensing/ value added reselling
(make clear what will be outsourced and what will be done internally)
• offering: direct distribution/indirect distribution (if indirect: single or multi-channel)
Component two:
Who do we create value for? (select 1 from each set) (market factors)
• type of customer: b-to-b/b-to-c/ both/other
• local/regional/national/international market
• where customer is in value chain: upstream supplier/ downstream supplier/ government/
institutional/ wholesaler or retailer/ service provider / final consumer
• broad or general market/niche market
• transactional/relational customer
Component three:
What is our source of competence/advantage? (internal capability factors)
• production/operating systems
• selling/marketing
• information management/mining/info. packaging
• technology/R&D/creative or innovative capability/intellectual
• financial transactions/arbitrage
• supply chain management
• networking/resource leveraging
Component four:
How do we differentiate ourselves? (competitive strategy factors)
• image of operational excellence/consistency/dependability
• product or service quality/selection/features/availability
• innovation leadership
• low cost/efficiency
• intimate customer relationship/experience
Component five:
How do we make money? (select 1 from each set) (economic factors)
• pricing & revenue sources: how revenue is captured/#of drivers
• operating leverage: high/med/low
• volumes: high/med/low
• margins: high/med/low
Component six:
What are our time, scope and size ambitions? (select 1) (personal/investor factors)
• subsistence model
• income model
• growth model
• speculative model
An Application: Characterizing the Business Model of Southwest Airlines
Foundation Level Proprietary level
Component
One
(factors
related to
offering)
• Sell services only
• Standardized offering
• Narrow breadth
• Shallow lines
• Sell the service by itself
• Internal service delivery
• Direct distribution
• Short haul, low-fare, high-frequency,
point-to-point service
• Deliver fun
• Serve only drinks/snacks
• Assign no seats/no first class
• Do not use travel
agents/intermediaries
• Fully refundable fares, no advance
purchase requirement
Component
Two
(market
factors)
• B2C and B2B (sell to
individual travelers and
corporate travel depts.)
• National
• Retail
• Broad market
• Transactional
• Managed evolution from regional
airline to providing service to 59
airports in 30 States
• Careful selection of cities based on
fit with underlying operating model
Component
Three
(internal
capability
factors)
• Production/operating systems • Highly selective hiring of employees
that fit profile.
• Do not operate a hub-and-spoke
route system.
• Fly into uncongested airports of
small cities or less congested airports
of large cities.
• Innovative ground operations
approach
• Independent baggage handling
system
• Use of Boeing 737 aircraft
• No code sharing with other airlines
Component
Four
(competitive
strategy
factors)
• Image of operational
excellence/consistency/
dependability
• Differentiation is achieved by
stressing on-time arrival, lowest
possible fares, and passengers having
a good time (a spirit of fun)
• Airline that love built
Component
Five
(economic
factors)
• Fixed revenue source
• High operating leverage
• High volumes
• Low margins
• Short-haul routes and high frequency
of flights combined with consistently
low prices and internal efficiencies
result in annual profitability
regardless of industry trends
Component
Six
(personal/
investor
factors)
• Growth model • Emphasis on growth opportunities
that are consistent with business
model
doc_475943568.pdf
At its essence, a well-formulated business model must address six key questions.
Understanding the Business Model of the Entrepreneur
Michael H. Morris, Ph.D.
University of Florida
There is a need for a standard framework for characterizing an entrepreneur’s business model.
Without a relatively consistent approach, it will be difficult to determine whether standard model
types exist, the conditions that make a particular model appropriate, the ways in which models
interact with organizational variables (e.g., management styles, structures, cultures), and other
critical questions. To be of value, such a framework should have certain qualities. Chief among
these are the need for it to be reasonably simple, logical and measurable, while at the same time
being comprehensive and operationally meaningful.
If the purpose is to model a viable business, then what is the essence of a viable business? For
simplicity, let us assume that it is an entity that makes available a product or service to a customer
in a manner that allows it to charge more than its expenses while distinguishing itself from others
who sell the same thing, in the process generating an acceptable return on investment. Inputs are
translated into outputs, and this is accomplished in a way that makes economic sense and is
sustainable.
It would appear that, in seeking generalizability, most of the extant perspectives attempt to
oversimplify a firm’s business model. The challenge is to produce a framework that is applicable
to firms in general, but that serves the needs of the individual entrepreneur and the unique
combinations behind his/her venture that make it sustainable. Accordingly, a framework is
proposed that consists of three levels, or sets of decisions, and these are termed the ‘foundation’,
‘proprietary’, and ‘rules’ levels. Further, at each level, six basic components are considered.
The Foundation Level: Defining the Basic Components
At its essence, a well-formulated business model must address six key questions. These questions
reflect commonalities among the various perspectives found in the literature (see Table 4).
Specifically, the most consistently mentioned components of business models concern the value
proposition, the customer, internal processes and competencies, and how the firm makes money.
To these four, a competitive strategy element has been added, which captures the need to translate
core competencies and the creation of value into differentiation within the marketplace. The
inclusion of differentiation reflects an emphasis on competitive strategy by a number of
researchers (e.g., Hamel, 2001). It also reflects the almost universal emphasis on resource
combinations that are perceived to be unique relative to competitive offerings (e.g., Afuah and
Tucci, 2001; Amit and Zott, 2001). Finally, a useable framework should apply to all types of
ventures, ranging from lifestyle or managed growth ventures to high potential and speculative
ventures. Different models are likely to accommodate different levels of growth, and shorter
versus longer time horizons. Thus, the sixth decision area concerns the growth and time
objectives of the entrepreneur. Let us examine each of these components in more detail.
1. How will the firm create value? This first question is concerned with the value offering
of the firm. It includes the particular products or services being sold, the nature of the
product/service mix, and the relative depth and breadth of this mix. In addition, the value
proposition is defined by whether the firm provides access to the product or service, or sells the
actual product or service by itself, or sells the product or service as part of a bundle or total
system. Other issues include whether the firm makes the product or service, outsources product
manufacture or service delivery, licenses others to make and sell, acquires the product and re-
sells it, or acquires the product and then modifies and re-sells it. Finally, the value proposition is
affected by whether the product or service is provided directly by the firm or through an
intermediary.
2. For whom will the firm create value? This question focuses on the nature and scope of
the market in which the firm will compete. Of importance is whether the firm will principally sell
to consumers (b-to-c), businesses (b-to-b), or both, and where it falls in the value chain. When
selling to businesses, the entrepreneur must further distinguish where in the value chain the firm’s
customers will be, such as upstream (mining, agriculture, basic manufacturing), downstream
(final manufacturing, assembling), wholesaling, retailing, or some combination. The geographic
scope of the market should also be specified, such as local, regional, national or international.
Ventures also vary in the extent to which their success is driven by a focus on discrete
transactions to a range of customers, or by ongoing relationships with particular accounts.
3. What is the firm’s internal source of advantage? The term core competency is used to
capture an internal capability or set of skills that enables the firm to provide a particular benefit to
customers. Hence, Federal Express delivers a benefit of on-time delivery based on its competency
at logistics management. While a firm might attempt to build operations around any number of
competencies, sources of advantage can be organized into seven general areas. These include the
firm’s production/operating system, capabilities in technology development/innovation,
selling/marketing expertise, information management/mining/packaging prowess, competence in
financial management/arbitrage, mastery of supply chain management, and skills at managing
networks and leveraging resources.
4. How will the firm differentiate itself? Explain how you are different. Depending on
how they are applied, core competencies can enable the firm to differentiate itself, or produce
something perceived to be unique in the marketplace. The challenge of differentiation is to
identify salient points of difference that can be maintained over time. Given the ability of
companies to quickly imitate one another, the entrepreneur seeks bases for differentiation that are
more than cosmetic or transitory. Sustainable strategic positions tend to be designed around one
of the following five bases of differentiation: operational excellence, product
quality/selection/availability/features, innovation leadership, low cost, or intimate customer
relationships/experiences.
5. How will the firm make money? How do we monetize? A core element of the firm’s
business model is its economic model. The economic model provides a consistent vehicle for
earning profits. It has four sub-components. The first of these is the firm’s operating leverage, or
the extent to which the underlying cost structure is dominated by fixed costs, or is driven more by
variable costs. The second sub-component is volumes, and whether the firm is organized for
high, medium or low volumes in terms of both the market opportunity and internal capacity. The
third consideration is whether the firm will be able to charge high, medium or low margins.
Finally, the economic model considers whether the revenue sources are fixed or flexible. An
example of the former would be a company that sells ten items based on a fixed price list.
Alternatively, a firm that sold a number of value-added services at varying prices depending on
the customer segment and market conditions has more flexible revenue sources. This latter factor
is the source of many of the creative revenue models found in dot.com businesses.
6. What are the entrepreneur’s time, scope and size ambitions? What is the intended
magnitude of the business? The business model must capture the entrepreneur’s objectives and
ambitions. As such, the entrepreneur views the business in terms of an investment model. Four
such models can be used characterize most ventures: subsistence, income, growth, and
speculative. With the subsistence model, the goal is to survive and meet basic financial
obligations. When employing an income model, the entrepreneur invests to the point that the
business is able to generate on ongoing healthy income stream for the principals. A growth model
finds not only significant initial investment, but substantial reinvestment in an attempt to grow the
value of the firm to the point that it eventually generates a major capital gain for the initial
investors. The speculative model is employed where the entrepreneur’s time frame is shorter, and
the objective is typically to demonstrate the potential of the venture and then sell it.
These six components of the business model that are addressed at the foundation level, and the
specific decision variables within each component, are summarized in Table 5. For three of these
components, the entrepreneur or analyst must select one factor from a set. For the other three
components, one factor must be selected from each set of factors making up a given sub-
component.
The Proprietary Level: Creating Unique Combinations
While the foundation level is adequate to capture the essence of any firm’s business model,
venture sustainability is ultimately dependent on the ability of the entrepreneur to apply unique
approaches to one or more of the foundation components. Thus, having determined that the firm
will sell some combination of products and services directly to customers, or that it will sell in
business-to-business markets at high margins and low volumes, the entrepreneur defines ways to
implement such decisions in a novel manner. This is referred to as the proprietary level of the
business model, as it entails innovation that is unique to a particular entrepreneur and venture.
Consider the earlier-cited example of Dell Computer. At the foundation level, the company sells a
mix of products and services, with a heavier product focus. The product offering is customizable,
and is sold through a direct channel in both business and consumer markets. However,
competitive advantage derives from unique approaches that are applied to two of the foundation-
level components. The so-called ‘Dell Direct Method’ is the result of proprietary approaches both
to defining the value proposition and to organizing internal logistical flows. It is these proprietary
concepts that enable the firm to consistently deliver speed and customization at a moderate price,
which translates into a sustainable marketplace position.
The Rules Level: Establishing Guiding Principles
When a business model is operationalized, its success may also be tied to a basic set of operating
rules. These are guidelines that ensure the foundation or core components of the business model
are reflected in the ongoing strategic actions of the firm. Eisenhardt and Sull (2001) refer to a
similar notion in discussing “strategy as simple rules”. For instance, they discuss “priority rules”
that determine how Intel allocates manufacturing capacity, and “boundary rules” that govern the
types of movies that Miramax decides to make. In the Dell Computer example, examples of rules
might include turning inventory over in four days or less, or delivering replacement parts to the
customer’s home or business by the next business day. Through such rules, the business model
will influence which new product and market opportunities are pursued, as well as any
fundamental changes to basic operating methods (e.g., pricing, logistics, service delivery) within
the organization.
Applying the Framework in a Mainstream Industry
Table 6 illustrates the application of the integrative framework to Southwest Airlines. Southwest
has a unique business model that has sustained the company’s growth for thirty years. Not only
has the company achieved profitability every year since 1972, including years when most airlines
incurred losses, but it is consistently ranked in the top five among the most desired companies to
work for by Fortune magazine. The airline has won the so-called triple crown of the industry, for
best on-time record, best baggage handling, and fewest customer complaints, in five different
years.
The Southwest business model is first captured at the foundation level. Here, the focus is on what
the firm is doing, as opposed to how. This level gets at the essence of the firm’s approach, and
represents a standardized set of questions that can be quantified. Accordingly, comparisons across
firms are relatively easy to make at the foundation level, such that standard models can be
identified. This ability will be demonstrated below.
At the proprietary level, Southwest has innovated in a manner that has not only produced
sustained profits, but has changed the manner in which other airlines operate. From Table 6 it can
be seen how they tailor each of the basic components of the model, and how each of the elements
is intertwined and internally consistent with the others. Arguably, their model centers on the
firm’s core competency, which is their production/operating system. It is their unique operating
system (e.g., employee hiring, selection of airports and routes, no code sharing, independent
baggage handling, standardization of aircraft, etc.) that make possible their unique value
proposition (short haul, low-fare, on-time, direct service that is on-time and fun).
Finally, it would be easy to deviate from this model, especially given the competitive, regulatory,
and market pressures in the airline industry. However, a number of ‘rules’ help ensure that
Southwest does not make strategic or tactical moves that are inconsistent with their business
model. Rules regarding maximum fares, flight turnaround times, or on-time performance
effectively delimit courses of action management might consider, while also reinforcing in the
minds of operating personnel the strategic intent of the company.
As can be seen with this example, the proposed framework is reasonably simple to apply, and
each element is measurable. Further, the framework is comprehensive in nature, capturing the
essence of a sustainable business in terms of strategy, operations, and financial performance.
Sustainability further requires that the components of the model be internally consistent, as can be
seen with the Southwest example. This consistency must be found within and between sub-
components. Thus, an economic model with high operating leverage, low margins, moderate
volumes and fixed revenue sources may, by itself, be untenable. Further, the economics must fit
with the customer model. Thus, a given economic model might not be workable when selling in a
regional b-to-b market, where significant investment in the development of customer
relationships is required. Finally, it should be noted that the framework applies to ventures of all
types and sizes. However, firms with multiple divisions or strategic business units may have
different models for different divisions.
The Core Components of a Business Model
Michael H. Morris, Ph.D.
Component one:
How do we create value? (select 1 from each set) (factors related to the offering)
• offering: primarily products/primarily services/heavy mix
• offering: standardized/some customization/high customization
• offering: broad line/medium breadth/narrow line
• offering: deep lines/medium depth/shallow lines
• offering: access to product/ product itself/ product bundled with other firm’s product/service
• offering: internal manufacturing or service delivery/ outsourcing/ licensing/ value added reselling
(make clear what will be outsourced and what will be done internally)
• offering: direct distribution/indirect distribution (if indirect: single or multi-channel)
Component two:
Who do we create value for? (select 1 from each set) (market factors)
• type of customer: b-to-b/b-to-c/ both/other
• local/regional/national/international market
• where customer is in value chain: upstream supplier/ downstream supplier/ government/
institutional/ wholesaler or retailer/ service provider / final consumer
• broad or general market/niche market
• transactional/relational customer
Component three:
What is our source of competence/advantage? (internal capability factors)
• production/operating systems
• selling/marketing
• information management/mining/info. packaging
• technology/R&D/creative or innovative capability/intellectual
• financial transactions/arbitrage
• supply chain management
• networking/resource leveraging
Component four:
How do we differentiate ourselves? (competitive strategy factors)
• image of operational excellence/consistency/dependability
• product or service quality/selection/features/availability
• innovation leadership
• low cost/efficiency
• intimate customer relationship/experience
Component five:
How do we make money? (select 1 from each set) (economic factors)
• pricing & revenue sources: how revenue is captured/#of drivers
• operating leverage: high/med/low
• volumes: high/med/low
• margins: high/med/low
Component six:
What are our time, scope and size ambitions? (select 1) (personal/investor factors)
• subsistence model
• income model
• growth model
• speculative model
An Application: Characterizing the Business Model of Southwest Airlines
Foundation Level Proprietary level
Component
One
(factors
related to
offering)
• Sell services only
• Standardized offering
• Narrow breadth
• Shallow lines
• Sell the service by itself
• Internal service delivery
• Direct distribution
• Short haul, low-fare, high-frequency,
point-to-point service
• Deliver fun
• Serve only drinks/snacks
• Assign no seats/no first class
• Do not use travel
agents/intermediaries
• Fully refundable fares, no advance
purchase requirement
Component
Two
(market
factors)
• B2C and B2B (sell to
individual travelers and
corporate travel depts.)
• National
• Retail
• Broad market
• Transactional
• Managed evolution from regional
airline to providing service to 59
airports in 30 States
• Careful selection of cities based on
fit with underlying operating model
Component
Three
(internal
capability
factors)
• Production/operating systems • Highly selective hiring of employees
that fit profile.
• Do not operate a hub-and-spoke
route system.
• Fly into uncongested airports of
small cities or less congested airports
of large cities.
• Innovative ground operations
approach
• Independent baggage handling
system
• Use of Boeing 737 aircraft
• No code sharing with other airlines
Component
Four
(competitive
strategy
factors)
• Image of operational
excellence/consistency/
dependability
• Differentiation is achieved by
stressing on-time arrival, lowest
possible fares, and passengers having
a good time (a spirit of fun)
• Airline that love built
Component
Five
(economic
factors)
• Fixed revenue source
• High operating leverage
• High volumes
• Low margins
• Short-haul routes and high frequency
of flights combined with consistently
low prices and internal efficiencies
result in annual profitability
regardless of industry trends
Component
Six
(personal/
investor
factors)
• Growth model • Emphasis on growth opportunities
that are consistent with business
model
doc_475943568.pdf