Over the recent years, there was seen an ever-increasing adoption of the business models among the entrepreneurs. The approach is fundamental for business success and consequently is important for numerous entrepreneurs. It is evident that the success of most businesses can be attributed to the comprehensiveness of their business model/plan. Business analysts conclude that most investors do not invest in the business but they rather invest in the business model. As a result, most companies and businesses have invested millions in their business model and others are significantly working towards improving their models. Duplicating of business models is highly discouraged because the operations and objectives of businesses and companies are different. It therefore implies that businesses should develop their business models that would clearly define their operations and correspond to their goals. Current paper critically focuses on business modeling and why it should be applied by the entrepreneurs.
Definition of Business Model
Business model refers to a strategic plan that a company designs and implements with an aim of generating revenue and gaining profit (Barrow, Barrow & Brown 2012). The business plan should involve all functions and components of the company or business organization as well as the expenses incurred and the revenue generated. Therefore, a business model is an abstract exemplification of an organization. Klabunde (2015) defines the business model as a financial arrangement and co-operational, graphical, conceptual or textual issue that is created by an entity either immediately or some time in future. Additionally, the business plan defines the products, co-products, and services that the business offers, and this is based on the arrangement proposed to achieve the strategic objectives and goals. Thus, the primary dimension of a business must indicate the following; the value network that articulates the major construct of the company plan, cost finance, value architecture, and value proposition (Lapointe & Cimon 2009). Evidently, it is clear that the business model corresponds to a series of untested hypotheses. Thus, entrepreneurs should ensure that all the requirements of the business model are availed, and skilled individuals are involved in the design.
Reason for Developing Business Model by an Entrepreneur
The business model is vital for those entrepreneurs, who want to start up a business, for the current performance of the business and perhaps for the future operational objectives of the business. It has been argued that a business model rarely survives in their first consumer contact and remains entirely intact (Oxenford & Claveau 2014). This implies that business people should be critical while designing their business models and should not forget that the model should cater for the customer relations in order to avoid losing customer contact. Therefore, a business organization should develop a business model so as to ensure that it is in contact with the customers.
Businesses should develop a business model because it helps the entrepreneurs describe the rationale regarding how organization captures, creates and delivers value (Arseculeratne & Yazdanifard 2014). Value in this case, is fundamental since it is the main reason as to why people and organizations venture into business. Therefore, entrepreneurs develop a business model that stipulates a step by step approach that the company will adopt in order to realize its objective values. It thus, implies that a business without a plan cannot adequately create, capture and deliver its value (Oxenford & Claveau 2014).
Business model acts as a management guideline for business management. Shirey (2007) argues that a business model is a vital aspect that enables an individual to manage his or her business more effectively. The individual can dedicate his/her efforts to the writing plans and procedures. Through the written procedure, one can understand his or her business better and in return chart the specific courses of action that require to be taken to improve the business operation. A business plan is paramount since it presents detailed alternative future scenarios that emanate from the business goals and objectives; this aligns with the necessary resources that are fundamental for achieving such goals (Shirey 2007). Thus, a business model helps a person to understand his or her business marketing capabilities; this enables one to plan on how he or she is going to maximize the business operation within the set environment. Significantly, the business organization plays a vital role in realizing and ensuring the long-term success of the business.
A business plan helps entrepreneurs and business organizations to enhance funding as well as facilitate growth (Shirey 2007). In the course of the lifetime, companies are faced with investment decisions. Perhaps cash flow alone is not enough to fund the enormous opportunities available, and thus businesses seek support from external sources such as banks and other willing financiers. It is, therefore, clear that the funding markets are ready to help businesses making them competitive. In order to make sure that the financiers are not unreasonably taking risks, they require businesses and organizations seeking support to avail their up-to-date business plan along with their recent financial statement (Yu et al. 2013). For example, business and organizations should avail their loss and profit statement. The profit and loss statements are essential to the investors because they help them to understand the performance of the business in the past. The up-to-date business plan is also equally significant and important because they avail a window through which the investors can perceive the future of the business (Spaulding 2010). Additionally, the business plan creates a platform whereby organizations clearly define the opportunity impressing the investors. Therefore, a well-planned business model conveys fundamental information to potential investors. It also helps them to develop confidence in the business since the future of the business is well catered. Evidently, most investors try to predict the future of the business. For instance, it examines whether the business is able to generate enough cash flow that will enable it to cater for the debt obligations since this will encourage the business to operate efficiently.
It enhances the organization to develop and communicate a course of action. A business plan helps an organization to assess its future opportunities. This enables the organizations to commit themselves to a particular course of action. Once the organization commits itself to the business paper plans, other distracting options are effectively marginalized (Venezze 2014). With the help of the paper plan, the organization is aligned to focus on the primary activities. The plan assigns milestone to particular individuals and ultimately enables them to monitor progress. By writing a business plan, a collaborative and more efficient model is created (Venezze 2014). This is because a plan is disseminated quickly. In addition, it prompts feedback and further questions through those individuals who go through it. Therefore, a business model helps to identify business strengths and weaknesses and work on improvements. It is therefore recommended for a business to develop business models.
Business models help in the management of cash flow. Critical management of cash flow is a vital necessity for all businesses. Finch (2010) argues that the reason as to why business fails is not due to unprofitability experienced by the business rather it is because most businesses become insolvent. It implies that businesses are closed down because as they are unable to pay their debts. It occurs due to the break-even scenario, where total revenue gained is equal to the total cost (Barrow, Barrow & Brown 2012). Thus, start-up should be keenly figured out when the business picks up and runs profitably. Furthermore, as the business figures out some more investment opportunities, it encounters significant cash outflows. The cash outflow may be higher than the cash inflow; critical assessment of such opportunities should be undertaken due to the seasonal variation that the business may encounter (Klabunde 2015). In order to avoid such financial disasters, the business should adopt timing of cash flow through the business model. Cash strains may also arise when one sells on credit; it implies that one will receive cash in future. The situation becomes complicated when one has to pay for other expenses and yet income is not received by the business (Yu et al. 2013). This adds to the company’s solvency, however, with a well-structured business model, there is an advanced management of funds.
A business plan acts as a support for a strategic exit. This occurs particularly where the owners of the business decide to dissolve or exit the business. Business plans represent the most likely exit strategy. This helps to direct and inform about the current decisions. The business model stipulates the process of liquidating the business; this presents an option for investors to cash out their investments at the time of their choice. Some of the exit strategies presented by the business model include; mergers, management buy outs, family succession, acquisitions by competitors, and initial public offering of stock (IPO’S) (Barrow, Barrow & Brown 2012). Venezze (2014) argues that “Investment decisions can be taken in the present with one eye on the future via a well-thought-out business plan (p. 511).” This suggests that there is an exit route appealing to the investors; they may be compelled to focus on activities that are aimed at increasing the attractiveness of the company against the competitors. Though valuing firms may be notoriously subjective and challenging, a well-written business model highlights prospects for the forthcoming investors (Venezze 2014). Therefore, the business plan should increase the likelihood of the effective exit by the present owners.
Venturing and Creating Value through Business Modeling
Value creation refers to the enactment of action that aims at increasing the worthiness of goods and services. It is not only limited to the products and services but also extends to enhancing the worthiness of a business, organizations and companies. Evidently, most business operators and entrepreneurs focus on creating the value so as to increase the customer's preferences so that they purchase the products that the company deals with. Value creation also extends to the shareholders since they want to have their stake in the company appreciated in value (Spaulding 2010). Value creation is an autonomous approach that is adopted by the companies to ensure that the performance of the company is satisfactory and various stakeholders are equally satisfied. However, value creation cannot be achieved through the bogus business model. Therefore, the business model represents a foundation block for the value creation in businesses, organizations, companies, etc.
A valid business model aims at maximizing the company’s profit. This is achieved by implementing strategies through which cash outflow does not exceed cash inflow. This affirms the fact that value creation is the primary goal of most business organizations. The higher profit realized is a reflection of more sales, and implies that the business model can cater for the customer’s needs (Yu et al. 2013). Therefore, creating value for consumers’ needs helps to increase the sales of goods and services. Consequently, the increase of sales contributes to creating value for shareholders. Furthermore, the sales increase is reflected in the increase of stock price. The increase of stock price secures the future accessibility of investment capital that is fundamental for funding the operations of any business organization (Shirey 2007).
From the dimension of the financial perspective, the value is considered to be created when the company or other type of business gains revenue. The revenue is referred to us the return on capital and should exceed the expenses or the cost of capital (Oxenford & Claveau 2014). Income and competitive advantage are well realized through the business model that incorporates innovation and technology as the current and future strategy for the business operation. The business should have a provision whereby companies and business organizations can seizure the value of new technology in two ways. These techniques include incorporating new technology into the existing business activities (Oxenford & Claveau 2014). This is done through new ventures that aim at exploiting the technology in the innovative business arena. The technology highlighted by the business models should enable firms to carry out their activities effectively and productively. It therefore implies that the cost of operation will be low thus enabling companies to have higher returns. Such a model is a guarantee of business success.
Lapointe and Cimon (2009) affirm this by pointing that “firms must necessarily take technology to market through a venture shaped by a particular business model (p. 41).” He also argues that whether the technology is explicit or implicit is should be embodied in the performance of innovation. Moreover, technology is latent unless it is commercialized. Klabunde (2015) argues “the extent to which the value is realized is contingent upon the manner in which it takes place” (p. 7).
To conclude, the business model is a fundamental asset in which most successful companies and business organizations continue to invest. The business model plays a vital role in the operations of any business. For instance, it attracts and convinces the investors to invest in the company, manages cash flow, supports a strategic exit, communicates and develops the course of action, maps the future, secures funding and encourages growth, among others. In addition a business model helps to capture and create value in any business. This is because it stipulates strategies that aim at increasing business profit and share value, adequately satisfying the customer’s needs. Furthermore, the business model creates value by suggesting and availing technology that ensures efficient operations of the company. This ascertains the fact that the nature of the business model adopted by the company determines whether it will succeed or fail.