The Importance of a Business Model - Assignment Example

BUSINESS QUESTIONS By X Prof Question 2 pages) What is the importance of a business model? What role should the business model play as the firm grows and improves its processes? When should a firm stick with its business model and when should the firm adapt its model? Business is a complex art. It involves a lot of angles relating to competition, performance and commitment. Prices and services must change depending on the successes and failures of your competition. One of the things that will get you through hard times and economic downturns is a good business model. The model is something you rely on. It keeps you on track and provides you with a blueprint that you can follow in uncertain situations. It shows what your margins are and how and why you can expect to make a profit in various scenarios. It provides you with a document you can come back to in the future to remind you what your goals were when you first started and how you would create value. When an entrepreneur first comes up with the idea of a business, he will msot likely need investors to help him or her get the idea off the ground. Some businesses begin with an experienced and well connected businesses man pitching his new idea to investors at the local steakhouse, the investors signing an agreement right then and there, and the business opening soon after. For most entrepreneurs however the process is more complicated. They will need a well thought out business model and business plan in order to attract investors and to get money from a bank. The model will show exactly how the business plans to make money and to be profitable. How will the business capture value? is the question a business model answers. It is one that everyone interested in business should be able to answer about their own business or their friends. In todays changing world there are many new things to keep in mind when designing a business model. As several individuals involved in the theory behind such models recently explained: The rapid growth and adoption of new technologies have facilitated organizational transformations. Recent advances in communication and information technologies, such as the emergence and swift expansion of the Internet and the rapid decline in computing and communication costs, have allowed the development of new ways to create and deliver value, which have offered scope for the creation of unconventional exchange mechanisms and transaction architectures . . . (Zott, et al, 11) But a business model should not remain static. It needs to change as a business grows and expands. If you start out selling fast food from a van down by the river and eventually expand into a fast food franchise in one hundred different countries, your original business plan is not going to be of much use to you anymore. You will need to update it regularly as your circumstances change. Similarly, the amount of competition you are facing in a marketplace may well dictate changes to your business model. You will have to adjust your prices and even your operations if you things get very competitive and your competitors eat into your bottom line. The most important thing is to remain vigilant about the marketplace and to see what sort of changes are happening. If you refuse to do this and refuse to alter your model, you will be out of business very quickly. Businesses models are very important for any entrepreneur starting out. They need a way to plan how their business is going to create value and they need a way to attract investors. But they need also to be mindful that markets change and the model must be flexible. Question 2 ( 2 pages) One of the primary reasons that firms fail is inadequate financial resources. Knowing this, what steps should an entrepreneur take to obtain and maintain adequate resources? What is more important, obtaining or maintaining financial resources? Why? In order to start a business it is obvious that you will need money. The question is how much. Do you make a rough guess and get the loans to cover that estimate or do you borrow more than you think you will need in case of various contingencies? This is a dilemma that faces many entrepreneur because no one wants to be underfunded. It is an issue that every entrepreneur must get a handle on. Very few start up businesses succeed in general, and even less so in todays market place. It is very important to know what youre doing and not to borrow so much money that you will be in danger should your business take a small dip or downturn. You have to be ready for almost anything. All business is in some sense a risk. That is part of the nature of the business. As one adviser recently put it: It is often said that small business people have a difficult time borrowing money. This is necessarily true. Banks make money by lending money. However, the inexperience of small business owners in financial matters often prompts many banks to deny loan requests. To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it and how you can pay it back. You must be able to convince your lender that you are a good credit risk. Requesting a loan when you are not properly prepared sends a signal to your lender. That message is ... "High Risk!" (Glen) The truth is that it is more important to maintain financial resources than to obtain them. So long as you have a good business model and some experience it is not that difficult to find someone willing to invest in your start up. The problem is how to maintain that funding through good times and bad. That is the complicated part. Many people borrow more than they can afford to pay back and are unable to make their interest payments and are forced into bankruptcy. That is a worst case scenario as it will be much more difficult to borrow money after that happens. Also, if you business is underfunded at any point because an investor has pulled out your reputation takes a hit and other investors will sit up and take notice and some of them will then pull out. That is a house of card scenario. You have to build your business on a strong foundation of maintaining loans. Reputation is very important in the business world: if you cant pay your loans that will affect your reputation quickly. We can see these problems in the current marketplace. Many economists believe the Credit Crunch crisis began because of a big asset boom in the United States. Banks and other lenders gave away many loans at very low interest rates to people who simply who could not afford to pay back the money. In the beginning this led to a huge boom in housing prices because there were so many buyers in the housing market and there was a high demand and a somewhat low supply. However, eventually what happened was that people began to default on their mortgage payments. During the boom years many complicated financial products involving mortgages were bought and sold by banks and it was difficult to know how many of these "toxic mortgages" were actually on a banks balance sheet. This process is only now being corrected and improved. Entrepreneurs must be very careful when borrowing money. They must be sure not to over leverage themselves and know just how much they can afford to borrow. All business is risky but it can be minimized. Work consulted Glen, Jerry. (2010). “How to Raise Money for Your Small Business.” The Entrepreneur Network. http://www.tenonline.org/sref/jg2.html Zott, C., et al. (June 2010) “The Business Model: Theoretical Roots, Recent Developments, and Future Research”. WP-862, IESE Paper. Read More