Entrepreneurship, 3rd Edition

CHAPTER 4

UNDERSTANDING YOUR BUSINESS MODEL AND DEVELOPING YOUR STRATEGY

Blake Mycoskie of TOMS shoes.

Once you've identified your opportunity, the next step is to devise a strategy to pursue that opportunity. While you're probably familiar with the basic strategy categories from previous coursework—differentiation, low cost, niche—many would-be entrepreneurs fail to grasp the intricacies of devising and implementing their strategy. All strategies are driven by the company's business model. Therefore, before you state that your firm is going to use a differentiation strategy or a niche strategy, you need to understand exactly what your business model is.

The Business Model

Every firm's business model consists of two components: a revenue model and a cost model. The revenue model breaks down all the sources of revenue that your business will generate. For instance, if you own a restaurant, your basic revenue model will separate food and beverage into two main sources of revenue. You can take that further and break down the revenue model by meals (breakfast, lunch, and dinner), categories of food (Italian, American, etc.), or even food item (pizzas, hamburgers, etc.). The more detailed your categories, the more information you can glean about how certain aspects of your business are performing.

The cost model identifies how you are spending your resources to make money. It includes ...