BM2104

CONDUCTING A FEASIBILITY ANALYSIS AND DESIGNING A BUSINESS MODEL

Idea Assessment (Cornwall & Scarborough, 2016)
An idea assessment is a process of examining a need in the market, developing a solution for that need,
and determining the entrepreneur’s ability to turn the idea into a business successfully. The best business
ideas start with a group of customers with a common problem or need. Successful entrepreneurs learn to
apply the creative processes to find solutions for these customers. The idea assessment process helps an
entrepreneur more efficiently and effectively examine multiple ideas to identify the solution with the
most potential. Examining numerous business ideas ensures that the entrepreneur does not lock in on a
single idea and overlooks others with an even greater chance of success.
Successful entrepreneurs understand that the process of going from ideas to the launch of a new business
venture is like a funnel. When the entrepreneur observes a need in the market, the creative process
generates many business ideas that might address this need. Each step in the new business planning
process (as shown in Figure 1) narrows down the number of ideas until the entrepreneur is ready to launch
a business that he or she has carefully researched and tested. An idea assessment helps the entrepreneur
efficiently evaluate the numerous ideas that come out of the creative process before committing the time
and effort to craft a business plan, design a business model, or even conduct a feasibility analysis. One (1)
effective tool to help assess ideas is the idea sketch pad (as shown in Figure 2).

Figure 1. The new business planning process

Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 149.

Entrepreneurs too often jump ahead and begin modeling or planning their business ideas. They get excited
about the potential they imagine if they launch a business based on the idea. However, most ideas do not
become successful businesses. Alex Bruton, the developer of the idea sketch pad, says it is human nature
to misjudge how unlikely it is for a new business idea to become a successful business. Rather than act on
an impulse, successful entrepreneurs are disciplined in evaluating each new idea. Because it takes so many
ideas to develop a viable business concept, entrepreneurs must become adept at quickly sorting through
all of them.

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 1 of 12
 BM2104

Figure 2. Idea sketch pad

Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 150.

The idea sketch pad helps an entrepreneur assess ideas in a relatively short period. When using the sketch
pad, the entrepreneur asks a series of key questions addressing five (5) key parameters:
1. Customers. Start with a group of people who have a clear need that is not being addressed. This
may be a need that no business is currently addressing, or it may be a need that no business is fully
or adequately meeting for these customers. The entrepreneur assesses the customers by answering
basic questions about the potential users of the product or service and the potential buyers if they
are different than the users. For instance, for sugary cereals, children are the users, and their
parents are the buyers. Specifically, who would be the users of the offering? How would they use
the offering? How many potential customers are there?
2. Offering. Describe the idea for a product or service to offer the customers. Are you offering a
product, a service, an experience, or a combination of one (1) or more of these? What are its key
features? Describe it in detail and sketch out an image of it, if possible.
3. Value proposition. Explain why the product or service will be important to the customers. Why
would the offering be valuable to the user and/or buyer? How does it address the need these
customers currently have that is not being met?
4. Core competencies. Does the offering include any technologies or unique features that will help
differentiate it from competitors? Is it based on intellectual property?
5. People. Identify the key personnel on the team who will launch the business. Who are the founding
entrepreneurs of this venture? Do they have the skills and knowledge needed to turn the idea into
a start-up venture successfully? Can they attract key team members who will fill in gaps in
knowledge, skills, and experience?
Feasibility Analysis (Cornwall & Scarborough, 2016)
A feasibility analysis consists of four (4) interrelated components: an industry and market feasibility
analysis, a product or service feasibility analysis, a financial feasibility analysis, and an entrepreneur
feasibility analysis (see Figure 3). Feasibility analysis is an opportunity to take a hard look at an idea to

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 2 of 12
 BM2104

know whether it needs minor or major pivots, or if warranted, to be completely abandoned to move on
to another idea.

Figure 3. Elements of a feasibility analysis

Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 151.

When evaluating the feasibility of a business idea, an analysis of the industry and targeted market
segments serves as the starting point for the remaining three (3) components of a feasibility analysis. The
focus in this phase is two (2)-fold: (1) To determine how attractive an industry is overall as a “home” for
a new business and (2) to evaluate possible niches a small business can occupy profitably. When examining
an industry, an entrepreneur should examine both the macro-environment that can impact many
industries and the specific competitive environment of the industry of interest (see Figure 4).
Industry and Market Feasibility (Cornwall & Scarborough, 2016)
Most opportunities for new businesses within an industry are due to changes taking place in that industry.
Foundational macro forces shape industries and the markets they serve. Changes in any of these macro
forces can dramatically change the competitive nature of the industry and fundamentally change the
needs and want of its target market. Entrepreneurs must be vigilant when monitoring macro forces.
Changes in macro forces may have created the initial opportunity the entrepreneur pursued when
launching the business, and change will likely continue. If the entrepreneur does not adapt the business
to meet the changes these macro forces create in the industry and market, even the most innovative new
business may become outdated and left behind in the competitive landscape.
Six (6) foundational macro forces create change in industries and the markets they serve:
1. Socio-cultural. Social and cultural change can lead to dramatic changes that can create whole new
industries and fundamentally transform existing industries. For example, in the 1970s and 1980s,
women began entering the workforce at much higher rates than had been the case previously. Not
only did more women enter the workforce, but they also had career aspirations to compete for jobs
that once had been dominated by male workers. This cultural change led to the birth of the daycare
industry. It also resulted in a new segment within the women’s fashion industry for women’s
business attire. It led to rapid growth in the restaurant industry as families began eating in
restaurants much more frequently than previous generations and to a growth period for the auto
industry. The percentage of families with two (2) cars doubled from 1960 to 2011.
2. Technological. Technological breakthroughs lead to the development of new products and entirely
new industries. For example, the Internet is a technology that has had a profound impact on many
industries. Before the Internet age, a few large companies dominated the music industry. The
Internet led to many new businesses within the music industry, including Spotify and Apple’s iTunes,
which changed how customers buy and listen to music. The Internet also changed how people

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 3 of 12
 BM2104

consume information. As the news became available online, there was a dramatic decrease in the
number of people reading print newspapers. As result, advertising revenues have plummeted for
print newspapers, while online newspapers have experienced steady growth in advertising.

Figure 4. Environmental forces and new ventures

Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 152.

3. Demographic. Changing demographics creates opportunities for entrepreneurs. For example, as

Generation Y (those born during the 1980s to early 1990s) reaches adulthood, businesses will begin
to pay attention to the next generation, Generation Z. Although Generation Y is optimistic and
idealistic, those who are part of Generation Z (those born between the mid-1990s to about 2013)
are much more realistic. School violence and the Great Recession (which began in 2008) have
shaped their lives. Generation Z is more realistic in how they view the world. They intend to be
careful with their money because they have watched their parents’ generation struggle with
prolonged unemployment and economic uncertainty. Those in Generation Z will seek products and
services that offer value. In a survey of members of Generation Z conducted by the Intelligence
Group, 57 percent said they would rather save money than spend it.
4. Economic. Although many companies struggle during economic downturns, some businesses can
grow. For example, firms in the e-learning industry thrived during the Great Recession. Web-based
learning provides customers with opportunities to improve their education and skills at an
affordable price. Given the highly competitive job market during a recession, additional knowledge
and skills offer job seekers a competitive advantage when applying for a new position. However,
those who were unemployed or afraid of becoming unemployed were unwilling to pay the growing
cost of tuition for traditional educational programs. Companies that provide high-quality Web-
based e-learning at a fraction of the cost of traditional university-based education filled this gap in
the market.
5. Political and legal. The enactment of new legislation creates opportunities for entrepreneurs. For
example, when the COVID-19 pandemic emerged in 2020, many businesses were forced to shift
from traditional brick-and-mortar stores into online product/service delivery due to increasing
government mandates and restrictions. Because of this new trend, savvy entrepreneurs are creating
new companies that help online businesses to track online sales and provide logistical support
services.
6. Global. Global trends create opportunities for even the smallest of companies. More open global
markets allow businesses to seek customers and suppliers from all corners of the world.

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 4 of 12
 BM2104

Product or Service Feasibility Analysis (Cornwall & Scarborough, 2016)

A product or service feasibility analysis determines the degree to which a product or service idea appeals
to potential customers and identifies the resources necessary to produce the product or provide the
service. This portion of the feasibility analysis addresses the question, “Are customers willing to purchase
our goods and services?” Entrepreneurs need feedback from potential customers to answer this question
successfully. Primary research involves collecting data firsthand and analyzing it; secondary research
involves gathering data that has already been compiled and is available, often at a reasonable cost or
sometimes even free. In both types of research, gathering quantitative and qualitative information is
important to draw accurate conclusions about a product’s or service’s market potential.
The following are the primary research tools:
• Customer Surveys and Questionnaires. Keep them short. Word the questions carefully to avoid bias
results, and use a simple ranking system (e.g., a 1-to-5 scale, with 1 representing “definitely would
not buy,” and 5 representing “definitely would buy”). Test the survey for problems on a small
number of people before putting it to use. Web surveys are inexpensive, easy to conduct, and
provide feedback fast. Do not only survey people you know or those who are convenient to reach.
Survey people who represent the target market of the business.
• Focus Groups. A focus group involves enlisting a small number of potential customers (usually eight
[8] to 12) to give feedback on specific issues about a product or service (or the business idea itself).
Listen carefully for what focus group members like and dislike about the product or service as they
tell exactly what is on their minds. The founders of one (1) small snack food company that produced
apple chips conducted several focus groups to gauge customers’ acceptance of the product and
guide many key business decisions, ranging from its name to its packaging. Once again, consider
creating virtual focus groups on the Web. One (1) small bicycle retailer conducts 10 online focus
groups each year at virtually no cost and gains valuable marketing information from them. Feedback
from online customers is fast, convenient, and real-time.
• Prototypes. An effective way to gauge the viability of a product is to build a prototype of it. A
prototype is an original, functional model of a new product that entrepreneurs can put into the
hands of potential customers so that they can see it, test it, and use it. Prototypes usually point out
potential problems in a product’s design, allowing inventors to fix them even before putting the
prototype into customers’ hands. The feedback customers give entrepreneurs based on prototypes
often leads to design improvements and new features, some of which the entrepreneurs might
never have discovered on their own. Makers of computer software frequently put prototypes of
new products into customers’ hands as they develop new products or improve existing ones. Known
as beta tests, these trials result in an iterative design process in which software designers collect
user feedback and then incorporate their ideas into the product for the next round of tests. Three-
dimensional printing creates a less expensive way for entrepreneurs to develop a basic prototype
of a product based on drawings. Although the output of a three-dimensional printer is not a fully
functional product, it provides a method of creating a model to test and use to source
manufacturing of parts.
• In-home Trials. One (1) technique that reveals some of the most insightful information into how
customers use a product or service is also the most challenging to coordinate: in-home trials. An in-
home trial involves sending researchers into customers’ homes to observe them as they use the
company’s product or service. However, in-home trials can be expensive to conduct and, therefore,
may not be affordable for the budgets of most entrepreneurs.
• “Windshield” Research. A good source of information is to observe customers interacting with
existing businesses within an industry. Windshield research involves driving around and observing
customers interacting with similar kinds of businesses and learning what customers like and don’t

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 5 of 12
 BM2104

like about those businesses. For example, before one (1) potential investor was willing to commit
funding for a new coffee shop, he required that the entrepreneur get traffic counts at local
competitors’ outlets. He observed heavy demand and often long lines, which helped support the
need for a new coffee shop.
The following are the secondary research tools:
• Industry Databases. Several online business databases are available through university libraries,
such as Encyclopedia of Emerging Industries, Encyclopedia of Global Industries, Encyclopedia of
Products & Industries—Manufacturing, IBISWorld, and Market Share Reporter. These databases
offer a wide variety of information on specific industries, including statistical analyses, geographic
reports, trend analyses, and profiles.
• Demographic Data. To learn more about the demographic characteristics of customers in general,
use the Philippine Statistics Authority (PSA) website, which provides detailed breakdowns of the
population in the country. PSA is the government agency mandated to conduct the census in the
Philippines. The census aims to provide government executives, policymakers, and planners with
population and housing data to base their social and economic development plans, policies, and
programs (PSA, 2020).
• Forecasts. The National Economic Development Authority (NEDA) provides projections on
economic growth and development in the Philippines. The Bangko Sentral ng Pilipinas (BSP)
provides forecasts on interest rates.
• Market Research. This includes data compilations and previous studies on related or similar
business undertakings.
• Articles. Magazine and journal articles pertinent to the proposed business are great sources of
information.
• The Internet. Entrepreneurs can benefit from the vast amount of market research information
available on the Internet. This is an efficient resource with up-to-date information, and much of it
is free. Entrepreneurs must use caution, however, to ensure the credibility of online sources.
Financial Feasibility Analysis (Cornwall & Scarborough, 2016)
The four (4) major elements to be included in a financial feasibility analysis have the initial capital
requirement, estimated earnings, time out of cash, and resulting return on investment.
1. Capital Requirements. Some businesses require large amounts of capital, but others do not.
Typically, service businesses require less capital to launch than do manufacturing or retail
companies. Start-up companies often need capital to purchase equipment, buildings, technology,
and other tangible assets and hire and train employees, promote their products and services, and
establish a presence in the market. A good feasibility analysis estimates the amount of start-up
capital an entrepreneur will need to get the business up and running.
2. Estimated Earnings. An entrepreneur should forecast the earning potential of the proposed
business. Industry trade associations and publications offer guidelines on preparing sales and
earnings estimates for specific types of companies. Entrepreneurs can estimate the financial results
they and their investors can expect from the business venture if the start-up is executed according
to plan.
3. Time Out of Cash. A common cause of business failure is running out of cash before the business
breaks even and can support itself through the cash flow from operations. According to a study by
U.S. Bank, four (4) out of five (5) small business failures can be attributed to “starting with too little
money.” During the planning stage, the entrepreneur should estimate the total cash it will take to
sustain the business until it achieves break-even cash flow. This estimate should be based on a less-
than-optimistic scenario because there are almost always unexpected costs and delays in the start-

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 6 of 12
 BM2104

up and growth of a new business. To calculate the number of months until the business runs out of
cash, an operating company divides the amount of available cash remaining by the negative cash
flowing from the business each month. The result is the number of months the business can survive
at its current rate of negative cash flow. Ideally, the company will grow quickly enough to avoid
reaching the point of no more cash.
4. Return on Investment (ROI). The final aspect of the financial feasibility analysis combines the
estimated earnings and the capital requirements to determine the rate of return the venture is
expected to produce. One simple measure is the rate of return on the capital invested, which is
calculated by dividing the estimated earnings the business yields by the amount of capital invested
in the business. This aspect of financial feasibility is generally of most concern to investors. Although
financial estimates at the feasibility analysis stage typically are rough, they are an important part of
the entrepreneur’s ultimate “go” or “no go” decision about the business ventures. A venture must
produce an attractive rate of return relative to the level of risk it requires. This risk-return trade-off
means that the higher the level of risk a prospective business involves, the higher the rate of return
it must provide to the entrepreneur and investors. Why should an entrepreneur take on all of the
risks of starting and running a business that produces a mere three (3) or four (4) percent rate of
return when he or she could earn that much in a risk-free investment at a bank or other financial
institution? Although entrepreneurs should pay more attention to this calculation, many do not
because they tend to get wrapped up in the emotion and excitement of their business ideas.
Entrepreneur Feasibility (Cornwall & Scarborough, 2016)
Many new businesses require that an entrepreneur have a certain set of knowledge, experiences, and
skills to have any chance of being successful. This is called entrepreneurial readiness. Some of these can
be simple skills. For example, starting a landscaping business requires knowing how to operate a
lawnmower and other equipment. Being successful in a landscaping business also depends on some level
of knowledge about plants and grasses. Other new businesses may require a higher level of knowledge
and skills. For example, starting an accounting firm requires a high level of expertise and experience in the
laws and practices of accounting. Entrepreneurs can gain the knowledge and skills they need from
previous jobs, formal education, or interests or hobbies. They can also acquire knowledge as part of what
they work on during the planning process. Entrepreneurial readiness also involves issues such as
temperament, work ethic, and so forth. Performing an entrepreneurial self-assessment can help evaluate
entrepreneurial readiness (see Table 1).

Considerations Indicators
• What gets you excited, gives you energy, and motivates you to excel?
• What do you like to do with your time?
• What drains energy from you? (in work and personal relationships)
• How do you measure success in your personal life? (family, friends and relationships;
Personal
personal interests and hobbies; and contributions to community and society)
Aspirations
• What do you consider success in your business and career? (short-term and long-term)
& Priorities
• What are your specific goals for your personal life?
• What are your goals for your business and career? (income and lifestyle; wealth; free time;
recognition and fame; and impact on community)
• What do you want to be doing? (in one [1] year, five [5] years, 10 years, and retirement)
• List the core personal values you intend to bring to your business (e.g., treating people fairly,
giving something back to the community).
Core Values
• Where does each of these core values come from (religious faith, family, etc.)?
• Why is each of them important to you?

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 7 of 12
 BM2104

Considerations Indicators
• What are the major reasons you want to start a business?
• How many hours are you willing and able to put into your new venture?
• How would you describe your tolerance for uncertainty and risk?
• Do you easily trust other people working with you on a common activity? Why or why not?
• How much financial risk are you willing to take with your new venture (personal assets,
personal debt, etc.)?
• Assume you decide not to start your business. A short time later, you see that someone has
Personal
started the same business and is doing well. How would you feel? Why?
Entrepreneurial
• What are the non-financial risks for you in starting a new business?
Readiness
• How do you react to failure? Give examples.
• How do you react in times of personal stress? How do you deal with stress in your life?
• How much income do you need to support your current lifestyle?
• How long could you survive without a paycheck?
• How much money do you have available to start your business?
• Which of your assets would you be willing to borrow against or sell to start your business?
• Whose support (non-financial) is important for you to have before starting your
Table 1. Entrepreneurial self-assessment
Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 165.

Another way to ensure the necessary knowledge and skills are in place is through building a team. For
example, an aspiring entrepreneur may have an idea for a new app for smartphones but may not have
any programming or design skills. He or she would be best served by exploring the possibility of adding
people to the team with that skill set. If more than one entrepreneur is starting the business, all of them
should complete an assessment and use this as a launching point to examine their collective
entrepreneurial feasibility.
Beyond the entrepreneur’s readiness to start a business, the second aspect of entrepreneur feasibility is
to assess whether the business can meet the financial and non-financial needs of the entrepreneur and
the team. Will the business be able to generate enough profit to support everyone’s income needs? If it
is successful, will it also meet the wealth goals of the founding team? Just because a business is profitable
does not mean that it is profitable enough to support the entrepreneur and his or her team. This can vary
from entrepreneur to entrepreneur. A 22-year-old single entrepreneur fresh out of college has very
different financial needs than a 42-year-old married entrepreneur who has a mortgage, car payments,
and tuition for private schools for his or her children. But making money is not the only thing that matters
for most people. Does business fit with the goals and aspirations the entrepreneur has outside of work?
A business that demands extensive travel may not fit with an entrepreneur who has a goal of being highly
involved with his or her family. A restaurant, which often demands that the entrepreneur be involved six
(6) or seven (7) days a week, 52 weeks a year, may not be a good business model for an entrepreneur who
wants to travel and take extended vacations.
Developing and Testing a Business Model (Cornwall & Scarborough, 2016)
In their groundbreaking study of how successful entrepreneurs develop business models, Osterwalder
and Pigneur identified the common elements that successful entrepreneurs and investors use when
developing and evaluating a business model. They found that most entrepreneurs use a visual process to
develop their business ideas, such as diagraming their business on a whiteboard. They don’t just start
writing the text of a business plan. Rather, they map out the key components required to make their
businesses successful. A business model adds more detail to the evaluation of a new business begun
during the feasibility analysis by graphically depicting the “moving parts” of the business and ensuring
that they are all working together.

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 8 of 12
 BM2104

When building a business model, the entrepreneur addresses a series of key questions that will explain
how a business will become successful. What value does the business offer customers? Who is my target
market? What do they expect of me as my customers? How do I get information to them, and how do
they want to get the product? What are the key activities to make this all come together, and what will
they cost? What resources do I need to make this happen, including money? Who are key partners I will
need to attract to be successful?
In their study, Osterwalder and Pigneur found a pattern of how entrepreneurs use a visual representation
of their business model to answer these questions. They used these findings to develop a Business Model
Canvas that provides entrepreneurs with a dynamic framework to guide them through the process of
developing, testing, and refining their business models (see Figure 5).

Figure 5. The business model canvas

Source: Essentials of entrepreneurship and small business management (8th ed.), 2016, p. 166.

The canvas is comprised of nine (9) elements:

1. Customer segments. A good business model always starts with the customer. The entrepreneur’s
first step is to identify a segment of customers who have a clearly defined need. In the previous
steps outlined in this chapter, the entrepreneur begins to define the market for the new business.
For most entrepreneurs, the initial market is defined much too broadly. The entrepreneur uses
demographic, geographic, socioeconomic, and other characteristics to define the target market.
Narrowing the target market enables a small company to focus its limited resources on serving the
needs of a specific group of customers rather than attempting to satisfy the desires of the mass
market. Creating a successful business depends on an entrepreneur’s ability to attract real
customers who are willing and able to spend real money to buy its products or services. Perhaps
the worst marketing error an entrepreneur can commit is failing to define a target market and trying
to make the business “everything to everybody.” Small companies are usually much more
successful, focusing on a specific market niche or niches to excel at meeting customers’ special
needs or wants. Who, specifically, has the needs the new business will be addressing with its
products and/or services? It may be a market niche. It may be a mass market. Or it may be a
segmented market based on age, gender, geography, or socioeconomic grouping.

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 9 of 12
 BM2104

2. Value proposition. A compelling value proposition is at the heart of every successful business. The
value proposition is the collection of products and/or services the business will offer to meet the
customers' needs. It is all the things that will set the business apart from its competitors, such as
pricing, quality, features, product availability, and other features. Most value propositions for new
businesses come from fundamental macro trends within the economy, demographics, technology,
or society and culture discussed earlier in the chapter. Trends lead to changes within industries.
These trends are first uncovered in the industry and market feasibility analysis. A fundamental role
of being an entrepreneur is to find solutions for the problems and needs customers have that result
from the change that follows disruptive trends such as these. It could be something about the
product itself, such as its price and value, features, performance, durability, or design, or it might
be something emanating from the company's personnel, including their expertise, responsiveness,
or reliability.
3. Customer relationships. Not every business provides the same type and same level of customer
service. This is what defines the customer relationship in the business model. For example, several
effective business models provide meals to consumers. Customers may choose to buy food from a
vending machine, a fast-food restaurant, a fast-casual sit-down restaurant, or an exclusive fine
dining establishment. Each of these business models has a very different approach to define the
relationship with customers. The vending business offers quick, convenient, and impersonal service.
At the other extreme, the fine dining restaurant works closely and personally with customers to
ensure they get exactly what they want. Each approach is effective and appropriate for its particular
target market. When developing this segment of the business model, the entrepreneur must answer
several questions. How do customers want to interact with the business? Do they want intensive
personal service, or would they rather have limited engagement or even automated interaction?
There is no one best approach to customer relationship for all businesses, but they're usually the
best approach for each business model.
4. Channels. The business model canvas refers to both communication channels (promotion) and
distribution channels (product placement). Communication channels define how the customers
seek out information about this type of product. Where do potential customers go to when they
want to get information about products and services? It could be Web sites, social networks, blogs,
advertisements, experts, and so forth. Again, there is no one best way to communicate for all
businesses, but one or more will be most effective with the specific target market for a given
business model. The distribution channel defines the most effective way to get products to the
customers for this type of business. For some business models, it may be best to use in-home sales
through Web sites such as Amazon because the target market may prefer to order online from the
comfort of their living rooms. The customer may want to see the merchandise, touch it, and interact
with it in an exciting new retail location for other business models. The entrepreneur must
determine where the customer wants to purchase and then determine the most effective way to
get it to the customer at that location.
5. Key activities. What important things must the entrepreneur do to ensure a successful launch and
sustain the business's growth? The business model aims to build a basic checklist of what needs to
be done to open the business and what activities are necessary to ensure its long-term success. The
business plan development will then take this list and expand on it in much greater detail.
6. Key resources. What are the human, capital, and intellectual resources needed for the business to
be successful? Again, this will serve as an initial checklist to ensure that the entrepreneur has
identified all key resources necessary to support a successful launch and to sustain the business as
it grows. The business plan provides the opportunity to explain these in much greater detail and
develop all necessary cost estimates for the financial forecasts.

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 10 of 12
 BM2104

7. Key partners. This business model segment includes key suppliers, key outsourcing partners,
investors, industry partners, advisers, and all other external businesses or entities that are critical
to making the business model work. Entrepreneurs cannot expect to become successful all by
themselves. They must build a network of relationships when launching and growing their
businesses.
8. Revenue streams. How will the value proposition generate revenue? Will it be a one-time sale,
ongoing fees, advertising, or some other sources of cash into the business? The entrepreneur should
answer these questions using the information discovered in the business model's value proposition,
customer segments, customer relationship, and channel components (the right side of the business
model canvas). The revenue streams information serves as the framework for the more detailed
revenue forecasts developed for the business plan.
9. Cost structure. What are the fixed and variable costs that are necessary to make the business model
work? The plan's key activities, resources, and partners components (the left side of the business
model canvas) identify the basic types of costs and estimate their scope. Like the revenue streams,
the cost structure of the business model becomes the framework for developing more detailed
costs that the entrepreneur will incorporate into the financial forecasts of the business plan.
Developing a business model is a four (4)-phase process:
• Phase 1: Develop the Business Model Canvas. The first phase is to create an initial business model
canvas, as outlined previously. It is best to do this on a whiteboard, on the wall using Post-it Notes,
or free business model software such as Business Model Fiddle (www.bmfiddle.com). As the
entrepreneur goes through the next three (3) phases, the business model will change. At this point
in the process, much of the information in the business model is only a series of hypotheses to be
tested. The entrepreneur will update the business model as he or she learns more about the
customers and the resources it will take to launch and grow the business. The business model canvas
allows all of the team members involved in the start-up to work from a common framework. The
team documents all of the business model hypotheses that require further investigation and keeps
track of changes in the model that result from testing the hypotheses. The entrepreneurial team
also estimates the total market size and the specific target market size that would be feasible to
attract to the new business when it launches.
• Phase 2: Test the Value Proposition with Customers. The second phase in designing the business
model is to test the problem that the team thinks the business solves through its core value
proposition. This is best done with primary research data. That means the entrepreneurial team
must “get out of the office” and test the model with real customers. By engaging potential
customers early in the development of a new business and listening to what they have to say, the
team has a much better chance of developing a business model that will attract customers. By
engaging with real customers, the entrepreneurial team asks the following questions:
a. Do we understand the customer problem the business model is trying to address?
b. Do these customers care enough about this problem to spend their hard-earned money on
our product?
c. Do these customers care enough about our product to help us by telling others through word-
of-mouth?
• Phase 3: Test the Product with a Prototype or Minimal Viable Product. The third phase is to test
the solution to the problem in the market. One technique to test the solution offered by the
business model involves business prototyping, in which entrepreneurs test their business models
on a small scale before committing significant resources to launch a business that might not work.
Business prototyping recognizes that every business idea is a hypothesis that must be tested before
an entrepreneur takes it to full scale. If the test supports the hypothesis and its accompanying

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 11 of 12
 BM2104

assumptions, the entrepreneur begins building a business plan. If the prototype flops, the
entrepreneur scraps the business idea with minimal losses and turns to the next idea. The Internet
is a valuable business prototyping tool because it gives entrepreneurs easy and inexpensive access
to real-life potential customers. Entrepreneurs can test their ideas by selling their products on
established sites such as eBay or setting up their Web sites to gauge customers’ responses. A
process that can guide early testing versions of a product or service is known as a lean start-up,
which is defined as a process of rapidly developing simple prototypes to test key assumptions by
engaging real customers.
• Phase 4: Pivot Business Model Until Ready to Expand. The fourth phase of designing a business
model is to make changes and adjustments, called pivots, based on what the entrepreneur learns
from engaging the market about the problem and the solution that the new business intends to
pursue. Some pivots may be subtle adjustments to the business model. In contrast, others may be
fundamental changes to key parts of the model, including the value proposition, markets served, or
ideal revenue streams. There are three (3) major types of pivots:
1. Product pivot. The features that make up a product may not match what the customer wants
or needs. Sometimes the entrepreneur adds features that are not important to the customer.
Although customers may accept these features as part of the product, they are not willing to
pay extra for them. This creates a product that is not focused on the market need: It costs
more than it should due to the extra features.
2. Customer pivot. Although a product might solve a real market problem or need, the initial
business model sometimes targets the wrong customer segment or even the wrong market.
For example, PayPal targeted the handheld device market, including the Palm Pilot, for its
electronic payment system. However, the founders of PayPal soon realized by listening to
customer feedback that there was a much larger market for its product. Businesses were
beginning to engage in commerce on their Web sites. PayPal pivoted its business model and,
as a result, rapidly grew to become a $1.6 billion or 80-billion-peso company facilitating
Internet commerce.
3. Revenue model pivot. There are many ways in which the revenue model may pivot. One of
the most basic revenue decisions is using a high margin/low volume model or a low
margin/high volume model. For example, Best Buy began as a single location stereo
equipment store called the Sound of Music back in the 1960s. Like all of its competitors, the
revenue model was high margin/low volume. The owners would mark up inventory two to
three times what the product cost them to purchase. As a result, the store would turn its
inventory over about once a year. After a tornado destroyed the building but left the
inventory undamaged, the Sound of Music owners rented a large tent and ran a drastic sale.
The demand was so overwhelming that when they reopened, they changed their revenue
model to low margin/high volume and renamed the business Best Buy within a short time.
The low prices created so much demand that the stores would sell their entire inventory
about once a month rather than once a year. Other revenue model pivots change the type of
payment received. The model may change from a single payment to recurring revenue or shift
from hourly billing to charging a fixed price per service. Social entrepreneurs can pivot from a
revenue model based on a nonprofit that raises money through grants and donations to a
social enterprise that generates revenues from a product or service.
References:
Cornwall, J. & Scarborough, N. (2016). Essentials of entrepreneurship and small business management (8th ed.). Pearson Education Limited.
Philippine Statistics Authority (PSA). (2020). PSA enjoins the public to support the conduct of the 2020 census of population and housing (CPH).
https://psa.gov.ph/content/psa-enjoins-public-support-conduct-2020-census-population-and-housing-cph-0

04 Handout 1 *Property of STI

 student.feedback@sti.edu Page 12 of 12