A PRODUCT IS JUST A PRODUCT AND A SERVICE IS JUST A SERVICE. A BUSINESS MODEL DEFINES THE ENTERPRISE.
Whether you are a startup or re-examining a business that has been around for some time, the principle is the same, especially in the digital, highly competitive and demanding world of business in which we operate. You need to constantly find ways to better position the company for growth. To achieve this, you need a clear structure. This structure allows the growth to be repeatable and predictable, rather than accidental.
Accidental growth is magical. An opportunity opens up out of nowhere and revenue pours in. The problem comes when the accident moves on to some other lucky recipient. Now, you have an operation on your hands with a big appetite for resources, but your revenue has dried up. Because you never quite understood why and how the opportunity presented itself in the first place, you can’t take steps to restore your revenue, and you’re on the quick road to debt, and possibly the end of the business.
Working on your business model is a reliable way to achieve a strong, coherent business structure. It’s well worth the effort.
Wikipedia describes a business model as follows:
BUSINESS MODEL (noun)
The rationale of how an organization creates, de- livers, and captures value, in economic, social, cultural or other contexts. The process of business model construction is part of business strategy.
There are three reasons that a business model is important:
– It determines the type of business, and the value it will provide to a specific set of customers;
– It determines how it will deliver that value to customers, and establishes a revenue stream from delivering that value; and
– It determines the core business concept and, ultimately, your final product.
Business models are used to describe businesses in detail – especially in the entrepreneurial context. They are also used within existing companies by managers and others in leadership roles to explore possibilities for future business development. A business model can effectively operate as a ‘recipe’ for managers and leaders.
The Value Proposition Sits at the Heart of the Business Model
THE BUSINESS MODEL EFFECTIVELY translates your business idea into a value proposition that you can sell to a customer.
So, what is a value proposition? A value proposition is the idea that clearly describes all the tangible and non-tangible benefits that a customer gains from using your product or service.
THE VALUE PROPOSITION: EXAMPLES
RETAIL STORES, SUCH AS PEP STORES, Walmart, Woolworths, Edgars, Macy’s and Truworths, all sell clothes, but they have very different value propositions.
Walmart and PEP’s value proposition, for example, is low-cost or discount clothing. People shop at Walmart and PEP for precisely this reason. Woolworths and Macy’s, on the other hand, have a value proposition that focuses on quality and exclusivity. Woolworths’ and Macys’ customers are willing to pay a premium for this quality and exclusivity.
THEY SAY A GOOD ARTIST BORROWS, and a great artist steals. I must confess that I’m a thief (and hopefully a decent business coach). I want to share two important ideas with you from other people: The Business Model Canvas (BMC), and the Customer Discovery concept. Hopefully, you’ll get as much value from them as I have.
Business Model Generation, by Alexander Osterwalder, is a practical, inspiring handbook for anyone striving to improve a business model or craft a new one. It offers powerful, simple, tested tools for understanding, designing, re-working, and implementing business models.
Most importantly, from my perspective, the book describes the Business Model Canvas – a strategic and visual management tool that allows organizations to describe, design, challenge, invent and pivot their business models.
We are going to use the BMC to explore the business need, and then to figure out how your business can satisfy that need. The BMC allows us to look at and understand the different key parts of the business process.
By seeking to understand the different components within the canvas, we can create a repeatable and scalable business model that describes how you will make money by creating and delivering value to a customer segment.
Let’s look at the BMC (Business Model Canvas[1]) building blocks, and what they mean:
CUSTOMER SEGMENTS (CS)
A BUSINESS SERVES one or several customer segments.
VALUE PROPOSITION (VP)
A BUSINESS SEEKS TO SOLVE CUSTOMER PROBLEMS and satisfy customer needs with Value Propositions.
DISTRIBUTION CHANNELS (DC)
VALUE PROPOSITIONS are delivered to customers through communication, distribution and sales channels.
CUSTOMER RELATIONSHIPS (CR)
CUSTOMER RELATIONSHIPS are established and maintained with each Customer Segment.
REVENUE STREAMS (RS)
REVENUE STREAMS RESULT FROM Value Propositions successfully offered to customers.
KEY RESOURCES (KR)
KEY RESOURCES ARE THE ASSETS required to offer and deliver the previously described elements.
KEY ACTIVITIES (KA)
… BY PERFORMING several Key Activities.
KEY PARTNERSHIPS (KP)
SOME ACTIVITIES ARE OUTSOURCED, and some resources are acquired outside the enterprise.
COST STRUCTURE (CS)
THE BUSINESS MODEL ELEMENTS RESULT in the Cost Structure.
Learn more about innovating your business model in the accompanying online course.
