Part 3 of a 4-Part Series on Entrepreneurship
By Dr. David Price
The third step or “entrepreneurship” is the construction of the business itself, or growth or change of direction of an existing firm. That is, understanding key elements of how the business is designed, how it will operate, function and deliver the value of the innovation to your customers. It is a framework for the business, a template crafted around business functions that can be altered if and when it is necessary. This is often referred to as a “business model” and understanding the concept is valuable for any business opportunity.
WHAT IS A BUSINESS MODEL? Most business experts agree that owners and executives should know how business models work if their organizations are to be successful, yet there is little agreement on what it is exactly. Peter Drucker, often referred to as one of the leading business experts of all time, defined a business model as answering the following questions: Who is your customer, what does the customer value, and how do you deliver value at an appropriate cost?
In “Why Business Models Matter,” Joan Magretta defines a business model as having two parts, the first is the creation of the making something: design, raw materials, manufacturing etc. The second part is all activities associated with selling something: finding and reaching new customers, sales transactions, distribution or delivery of a service. A new business model may include designing a new product, meeting an unmet need or a process innovation, so it can be new at either end of the chain. It can also be new if an existing business model is introduced to a different market.
Recognize that business models are as old as markets themselves, for example selling direct to consumers is one version of a business model. Others may be new and experimental based around new technologies such as the Internet. Other models include selling wholesale to retailers, selling through distributors, licensing products to other companies, selling online, selling through auctions, and many other alternatives.
There appears to be no one-size fits-all solution, and many companies may use some combination of business models to arrive at a unique model. Table 1 lists only some examples of business models and how each is slightly different.
Understanding the right business model requires the same thoughtful diligence and persistence as designing the right product or service, but the approach and skill sets required are different. This is why there are often a team of founders in new companies, some have technical skill in building the product or service, while another has business acumen that helps develop the business model, most often done at the same time. In much the same way we prototype a product, we should also look for proof of concept with a business model to validate its design.
WHY IS BUSINESS MODEL THINKING IMPORTANT? Beginning in 2006, the IBM Institute has conducted Global CEO research which reported that senior executives across industries regard developing innovative business models as a major priority. A follow-up study several years later revealed that seven out of 10 companies are engaging in business model innovation. Furthermore, an amazing 98 percent are modifying their business models to some extent. Business model design is undeniably here to stay, but why?
As most business owners know, Plan A rarely works out. If your business is struggling, it certainly does not mean you have a bad product, or that you should fire salespeople or even close the doors. Rather, it could be something else at the heart of your company, such as its design. Often we have to look more closely at how you are conducting your business and adjust the model and pursue Plan B, and Plan C and so on.
For example, many well-known companies have changed their business model in order to take advantage of opportunities, keep up with competitors or to simply survive. The 3M Company is a huge multi-national corporation that sells industrial and consumer products worldwide in a number of different industries, from electronics, automotive to healthcare. But the company started out as a mining company (originally the Minnesota Mining and Manufacturing Company—3M) and almost collapsed until it diversified—and changed its business model.
The same can be said for one of the worlds’ largest video game companies Nintendo, which began selling playing cards, or Wrigley Gum entrepreneur William Wrigley who started selling soap and baking soda until he realized there was more demand from his customers for chewing gum he was giving away as a promotional product.
These types of changes to a business are often termed “pivot” points, where companies will notice an opportunity or threat and make the necessary adjustments to what they do. Innovative companies tend to have this ability to pivot quickly, and this skill is now more important than ever as the length of market advantage gained by innovations is becoming depressed.
Take Facebook for example, an incredibly successful company but one that is still looking for ways to expand. If the firm finds itself limited by its current business model (i.e. advertising revenue through social media), it attempts to pivot in other ways, which may mean acquisitions with the purchase of companies such as WhatsApp, Instagram and Virtual Reality technologies. Other current examples include search engine giant Google, that has pivoted from Internet search to other Internet-related services (email, maps, YouTube) to self-driving cars and renewable energy farms.
But how do you know if you need an entirely new business model or just need to update? How do we know when it is time to pivot? Rita McGrath in "When Your Business Model is in Trouble" suggests when innovations to your current business create smaller and smaller improvements there is a need for evaluation. There also could be a concern when owners/staff have trouble thinking up new improvements or, worse yet, when customers are increasingly finding new alternatives.
HOW TO DESIGN YOUR BUSINESS MODEL Each business is distinctive in its history, culture, size, markets and future challenges, so the blueprint for your own business model will be unique. That being said, every business should be looking to evaluate its current position on how to improve.
CONCLUSION Ultimately business model design is about seeing the big picture, the core aspects of your business, its purpose, processes, and structure. The simpler the understanding of this vision the better. Of course, simple does not necessarily mean easy. Each business owner/ manager must be honest about what you can and are willing to change, as there will be consequences with each decision. Once the building blocks of the business model are established, in the following issue we move to the next phase of the entrepreneurial process: growth.