Wednesday, January 22, 2014

Business Model - creating a fabric to link the stakeholders

In the startup context, where survival is primary, entrepreneur’s pursuit is one of finding a business model that would stand their firm in good stead ensuring growth and profitability. One doesn’t have to reiterate the importance of finding the right business model or the long term viability of the company. The term "Business model", often used in the business community, refers simply to the way the company makes money through a set of activities. I had blogged about some prevalent business models a long time back elsewhere and here is a link to the same:
Given the large number of business models, one could easily believe that finding the right one to suit their business would be easy – however this is not to be.
Creating the business model is akin to building a tower from cards. The cards are all balanced and mutually supported. The flexibility at this stage is the ability to move the cards around and ensure the balance is in place. Only if the balance is created can the attempt grow beyond a specific size. Once the card tower is built, it’s time to build stronger bonds - think of glues that would make it more permanent.
[Note: this glue itself could be a limiting the growth/flexibility, but that’s the game one has to play - You cannot just build a larger tower if you focus on too much flexibility!]

From my experience of interacting with startups, I clearly notice that – attempting to build a business model relies a lot on finding the right balance between the various stakeholder commitments and then synch their acts to make the complete business engine operate without glitches. It is only over multiple iterations of engagement and testing the various business hypotheses that such a structure could be created and controlled through routines/procedures/policy for the business execution. These sum up the entrepreneurial learning and help guide the business moving ahead. Thus, we could visualize the firm’s business model as a fabric binding the various stakeholders in a specify tension through the binding and dependency of the various activities.
A natural question that arises here: is the claimed complexity of Business Model creation in a start up really hard? Why not just imitate?
Stated differently the question is - there are existing models that have been used, wouldn't it be just easy to start off by imitating a business model? Here is my argument why this many not be easy:

Yes, imitation could give you a head way into starting (a map say), but eventually you have to design and use a business model that suits your business needs - your customers define that. The geographical limitations, the economical situation, the capability of the talent available, cultural context, all have an influence on the business model that finally emerges. Even large companies that operate businesses across the globe cannot expect the same audience and therefore need to modify their model!

Increase the above stated complexity a hundred or thousand times – that is the environment that a start up is dealing with – the haze surrounding the start up is so high that it probably cannot even see a few meters ahead with clarity! The changes of survival for a start up enhance by actively seeking the right partners and steadily creating a business from the idea. The Business model is developed through multiple iterations of this nature.
What role does the entrepreneur’s ingenuity play in the process of building a good Business Model?

While some of the factors explained above are definitely important – my observation is that the initial mindset of the entrepreneur and the founding team would defines largely the business scale. While business are built to cater to customer demands, and one could often confuse the existing customer segment size to define the scope, I perceive it as a function also a stakeholder relationship (resources) and the innovativeness with which the relationships amongst the various stakeholders(my opinion on this listed in an earlier blog) are created to derive a greater benefit. 

Recollect: my claim of saying there is definitely an important role the entrepreneur plays and not everything is defined by the customer! The discussion could be extended to other stakeholders like – employees, suppliers, investors etc. (pick up links to older blogs)

In the context of an established organization, the board  has to be constantly on its toes validating to see if they are living up to the market trends or are they defining the market trends else their lethargy could risk a death changing ecosystem. The business model thus has to constantly evolve.
It is hard to consider a lot of dimensions of business and it would definitely benefit if there is some guidance on the same. How do we ensure that the business model effectively covers all aspects of the business? 

I feel a very useful tool that most businesses could use is the Business Model Canvas (check this link-  for a detailed coverage). Here is more pictorial lively representation of the canvas is as blow :)

The various blocks of the canvas help keep in mind the various components of the business in a balanced manner. If the business keeps a constant vigil on these dimensions it would help them identify when business shifts would be needed. The 9 blocks of the canvas:
  1. Customers
  2. Value Proposition
  3. Customer Relationships
  4. Channels
  5. Key Partners
  6. Key Activities
  7. Key Resources
  8. Costs
  9. Revenue

One clear benefit of the canvas is to emphasize the importance of the various blocks and gets the attention of these towards these and focus on these (lest you miss them). 

The Business Model Canvas though extremely useful, has some limitations in the startup context. I guess this would be the subject of another blog keep watching the space for more.

1 comment:

  1. Now I understood little bit about business model importance and complexity behind it.