People will always stress that having a well researched business plan is key before you start your business. Although creating a business plan is often an important step in
evolution of a business, particularly if you need financing or you are not experienced at running a business, it is not necessarily essential first step. There are two key elements that should be completed prior to business plan: •The business model •The strategy What is a Business Model? While word model often stirs up images of mathematical formulas, a business model is in fact a story of how a business works. In general terms, a business model is method of doing business by which a company can generate revenue. Both start-up ventures and established companies take new products and services to market through a venture shaped by a specific business model. In their paper, The Role of Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom outlined six basic elements of a business model:
1)Articulate value proposition – value created to users by using product 2)Identify market segment – to whom and for what purpose is product useful; specify how revenue is generated by firm. 3)Define value chain – sequence of activities and information required to allow a company to design, produce, market, deliver and support its product or service. 4)Estimate cost structure and profit potential – using value chain and value proposition identified. 5)Describe position of firm with value network – link suppliers, customers, complementors and competitors. 6)Formulate competitive strategy – how will you gain and hold your competitive advantage over competitors or potential new entrants. Joan Magretta in her article Why Business Models Matter took concept of business model a little further. Magretta suggests every business model needs to pass two critical tests, narrative test and numbers test. The narrative test must tell a good story and explain how business works, who is customer, what do they value and how a company can deliver value to customer. The numbers test means your profit and loss assumptions must add up. At most basic level, if your model doesn’t work, then your model has failed one of two tests.
To begin modeling process you need to articulate a value proposition on product or service being provided. The model must then describe target market. The customer will then value product on its ability to reduce costs, solve a problem or create new solutions. A market focus is needed to identify what product attributes need to be targeted and how to resolve product trade-offs such as quality versus cost. You also need to identify how much to charge and how customer will pay.
Think of business modeling as managerial equivalent of scientific method - you start with a hypothesis, which you then test in action and revise when necessary. The business model also plays a part of a planning tool by focusing managements on how all elements and activities of business work together as a whole. At end of day, business model should be condensed onto one page consisting of: a diagram outlining how business generates revenue, how cash flows through business and how product flows through business and; a narrative describing product/ service components, financial projections or other important elements not captured in diagram.
Business Models and Strategy
It is important to note that completing a business model does not constitute strategic planning. Strategic planning factors in one thing a business model doesn’t; competition.
What is strategy?
