A guide to help you put flesh on the bones of your business idea
Not long ago, a friend came to me complaining about his 9–5 job and the following dialogue took place:
G: What is the matter? You seem unhappy.
F: I am not satisfied with my job.
G: I didn’t expect to hear that from you!I thought you were doing something you liked, and that the salary was satisfying.
F: Yeah, but the problem is that my boss neither respects me nor appreciates my contribution to the company’s success. I am always doing my best for the company, providing excellent customer service and constantly bringing revenue through the high number of personal sales I make each month. Not to mention that I am always willing to work until late and make personal sacrifices in order to deliver an excellent performance and achieve the firm’s goals. In return, not only he does not show appreciation for my work, but he also tries to sabotage many of my deals with customers by purposely delaying the delivery of their orders. Given that many of my customers happen to be friends and family members, failing to deliver their orders in time makes me feel even worse.
G: This is terrible!!What do you intend to do to deal with this situation?
F: Ideally, I would love to start my own enterprise, so that I would be the boss of myself and not depend on anyone else. Moreover, by doing this, I would feel a sense of fulfillment and the pleasure of doing something for the greater good of the society I live in. There is a problem though.
G: What is it?
F: I have many business ideas, but absolutely no clue of how to turn them to viable business ventures.
I bet many of you will experience a short of deja vu reading this dialogue. Dealing with horrible bosses who treat you badly (you can help them improve their leadership skills by suggesting them to read this) or the routine of a 9–5 job that does not match your ambitions and desires are not easy tasks. Among other solutions, like finding a new 9–5 job for another company and thus another boss, there is always the possibility to embrace the risk of starting your own business.
However, this brings some serious challenges to wannabe entrepreneurs, like the need to secure funding to gather the necessary capital to start operations and the challenge to bridge the gap between the raw idea that probably lives in their heads and the viable business that will hopefully bring them revenue in the future. While the funding challenge will be discussed in future articles, the challenge of transforming your idea to an enterprise will be the topic of this one.
Business Model Generation
The cornerstone of every business is the value it provides to its customers. It is this value that will generate revenue for the company, if it is considered satisfying enough by customers to pay the suggested price for it. The business concept that describes the logic behind the creation, delivery and capture of value by an organization is called business model based on Osterwalder’s definition.
It is highly important for companies to develop a plan that will provide answers to three interrelated questions:
- what kind of value are they going to offer?
- to what kind of customers will this value be offered?
- in which way is the company going to deliver this value?
A business model provides this sense of direction that is needed for people inside the company to understand how things should work and where their focus should be given to deliver the promised value to customers. Moreover, the business model is one of the necessary requirements for companies to secure funding from external sources. Investors evaluate business ideas by assessing the feasibility and potential profitability of their business models. The main challenge was to develop a tool that will provide a shared language to describe business models in a simple and easy to understand way. The most well-known tool to describe business models is the Osterwalder Canvas, which consists of nine building blocks:
· Customer Segments: the different groups of people or organizations a company targets with its offerings
· Value Propositions: the mixture of products and services that create value for a specific customer segment
· Channels: the way a company communicates with its customer segments and delivers the value proposition
· Customer Relationships: the kind of relationships a company develops with specific customer segments
· Revenue Streams: the sources from which a company generates cash from each customer segment
· Key Resources: the most important assets that are required for the company to deliver the value propositions to its customer segments
· Key Activities: the most important things a company should do to deliver the value propositions to its customer segments
· Key Partnerships: the network of suppliers and partners needed for the business model to work
· Cost Structure: all the costs that are associated with the operation of a business model
Another tool that was suggested to describe business models, is Christensen’s Four Building Blocks. According to this tool, a business model consists of four elements, whose combination creates and delivers value to customers. These elements are:
1. Customer Value Proposition (CVP). Based on this model, value proposition is defined as a way for customers to get an important job done. The term job is used to refer to a fundamental problem in a specific situation that requires a solution. Before a company gets to design its offering, it should first understand all the dimensions of the jobs that customers need to complete as well as the process of doing that with all the necessary steps. CVP increases when the job is considered very important by customers and when the company’s offering is considered better than other alternatives or when there are no alternatives at all.
2. Profit Formula. Determines how the company creates value for itself by providing value to customers. Profit formula is defined by considering four factors: revenue model (price x volume), cost structure, margin model and resource velocity. Margin model identifies the necessary contribution for each transaction to achieve desired profit, after revenue model and cost structure are calculated. Resource velocity indicates how well and fast the company’s resources (inventory, fixed assets) should be utilized to achieve the expected volume and profit. For instance, resource velocity shows how many products should be produced each year to achieve desired profit and how quickly machines should make products.
3. Key Resources: Required assets to deliver the value proposition to customers (people, technology, equipment, etc.)
4. Key Activities: Operational and managerial processes that help the company deliver the value proposition to customers repeatedly and successfully (training, development, manufacturing, etc.)
Osterwalder’s Canvas was modified by Ash Maurya in 2012 as a response to the emerge of startups in order to address the risk and uncertainty of such kind of businesses. The new Lean Canvas was based on the five principles of Lean Thinking:
First, companies should recognize the products/services they offer to customers along with the added value they provide. Then, they should decide how this value will be delivered and identify the necessary processes. Any process that does not add value to the products/services and interrupts or delays the flow should be removed. Afterwards, the company should make sure that supply is adjusted to demand, so that waste is kept to a minimum. Finally, the whole system should be continually evaluated, so that new layers of waste are found and removed. This way the system keeps improving itself and becoming more lean.
According to Blank, a startup is a temporary organization designed to search for a repeatable and scalable business model. Lean canvas is designed to help startup companies design their business model from scratch, which is the main difference to Osterwalder’s canvas, where companies execute their existing business models. Startups need to find out who their customers are and what is important to them, what their offering will be and how much demand there is in the market. Lean canvas is designed to support organizations in finding answers to those questions.
The layout of Lean Canvas is similar to the Osterwalder Canvas, consisting of nine areas. Some of those areas are common for both canvases and these are: revenue streams, cost structure, customer segments, channels and value proposition. However, those areas are not exactly the same, since Lean Canvas adds some extra elements to them, the following ones:
· Early Adopters, which are the first group of customers that will try a new product. In the Customer Segments block of the Lean Canvas, companies are asked to identify those people and list their characteristics.
· High-Level Concept, which is an analogy companies can use to compare themselves with a well-known brand in the unique value proposition block.
There are also important differences between the blocks of the two canvases, with Lean Canvas focusing on creating a new business model and Osterwalder’s Canvas on describing an existing one. On the Lean Canvas, design of the business model starts with identifying the main problems of the customer segments, how they are being solved today and by whom. This way, the company makes a competitor analysis and has a chance to find gaps between their offerings and customers’ needs. After the problems are defined, there is a need of finding possible solutions to each one of them. Solutions should be decided after careful consideration and analysis, since there is a tendency of people following the first solution they come up with, even if it is not suitable for the listed problem. Moreover, entrepreneurs should not fall in love with the solutions they think of and be able to critically examine them and even abandon them if they are not good enough. Designing a business model is not enough and there is a major need for entrepreneurs to keep track of how their business is doing and measure the success of their decisions. To achieve this, they should establish some key metrics, which are numbers that will show companies what their next actions should be to generate more revenue. Those metrics, at the beginning, should focus on finding ways to increase the value that is delivered to customer segments, while later on they should focus on how the business can grow bigger. Finally, after the company has traded successfully for a considerable amount of time, it can recognize its unfair advantage. Unfair or competitive advantage is the defense of the company against competitors, a unique characteristic that is difficult to be copied or bought. For startups that have not started trading, it makes sense to leave this section blank, as it is too early for an unfair advantage to be established.
It would be worth mentioning that a business model is not a static tool, because it is constantly reviewed and modified by companies to make improvements, tackle potential issues or deal with changes in the market. Moreover, before an entrepreneur decides to use a business model, he needs to validate it, since business models consist of hypotheses that need to be tested. For instance, the selection of a target customer segment should be validated through data collection methods, like surveys, to make sure that this particular segment is interested in the products/services offered by the company. Imagine if a company starts trading only to realize that their potential customers are not interested in its products/services. Therefore, before an organization proceeds with a business model, it needs to collect enough data from various reliable sources to prove its feasibility and viability!!
Based on what I learned during my studies at Warwick University, having good and innovative ideas about potential startups is important, but it is the execution of those ideas that makes the difference between success and failure. Therefore, your brilliant business idea may mean nothing, unless you spend enough time planning your way to success through answering the three major questions (what, to whom, how) that are related to the value you are going to offer to customers. Hopefully, the previously examined tools will help you find those answers and guide you through the development of a viable business model, which will function as a solid basis for the creation of your startup.
I would be very eager to hear your thoughts about the matter. What other business tools can you suggest that would facilitate the transaction from the idea phase to the beginning of operations phase of your business? Write your own ideas in the comment section below the article and don’t forget to share this article with your friends, family and colleagues so that they have a chance to express their own opinions on this subject.