How To Design a Winning Business Model

The Scope of the Business Model

A business model is a framework that shows how to design, create and deliver a unique value. The level of depth and complexity for the structure of a business model depends on the stage of the startup development. In general, a business model used for an early stage of a startup will be simple due to the fact of limited availability of information. For the pre-startup stage, it may be applicable to use a simple version of a business model to explain how value is created. Lean startup will usually go through 3 distinctive stages, as for the pre-venture, startup and growing stages. The structure of a business model used to create value for the growing-business stage is more comprehensive and detailed compared to the one used for the early stages. The business model is basically built on three distinctive factors, as for the resources, transactions and value creation. Designing a business model is challenged by the quality & type of data collected, degree of coherence and change or innovation desired. A business model will require a successful validation before it is deployed for implementation.

The Structure of the Business Model

Every business model is built on the structure of resources, transactions and value creation, as per the following description:

  • Resources: It is tangible and intangible assets necessary to run a business. It includes physical assets (i.e. machinery, furnitures, offices), human resources (i.e. management & employees), capital (i.e. cash required to finance operating and capital expenditures) and intellectual properties (i.e. Know-how, patent, trademark, intellectual rights, good-well, reputation, experiences). Resources can be leveraged as through partnerships, networking, investment, IP, growing achievements and others. Resource management can be evaluated through multi-disciplined quantitative and qualitative measurements. Among those measurements is the SHaRP tool (Specialization, Hard to Copy, Rare and Precious). A resource is considered as a valuable one if it is characterized for being a specialized, hard to copy it by competitors, rare and not widely available and finally precious with rich in value. For designing a business model, full details on resource requirements must be defined for every stage of a lean startup.  
  • Transactions: it is about internal and external transactions necessary to create and deliver a value. Internal transactions are including the processes for conducting training of staff, hiring staff, managing staff, production, financial management, store, sales, R&D and so forth. External transactions are, those transactions necessary to create and deliver value, connecting the organization with external stakeholders, such as customers, partners, competitors, investors, suppliers and so forth. A full details on transactions map required to create a value must be stated.  
  • Value creation: it is the processes of creating and capturing the desired value. To create a value, design thinking will be applied as for observation, defining the problem, ideation and testing. To capture the value, business model must be first validated before customers acquire the product and capture value. The validation process will go through problem/solution test and product/market test before scalability is planned and achieved. Intangible resources, such as technology, know how, patent, play major role on the value creation, viability and sustainability.
  • Testing: a business model will go through three levels of testing as for the problem-solution fit, product/market fit and scalability prior to its implementation. A business model will have no value if it is not tested at market, proven viability and scalability.
  • Communication: a business model will be designed and be visible for the stakeholders, such as customers, investors and employees. This enabled visibility and communication will help to design and test the business model.

The Business Model for the Pre-Venture Stage

For the pre-venture stage, the business is an early stage and before it gets financed and implemented. At this stage where idea concept (problem/solution) is being developed & tested but before the product/market is tested. For the pre-venture stage, it is not advised for applying a complex business model; where, a lot of information is missing. Instead, it will be advisable to apply the business model with its basic structure covering the key resources, transactions and value creation. These key components should be defined and tested before moving forward. The holder of the business model must set a quantitative criteria against resources required, transactions to be made to create and capture value and finally to map value creation and capturing.

The Business Model for the Startup Stage

A startup is usually working to create the business and make it viable. At this stage, a business has received seeds fund and has been working to develop the product/service and complete the product/market test. Furthermore, at this stage the business is not fully created and thus it is advisable for applying the business model developed by Ash Muraya, as described below:

  • Problem: It is about defining the problem streams that a group of customers are experiencing and looking for a quick solution. The problem streams are derived from a thorough analysis for the job performed, pains and desired gains.
  • Solution: It is about defining the solution for the pressing problem. Solution must be accepted by the majority of target customers. Solution will be a product or service that will perform a role of pain relievers and gain creator.
  • Key metrics: It is about setting the critical success factors. It is the conditions where a solution can be judged whether it is viable (validated/tested) or not. Such metrics are:
    • Estimation of a market size.
    • Market-share target.
    • Conversion rates for customer development: prospective, leads, customers, etc.
    • Commercial offering.
    • Cost structure.
    • Unique value propositions.
    • Profitability.
    • Channels.
  • Customer segments: It is a group of customers sharing common need preferences. Full information on the target customer segments including jobs, pains and desired gains, must be defined and tested. Such information is who they are? How to reach them? What is the market size and target market share? State specific characteristics for the customer segments, including customer profile, customer persona, customers’ priorities and requirements.
  • Channels: it is the path to reach target customers. Full information on channel distribution, including how to communicate with customers, sell, deliver goods, collect payments, provide post-sale services and how customer find, acquire and pay for the products.
  • Unfair advantage (Innovation): it is your core assets ( tangible and intangible) that competitors unable to copy. These competitive advantages will give superior edges and boost your business. The unfair advantages are including technology advancement, patent, capabilities, knowledge, economy of scale, unique proprietary, valuable data,..etc.
  • Unique value propositions: it is a clear and compelling message explaining why your business is different than competitors and why customers acquire your products or services. Value propositions can be a product & specifications, benefits, features, lower price, attractive design, etc. It should act as a pain reliever and or a gain creator.
  • Cost structure: It is a full information on the production cost for the products and services, including operating and capital cost and how it is funded. It includes full analysis on fixed & variable costs, cost per a product/service, break-even analysis, capital required & funding options, cash-flow analysis, reporting and control.
  • Revenue streams: It is how to sell and generate a revenue. It includes revenue models ( ordinary selling, leasing, subscription, membership), revenue types (transactional-one time or recurring- continuous), pricing strategy, break-even sales, growth, ..etc.

The Business Model for growth

A startup looking for a growth will usually set a strategy that describes ways to enabling a growth. At this stage, a business has successfully tested the business concept (problem-solution fit) and tested the market (product-market fit) and has been working to generate a growing revenue. Also, at this stage the business is being created & gather some details and thus it is advisable to apply the business model developed by Alexander Osterwalder, as described below:

  • For the resources section:
    • Key partners: it is about establishing necessary partnership to leverage in resources, capacities and knowledge. A full description on desired partnership is required, including who are they, why are they essential? How they are connected to resources and activities?
    • Key resources: it is about human (capabilities), capital, physical assets( assets) and intellectual rights (knowledge). Full information on resources required must be stated.
    • Key activities: it is activities critical to value creation, value capturing, customer relationships, channels, resources, cost structures, etc. Key activities are critical to value creation and capturing. It  must be clearly mapped and stated.
  • For the transaction section:
    • Customer segments: As explained above, it is a group of customers sharing common need preferences. Full information on the target customer segments including jobs, pains and desired gains, must be defined and tested. Such information is who they are? How to reach them? What is the market size and target market share? State specific characteristics for the customer segments, including customer profile, customer persona, customers’ priorities and requirements.
    • Channels: it is the path to reach target customers. Full information on channel distribution, including how to communicate with customers, sell, deliver goods, collect payments, provide post-sale services and how customer find, acquire and pay for the products.
    • Customer relationships: it is about how to get, keep and grow customers. A strategy and tactics on how to get, keep and grow customers must be stated.
  • For the value streams:
    • Value propositions: It is a clear and compelling message that states why your business is different than competitors and why customers acquire your products or services. It can be a product & specifications, benefits, features, price, design, etc. It should act as a pain reliever and gain creator.
    • Cost structure: It is about estimating the production cost for the products and services, including operating and capital cost and how it is funded. It includes full analysis on fixed & variable costs, cost per a product/service, break-even analysis, capital required & funding options, cash-flow analysis, reporting and control.
    • Revenue streams: it is about how to generate revenue. It includes setting revenue models ( ordinary selling, leasing, subscription, membership), revenue types (transactional-one time or recurring- continuous), pricing strategy, break-even sales, growth, ..etc.

Considerations for Designing a Business Model

  • Choosing the right business model: as explained above, choosing the right business model suitable for the conditions of a business stage (pre-venture, startup, growing) is critical to the success of the business. As explained above for the pre venture stage requires a simplest business model focussing on the resources, transactions and value streams. However, for the startup and growing stages, the chosen business model will be with more details to achieve milestones.  
  • Minimum viable product (MVP): it is the lowest version of a product that is developed for testing and completion. It includes different level of design iterations and testing.
  • Testing of assumptions (validation & analysis): A business model will be initiated with key assumptions. Then, assumptions will be tested against set criteria through interacting with target customers and collecting data for analysis and validation. A business model will go through different  level of testing and redesigning before it is deployed for implementation.

The Business-Model Cycle

  • Development of a business concept: it is a design-thinking processes including defining a compelling problem, designing a solution and test with evidence the problem-solution fit.
  • Product design: it is the processes for visualizing the business concept and product development, including how to create and deliver value to customers.
  • Testing: it is the processes of gathering and analyzing information on set assumptions from target customers to conclude a final decision on validating or resetting assumptions for the business-model sections (resources, transactions and value creation).
  • Redeployment of a business model: it is aiming at the redesigning, improving accuracy and implementing the tested business model.

The Business-Model Innovation

  • Innovation is the outcome of a novel configuration in resources and transactions to create a value for a new market or a new way to serve an existing market.
  • The drivers for business innovation is varied, including entertaining a business superiority, dominating the market, achieving higher profitability & sustainability, becoming more focus, exploring global opportunities, leadership, increasing value for the business, achieving higher growth and others.
  • Innovation is involved in high-risk and challenging processes including leveraging the key business drivers (CEO leadership, team, exploring valuable opportunities, efficiency of operations) and preparing the business environment for innovation including creating a business culture, creating a management system, partnering for knowledge, encouraging internal and external ideation, creating capabilities and enhancing knowledge.

Call for Action:

You please feel free to feed me back with your comments and suggestions. Should you need a training or mentorship or advising assistance on entrepreneurial businesses, You please contact us.  For more details, you visit our website http://www.growenterprise.co.uk.

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Written by: Munther Al Dawood

Enterprise Development Services

www.growenterprise.co.uk

maldawood@growenterprise.co.uk

Inspired by: Block, A. & George G. 2017. The business model.

 

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