Getting Your Business Model Right

“Inclusive” Business Models are at the core of the projects and discussions here at the Practitioner Hub. We are exploring what “inclusive” refers to, providing examples, case studies and facilitate discussions between members. But are we sure what we mean by a business model before we start putting “inclusive” in front of it? If you are an entrepreneur - have you thought through and designed your business model so that it gives you competitive advantages over time? Too often, I get the impression that many think of business modeling in too simplistic terms. It is clearly more than issues relating to pricing, revenue streams and costs.

I used to work in the Internet industry where the standard question in Silicon Valley when start-ups met was “So, what’s your business model?” This question meant “how and who do you charge for your services?”, as the Internet was moving from all free to paid services. Even the investor community seemed to use the concept of business modeling in this most simplified meaning and we saw company valuations that were related to number of users, rather than based on a deeper understanding of the other 7 elements of the business model. Let us take a look at what they are. The first thing you may note is that it is dramatically different from a supply-chain view, since we do not start with the supplier and move towards the end-user in a logic order. It works the other way around:

1. Customer Segments – which segment(s) are you targeting? Choosing niche or mass market will have implications on all the other elements. How do you define your segment (the key attributes) is important for how you will later identify them for communications and sales.
    
2. Value Proposition – designed to solve the problems and needs of the segment you have selected. If you target several segments, your propositions need to be adapted accordingly.
    
3. Channels – distribution and sales, as well as communications. Franchise models and micro-distribution models are popular among many entrepreneurs and small companies in underserved markets. But before deciding on these models are you really sure that you want to hand over your direct customer relationships to someone else? Have you weighed the costs of serving through indirect channels in relation to geographic reach, etc?
    
4. Key Internal Resources – internal resources that help you develop and deliver your products and services.
    
5. Key External Resources (Partnerships) – funding, development, distribution etc. Many start-ups are naturally very limited by their own resources, but still rarely take advantage of acquiring knowledge and input to the organization by developing external networks and partnerships, as our own research at Njord Consulting has shown.
    
6. Customer Relationships - developing and maintaining a relationship with the segments you identified in Step 1. Customers can also have a very active role in designing your product and service, that is also one aspect of “inclusive” business modeling. Some refer to this as co-creation.
    
7. Revenue Streams – exploring for example multiple revenue streams when consumers alone do not provide an attractive business case (who else can we make business with who also targets same segments?)
    
8. Cost Structure – low costs to operate is of course imperative to succeed in underserved markets. This is an area often overlooked by companies locking themselves into a solution/supplier relationship early on.

Some would add to these building blocks “Key Activities”, but personally I think that belongs in your operational planning. After you have determined the business model and your strategy you look at what activities will be necessary to make it reality.

One purpose of going through the exercise of carefully designing the business model, and I am aware that it may seem very complex, is that it should help you to see how you can create competitive advantage. Competition may seem far away, but remember – when you become successful you are part of creating a market that will attract others. You will be in a better position to defend your business when you know which elements you can change.

For more practical examples of how to work through your business model, I would recommend “Business Model Generation” by Alexander Osterwalder and Yves Peigneur.