What is a business model and why does every entrepreneur need one!

2012-08-14 15:29

Last week Thursday on the Money Show on 702 Talk Radio and 567 Cape Talk, Bruce Whitfield and I spoke about business models. What are they, how to build one and most importantly, why they are better for raising entrepreneurial finance than the horrible, dreaded business plan. Dreaded for entrepreneurs to write and dreaded for funders to read. In any event, banks are big computers interested in only your credit worthiness as defined by them. They can’t, don’t and won’t read business plans.

The business model, especially if it’s diagrammatically presented combined with a detailed spread sheet and a go-to-market note of no more than 3 pages should suffice for any funder who is serious about investing and knows what they are doing.

So let’s look at the elements that make up a business model. Building a business is similar to building a building. I use the term building deliberately since this is what an entrepreneur should be doing, building a business, not running one. You need an architectural plan. The builder first figures out who he is building for, what he is building and how it will be used. Is it a hospital, home or school – each has a particular use and purpose and is intended to serve the needs of different people. He then creates an architectural plan and uses this to guide the construction of the building to deliver on its purpose.

Your business model should do the same thing. It is your architectural plan of how you need to build your business to deliver a value proposition to a defined customer base on a sustained and profitable basis (the 2 don’t mean the same thing; I often see entrepreneurs sustain businesses for ages that don’t make decent profits…ever). Once in place, you should graphically represent your business model on a big A3 piece of paper and stick it to the wall above your desk. Look at it every day and ensure that the activities you undertake in building your business are consistent with this architectural plan.

As in life, nothing remains constant meaning that this plan will be dynamic. As entrepreneurs we have the benefit of flexibility and adaptability and change, today more than ever, happens on a 360°, everyday basis. This change is generated by …

Trends

Deteriorating trust between people and governments and people and big business is a clear trend impacting the world and us in South Africa. Talk of nationalisation is a trend too that can and will impact our businesses that we run.

Market Forces

Needs and wants constantly change and increasing access to the internet is fragmenting customers into smaller, tighter and more specific groups. No longer will one-size-fits-all sustain a viable business model. On top of this, competition is driving down the cost of switching. Telkom never saw it coming and still doesn’t seem to see it happening, mobile operators have taken them out the market and continue to do so. Within this space, Cell C has now developed a new business model that sees customer choice taken to a new level of transparency. You can create your own contracts which are clean, transparent and customised to within your own personal circumstances. Watch Vodacom and MTN dance around that one!

Industry forces

Disruptive business models in traditional industries are shaking them up big time. 99designs.com is a great example of this. In the old-days, you would commission a fancy advertising agency to draw up your logo or corporate identification. You would nervously pull up in their gardened customer parking and climb out your car to walk past the fountain and enter into a funky, well decorated reception. Cool looking people all driving mini coopers, wearing converse takkies and designer jeans are walking around with their Apple laptops. A few hundred thousand Rands later you have a logo and some brochure design blue prints! Now, you develop a specification for your logo, submit it online with a budget and have thousands of moonlighting designers around the world submit proposals back to you. Same activity with a same result at what will be 20% of the price!

These forces and trends too will affect us in SA and therefore you and I as entrepreneurs. Our business models have to accordingly adapt. So let’s start by identifying the elements that make up a business model. There are about 8 of them…

Customer is King

Not in the conventional sense but rather that an accurate definition of your customer will drive your success or failure in building an effective business model. If you try being everything to everyone you will land up being nothing to anyone and so your business model will have no value to you or anyone else for that matter.

Brand promise

Trite as it may sound, but if you know your customer and, as a result, know what, why, how and when they want what you have to offer, you can make them a promise. They know that in dealing with your business, they will have a particular experience. It a promise of value called a brand promise or more conventionally, a value proposition.

Channels and chains

Whilst at the time of writing this blog, 50 Shades of Grey has taken the female world by store, this element has nothing to do with it! Instead, this defines the way you communicate with your customers. This ties your customer segments to your value proposition and includes everything from marketing to distribution.

Revenue revolutions

This part is easy unless you offering a service then it’s a bit more challenging. Do you have a way of charging your customers for your service or product that makes cents to the bottom line and keep them coming back for more. The bottom line I said, not the sustainable just line I mentioned earlier.

The above four deal with the “front office” of the business model. Now let’s get into the “back office” of the model…

Revered resources

Identify what resources you need to deliver operational results in your business. Look out for what’s really ‘core’ and what’s ‘non-core’. Core activities tie directly into your ability to build your business into an asset of value (this, in my view, is the primary purpose of an entrepreneur). If you don’t have that resource in your business, does it leave you vulnerable? This may be physical resources like plant and equipment or intellectual resources like patents, methods or models of delivering an operational outcome.

Action activities

How much of what we do every day really adds value to building our business into assets of value? I sometimes think less than 50%! Think carefully about what key activities are relay necessary to deliver the promise to the customer as well as make use of your resources to optimise their return.

Super suppliers

These may be raw material, people, product or anything else that is needed to build your offer to customers. Super suppliers are those that you cannot do without and yet you should always strive to do without them as a strategy for risk management. This is one of the ultimate ironies of business!

Cost consciousness

I have always said that starting a business in a recession has many benefits, the greatest of which is that it makes you look at costs that you incur in your business with excessive scrutiny. Do you really need to run that cost? If you say “no I can do it myself”, I am concerned. If you say “no, it does not add value commensurate with the cost”, I am thrilled!

So we have the elements of the business model or sticking to my metaphor, the building blocks of the business. Draw them up on this A3 sheet and stick it on the wall. Use it as a guide to what decisions and actions you undertake to ensure that you optimise your time and energy to build your business according to your model. It will help you begin seeing the wood for the trees and make for a less noisy and less lonely journey…even though it’s just a piece of paper on the wall. If you get stuck, drop me a line, I may be able to help.

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