Blog - Entrepreneurs with Denis Oakley

Entrepreneurs with Denis Oakley

I HELP BOLD LEADERS TRANSFORM THEIR BUSINESSES AND THE INDUSTRIES THEY COMPETE IN

You are here: Home / Blog

Blog

The decline of business models isn’t something that has been deeply studied. Joseph Schumpeter famously talked about creative destruction, and so I read his book from cover to cover and really creative destruction is covered in only a few pages in the middle of a book talking about different political systems in the 1940s.

Transformation of Stagnant and Declining Business Models

I started talking to a potential client yesterday about helping to transform their business. As part of the background reading, I spent some time looking at the underlying economics of the business. It very much reminded me of my time on the railways.

There, running a train, profitably, was usually good enough to pay for the train and its operations. Sometimes you paid for the use of the track. Rarely could you pay to upgrade the tracks or build new tracks. When I studied it, 15 years ago, the only profitable railways in the world – covering operations and infrastructure – were a few densely packed Japanese commuter lines.

At the same time MTR, the commuter railway in Hong Kong was dismissed because it was a shopping mall with railway lines to bring shoppers to it.

Railway Business Models

For many modern railways, the idea is to make money from the provision of mobility. To monetise the transportation of passengers as you shift them from A to B. Then may cover the cost of moving the train. More than that…

If we go back a hundred years or so the way that many railways in the SE of the UK made money was as property developers. They would run a railway out to a patch of countryside. Then they would build houses. The houses would be profitable because the people who bought them wanted to work in London.

MTR the Hong Kong metro system has a huge amount of passenger supply, and so every station, almost, is a shopping mall or office block. Its stations are destinations in their own right.

Here we have two different ways of playing with supply and demand. Another one is one of the Australian iron ore mines. The railway runs from the mine to the port. Not passengers – just great big ore carts – and a few years ago they automated it. No drivers. no signalmen. Just trains moving up and down as the hoppers are filled.

Compare these to the typically heavily subsidised railways in most countries. The subsidies are effectively a cash transfer to the middle classes with good jobs in the middle of major cities. The government needs to pay the subsidies for political reasons.

Why Railway Business Models Fail

Why has the business model failed so massively that for generations the railways have been unable to show a profit?

A couple of the big ones are the massive capital investment required, and the level of regulation applied because of the safety risk. I remember reading accident reports of early railway accidents when carriages collapsed squishing (worse than squashing) the passengers inside. That doesn’t happen any longer, even at far higher speeds. It comes at a cost to the business model.

A bigger part though has been the inability to innovate. Even by the 1940’s when the government forced the merger of the big 4 railway companies into British rail (nationalisation), the basic business model had been failing for a generation or more. And in the 80 years since the railways have gone through cycles of nationalisation and privatisation to no effect.

The finances have changed but the core aspects of the business model – fixed routes, fixed times have not changed. Why do I say that those are the core aspects of the business model? In the 1840s as entrepreneurs struggled to find the best way to run their railways, they discovered that fixed timetables based on railway time were the easiest to manage and deliver. That idea has remained ever since.

Core Features of Railways

At the heart of the railway model, is the ability to maximise throughput, think of the railways as a set of pipes sending pulses of fluid into a central pool (the city) and pumping it out again at the end of the day.

This worked for an industrial economy with large population movements to the factory and back. It also worked very well without competition from the car and the plane.

The business model didn’t change as those were brought in. If I was to start looking at how to innovate in the railways and create some very profitable rail networks I’d start by going back to basics and think about what it means to be a railway.

What We’d Need to Change (?)

  • What happens if we don’t have timetables?
  • What happens if the trains don’t run at fixed times?
  • What happens if the trains don’t have set routes?

If you work in the railways – or a commuter – you’ll be thinking that “Denis is fucking nuts” at this point. This is a key part of the method.

Most business models as they head into a period of decline and stagnation have these anomalies in them. Anomalies are components of the business model that were used during the early stages of the business model. They became to be seen as necessary to any business model.

Business Model Lifecycle

A really simple example – cars have 4 wheels. Ask a child to describe or draw a car and they will mention the 4 wheels. We’ve had cars with 3 wheels (Reliant Robins) and maybe 6, but it’s pretty hard for any of us right now to think why a car shouldn’t have 4 wheels.

The Sources of Failure are Earlier Decisions

A key part of what we need to do in business model innovation is to look at what we are doing in the stagnation and decline period. Then look back at the early stages of the business model innovation cycle and ask – why was that feature brought in? What purpose did it serve? Does it still serve that purpose now? What would happen if it wasn’t there any longer?

The reason we have to do this – and the reason why I ask these ‘fucking stupid questions’ is the track record of success of the people who haven’t asked them is appalling.

For a company that is failing because of a business model decline, then changing the details without looking at the core will simply delay the failure at best. Like plastic surgery on an ageing film star. Renewal and rebirth require going into a chrysalis and coming out something different.

I wrote yesterday about business model clones and thought that it was worth expanding on the concept. In normal business, if we make an undifferentiated product, one that is like all the other products, it’s effectively a clone. Identical indistinguishable products.

Cloned Products

Here are a few that I have bought over the last few days – non-branded TENS machines, an electric scooter, and an iPhone to TV HDMI cable. All clones. For most entrepreneurs it is pretty clear that sell a product that is identical to the competition is a tough play.

You have to compete on price. Marketing (as I have learned to my cost) can only get you so far. Profitability comes from cutting your production and distribution costs down so that you can sell at the lowest price.

Cloned Business Models

Business model cloning is similar.

It happens in a couple of ways. One obvious and preventable. The other is far more insidious.

The obvious one is when an entrepreneur sees a successful startup in a different country or field. She thinks, “Wow, Great!” and then clones the idea, coming up with gems like “Uber for X” or the “Airbnb for Y”.

I’m not going to say much more about this other than point out that the clonal success rate is very very low. Worse than normal. That’s normally because an idea has been grafted onto a new industry with little thought of how it will work.

Business Model Clones

Business Model Clones in Mature Markets

The second one is when markets mature.

the business model lifecycle showing the four stages of introduction, growth, maturity and decline

Here’s a sketch of the typical business model lifecycle. What I haven’t shown on this graph is the diversity of business models. Typically in the introduction phase there are a very large number of business models. Entrepreneurs try lots of different approaches as they try and figure out what works.

As they get into the growth phase most of the ‘out there’ models have gone bankrupt or been acquired. There are fewer business models. Then as the market mature and scale and efficiency becomes ever more important the number of business models declines still further.

Reduction in the Number of Viable Business Models

In a lot of mature industries, the number of viable business models has been reduced to a very small number. Let’s give a few examples. In fast food, you either have to be a larger chain (usually franchised) or a family business using cheap labour. In steel and chip making you have to have exceptionally large and well-capitalised plants or be a secondary producer – melting down scrap to keep costs low. In beer, you need to own huge breweries – or be a micro craft beer producer. In two of those three cases, the alternatives have arisen from business model innovation. Bland beer and expensive steel have driven innovation to increase diversity.

Looking at the UK now that I have come back after many years – lawyers, doctors, petrol stations, shopping centres, high street shops. Most players in the industry have similar or identical business models. They sit at the top of the maturity curve, having figured out that their current models are the best at maximising revenue or profits.

Low Resistance to Infection

The problem with a lack of diversity is that there is very little resistance to infection. If an environmental or technological change happens that will hurt one business – then it will hurt them all.

Stack ’em up, baby!

Whatever list of changes you want to make will be hammering these huge homogenised blocks of businesses that make up so much of the economy.

The answer of course is diversity.

Imagine that you have a species of fox with just one type of gene. When the environment changes, global warming, or house building, that fox can’t survive.

If some of the foxes have better sweat glands or Urban Traction Foot Pads (TM) then those foxes have a much better chance of surviving. Evolution 101.

Increasing Diversity – or Changing your Business Model – is the Route to Survival

If your industry is doing well then increased diversity is definitely counter profitable. You may well have found a local or global optima position. Any move away from that is bad for financial reasons.

As your industry faces increased competition or rates of change then the trade-off between optimising for local conditions and increasing diversity of the business model starts to change.

And here’s a quick video that explores that idea further

The world is changing. Over the next 20-30 years the economy will change as much as it did during the early years of the industrial revolution. That change will wipe out millions of small and medium enterprises and tens of millions of jobs. Business model innovation offers perhaps the only opportunity, other than luck, for helping those businesses survive.

At the start of the industrial revolution, England was not a bucolic pastoral idyll. It was a highly productive agricultural enterprise. The forests had been cut down for timber for the Navy. Fields had been enlarged and enclosed for large-scale farming, and the hills and moors had been turned over for sheep. Where conditions allowed there were small-scale coal, clay, and stone mines providing the key resources for the towns.

What the Industrial Revolution Did

In a matter of a few decades, innovations transformed farming, the processing of agricultural goods, and then enabled the production of manufactured goods and rapid transport between cities and then around the world. Every business transformed, we moved from living in the country to smoke-filled cities and the power of the aristocracy was shattered as new men took their place.

This revolution will be nothing like that.

There will be no dark satanic mills.

The only similarity is that jobs that millions of people do will change. Many, if not most of the jobs that people do now, will disappear. They will be done by computers.

Think about the industrial revolution and some of the jobs that disappeared, that only required one person rather than a hundred. Sowing, ploughing, picking, reaping, threshing, grinding, driving, herding, slaughtering, pickling, preserving, baking.

What the Digital Revolution is Doing

Some jobs have already disappeared – clerking and typing.

More that are going to go include driving, trucking, loading, delivering, picking, putting, diagnosing, closing, analysing, cleaning, planning, investing, telling.

Anything that can be automated will be. Where we can identify the patterns that humans use to complete a job, find an algorithm to calculate them, and a cheap machine to be attached, then it will be done. A lot of the time it won’t be done well at first. Few attempts will be abandoned. The automation will get better over time.

When we look back at the industrial revolution a few things are clear. Most of the big companies that existed at the start of the digital revolution started in the early to mid-years of the industrial revolution. GE, Unilever, Marks & Spencer, Sainsbury’s, Proctor & Gamble, Shell, Standard Oil.

They found a product that the new industrial economy required, built it into a brand that was known for being better than a thousand competitors, and then grew massively with the advertising and TV revolution of the 1950s.

Creative Destruction

As all these companies did so their competitors were wiped out. This is what Joseph Schumpeter calls creative destruction

“process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

Joseph Schumpeter – Capitalism, Socialism & Democracy

It’s easy to look back at the industrial revolution with hindsight and see the lessons. Where are we in the digital revolution?

Business model innovation

It seems likely that we are at the point where the changes are starting to take off. We are entering a period where the rate of change is the fastest. We’ve had 20 – 30 years of developing the innovations that enable the whole scale transformation of human life. Now people are creating the machines that do that.

If you want a nasty metaphor, it’s the point where the floodwaters are just topping the dam. There’s a trickle going over now. Pretty quickly that trickle is going to force a breach and then the whole dam will rip open.

Cloned Business Models

One of the reasons why this metaphor is accurate is that most existing businesses today have a similar business model. Lawyers all work the same way. So do advertising agencies. So do trucking companies and security companies and so on.

In most sectors, 80-90% of the businesses within them will be using the same business model. This has the benefit of being a known quantity that delivers results. You can take the template and apply it and it will work. Success is based on your skill, where you choose to run it, and general market conditions.

The trouble is that these businesses are like elms trees and bananas. They are all identical and when a new disease strikes them, dutch elm disease or Ralstonia banana wilt, none of them have the antibodies to fight back.

Competence is not an Insurance Policy

Living as I do between the Leicester textile mills and the Nottingham coalfields (none of which still exist) the evidence for the failure of industries with single business models is abundant.

When we look at previous business cycles we can assume that the owners and managers of the businesses that failed were, on average, just as competent, educated and able as the managers today.

They applied the rules that they knew to save their businesses. Working harder and smarter wasn’t enough.

I’m going to say that again

They applied the rules that they knew to save their businesses. Working harder and smarter wasn’t enough.

The ones that survived and flourished were the ones that were lucky or used differing business models that resisted change better; Business models that enabled change to become an opportunity and a driver.

Your Next Steps

So what to do?

Start looking at your business model. Start understanding your industry’s business model. And start looking at how change is happening in your industry.

Start thinking about how you will change your business model.

I have no insight into what your business model should become. What we do have on this site is a lot of information about the process of change. How to find a new business model. How to test it, how to try it out in the market.

Near me is Taylor’s bell foundry. It’s a small factory. It’s the largest bell foundry in the world. The only reason that it has survived is that its industry no longer exists. It serves the few remaining buyers who need large bells.

It’s better than disappearing, but you should be able to do better than that. Good luck!

This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.

If we hold these two principles of business model design front and centre in front of us, if you tattoo them on your co-founder’s forehead – then you have an immediate competitive advantage over the vast majority of entrepreneurs, leaders, and strategists playing in the field.

The reason is that so many of them are focused on how to get the business model to work, not on what it should be doing. (and thanks to my friend Belden Menkus for alerting me to this point).

The business model is not a passive vehicle to transport the value proposition from A to B. It is, to use a literary rather than a military metaphor. A way of making your quill sharper. So the words are clearer and giving you a wider usable vocabulary than the other poets in your circle.

A word of warning.

We’ve spent a lot of time thinking about how business models are born, live, and die. Whatever beautiful model you cook up will wither and age. Competitors won’t sit still as the playing field becomes increasingly tangled. They won’t try and compete for long on a pitch that has a 45-degree slope. Instead, they will change, and your business model will start to depreciate.

Everything is transient. You may, following these two principles come up with a model, and through luck or skill be able to execute it so that it lasts for decades or centuries. Sooner or later, it’s not going to work as well as it did, and that is when you need to head back to the drawing board again and repeat the process.

If You Want to Read More

I keep everything structured on my niftily titled business model innovation book page. Head there to browse, binge, read straight through, or cherry pick. Please do take a moment to comment below or upvote comments that you agree with

Subscribe to the New Book Chapters

As I write each new section you can have them sent to your email. The plan is to write something 2 – 3 times a week. It is easy to unsubscribe, but I hope you won’t as the goal is to delight and entertain as well as educate and train you through this business model innovation journey.

This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.

If you have done the exercise suggested above, or you’ve followed the worked example, what should be clear is that you have a much better understanding of the business. My first draft of the business model canvas for denis-oakley.com needed 26 words.

The model allows you to condense a lot of information. You can combine the power of a picture – the standard business model canvas framework – with the power of words.

I’ve done hundreds of business models for clients, and the following are some of the most frequent assumptions that we discover during the process.

  • Everyone in a very broad target group will like/want the product/service
  • The value being created is useful or wanted
  • The idea is good. Normally parts are, and lots aren’t
  • Day-to-day activities are clear. Often too much focus is put on setting up the business than figuring out how to run it
  • Resources = cash. Really resources = moat or USP. What do you have that others don’t

Motors

A motor in a business model is a small group of activities that work together to make the business successful. In the case of denis-oakley.com, there are two

  • Experience
  • Creates better consulting, which
  • Creates more value, which
  • Increases experience

And

  • Consulting
  • Creates more experience, which
  • Generates more content, which
  • Increases Lead Generation, which
  • Grows Consulting

Most businesses have something like this

Uber’s motor is:

  • Balance supply and demand
  • Makes Uber more attractive to Drivers and Passengers
  • Increasing market share
  • Which helps to balance supply and demand

Being able to be clear about your motor then allows you to focus your time and resources on these motors as you develop your business. If we think about Denis-Oakley.com again, pricing is down in the revenue box. It’s a long way from the main business motor. If we play with different pricing models there will be a change in the business, but it will be far smaller than the ones powered by the motors

What are your business motors?

Patterns

There are relatively few unique business models. As you look at more and more of them, you see that various patterns repeat. Many B2C companies for example have powerful motors around the front end. Marketing – Customer- Value proposition. That’s a very traditional, often advertising-led model. In contrast in manufacturing, you often see a Resource – Activity – Cost triangle as they compete primarily on their efficiency in creating high-quality low-cost products.

For example, a steel mill has a $5 billion fixed asset in the form of its steel mill and 200 years of onsite manufacturing knowledge. It uses this experience to make steel each day and bring the cost down which increases its IP (Resource) and allows it to make steel better and cheaper in the next period.

If You Want to Read More

I keep everything structured on my niftily titled business model innovation book page. Head there to browse, binge, read straight through, or cherry pick. Please do take a moment to comment below or upvote comments that you agree with

Subscribe to the New Book Chapters

As I write each new section you can have them sent to your email. The plan is to write something 2 – 3 times a week. It is easy to unsubscribe, but I hope you won’t as the goal is to delight and entertain as well as educate and train you through this business model innovation journey.

This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.

In this section, what I will do is walk you through the process of creating your business model using the business model canvas. This is a great tool developed by Alexander Osterwalder at Strategyzer.com.

We’ll look at each of the 9 nine segments of the business model canvas in turn, and I will explain the thought process behind how I developed the business model canvas for Denis-Oakley.com, which specializes in supporting early-stage entrepreneurs.

Customer Segments

When I set up Denis-Oakley.com, I’d been working in an entrepreneurial role for about 15 years. I’d recently separated from my wife and had little more than a suitcase, a laptop, and enough to live on for a month.
The first question I asked was “Where can I add value?” That then begged the question “Who am I adding it for?” That in turn generated a third question “Well, what problem do they have which needs solving?”
I knew a few things about entrepreneurs having been one for many years.

Summarised, these were:

  • Most fail
  • Most don’t know what they are doing
  • And most know where they want to go

I also knew that my experience was in the early-stage startup scene. That is getting started and getting your first customers all the way through to running a team of 10 – 20 people and making sales of $2-3 million.

  • That helped me to define my target customers
  • Entrepreneurs 25 – 50
  • Sole founders or solopreneurs
  • English speaking
  • University educated
  • Working part-time or with a source of funding
  • US/UK/Australia based

The value proposition was a bit more difficult. It’s amazing how many entrepreneurs are clear on what they want to do and yet cannot clearly state their value proposition. Here a lot of the ideas behind lean startup are good as you iterate through various formulations to find the best match with your customer’s pain point.

So, I knew that I wanted to support entrepreneurs. There are a lot of free resources out there and a huge number of small business consultants. What was the best value proposition that fitted my skill set and which added value?

My value proposition focuses on clarity, speed, and risk. There is a lot of noise, and there are literally millions of things that an entrepreneur can be doing. Which should YOU be doing? You have a limited runway – either cash, time, or market opportunity – to get things to work. I have lots of experience and tools to help you accelerate faster. Finally, the value proposition was about risk.

I have seen so many failures. Bad ideas, bad execution, bad luck. Lots can go wrong, but much of this is avoidable. The third part of my value proposition was to make sure that their plane didn’t get damaged on the runway as it took off.

The value proposition is captured as

  • Simple strategies to get startups focused on the key things they need to achieve
  • Using tools and processes to accelerate the startup process saving money and time
  • Reduce the chance of failure through testing and careful resource allocation

Customer Relations

If you read all that, it’s difficult to see how I can do that without quite a lot of one-to-one interaction with customers. I’m selling customized advice and experience which delivers better results. It’s not an automated hands-off experience like Uber. So not a lot of thought needed to go into this part.

Channels

When it came to channels, this was a lot more difficult. In most cases, a startup consultant can go along to local startups, talk, make friends, and get hired. I was 10,000km away from potential clients. I needed to find effective ways of finding them apart from traditional networking. To work out which marketing channels I wanted to use, I used a list of 19 different traction channels and considered how easy it would be to reach my audience on each. To start with Upwork.com was great. It was an existing platform, and all I needed to do was turn up and bid.

The next channel was LinkedIn. Traditional networking lets you interact with 10-20 people a night. LinkedIn gave me a potential pool of millions. The final channel was content marketing. This was twofold. First entrepreneurs do read a lot, and I could write well about entrepreneurship. This would pull organic traffic. Secondly, as it’s a B2B sale, the authority that a good blog would generate would then help to convert prospects.

What Resources Do I Need?

I needed a little bit of money to get things set up. It’s not on the same scale as $4 billion chip foundry, and so it’s not that relevant. Consultancy is not capital intensive. What it does need is experience. So I’d got 10 years of engineering experience and another 15 years of startup experience with a good dose of consulting mixed in. That was a key resource. Without the deep knowledge of the subject and experience as a practitioner, it’s difficult to get going.

The other key resource was the size of my network. With a bunch of startups under my belt, I had over 2,500 connections on LinkedIn. That gives me access to about 400,00 2nd connections and 130 million third connections. That makes it easy to connect with people and research potential clients. Other networks – such as Quora help leverage that even more

What do I Need To Do On A Day-To-Day Basis?

One of the key tasks is leveraging that network and using my experience to generate sales. At a top level, that’s good enough. When it gets into the details it does get very complicated. There are 21 top-level process steps in my LinkedIn lead generation funnel, for instance. All of those will change over time as LinkedIn, and the business evolves – the top-level Lead Generation on LinkedIn probably won’t.

There is a lot of content generation. Initially, I had one idea – generate reports for clients and then repackage those reports for other clients and turn them into case studies. Now it more often works that We see a new tool and think – how does this work. We create content around that. Again – what is the top-level activity? Focus on that. Finally, the key value-creating activity from my customer’s point of view – spending time doing the consulting work that they pay me for.

As you create your business model canvas, one of the things that start to intrude is – How do I do this operationally? In this case, I have three activities – Lead Generation – Consulting – Content Creation. How do I get the internal flow right so that the business works smoothly? That’s something we will come back to later and is one of the valuable outcomes of the exercise.

Partnerships Are Critical.

To start with, I had no partnerships, and the business struggled. There was too much to do, and the flow didn’t work. So first, Leander came on board (we run a business model guru together). Secondly, there is a VA team to help operationalize everything.

In some cases, startups may have critical partnerships with open source software providers, or they may require a network of resellers. Partners are the third parties that you need to make the business model work.
In some cases, costs and revenue can become quite complicated. With two-sided models, you may have one customer segment paying nothing and another customer segment paying for something – Google’s Search/Adwords product is like that.

In my case, not a lot of thought went in. There are marketing and salary costs. The revenue is straight-up hourly rates or project-based fees.
Tips on How to Produce a Business Model Canvas
That should have given you a little bit of an insight as to how to produce a business model canvas. The next step is to do it yourself.

The way that I do it is as follows.

  • Go through each segment and brainstorm. If it seems vaguely reasonable throw it in.
  • Look at the big picture and understand whether you are selling B2B, B2C or B2B2C, or another variant.
  • Think of a similar company and see how your business model canvas varies from theirs.
  • Prune and edit it. Simplify everything.
  • Then stand up in front of the mirror and talk through it.
  • Iterate and improve again

Step 1 I normally try to keep each entry to two to three words. Lots of text is difficult to absorb. If you can use images that can be awesome. They have to be clear.

Step 5 normally creates the most value. It is relatively easy to put something down. Taking it off the paper and verbalizing it. Explaining it. Explaining it just to yourself before you try on a partner, client or investor makes the flaws stand out.

You can spot the weaknesses because your voice loses confidence or you elide over the point. It’s either a weakness or not important.
A useful step is to break each component on the business model canvas down into three bullets or sentences on a separate piece of paper. That’s repeatable and can start to then give you the outline of a task list or project plan (or Trello cards).

If You Want to Read More

I keep everything structured on my niftily titled business model innovation book page. Head there to browse, binge, read straight through, or cherry pick. Please do take a moment to comment below or upvote comments that you agree with

Subscribe to the New Book Chapters

As I write each new section you can have them sent to your email. The plan is to write something 2 – 3 times a week. It is easy to unsubscribe, but I hope you won’t as the goal is to delight and entertain as well as educate and train you through this business model innovation journey.

This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.

Entrepreneurs need a business model because they are either

  • Doing new stuff
  • Doing stuff that is new to them

If you keep it all in your head, your thoughts are often not clear. There are always big chunks of your business that you don’t think about in enough detail. This is due to human psychology and the big package of cognitive biases that get thrown in free when we are born.

When we write long-form, it can be a mess and highly unstructured. I remember one client, a bitcoin entrepreneur, who gave me over 20,000 words in about five documents explaining what he wanted to do. It covered about 50% of what he needed to do to deliver on the value proposition, and we summarized it in less than a thousand.

Entreprenuers and Business Models

Entrepreneurs need business models because they help to challenge their assumptions.

We are all subject to confirmation bias. We see the things that confirm our own beliefs, and we ignore inconvenient evidence. Theranos in 2016 had clearly been in trouble for some time. It was only then, though, that the bad news became powerful enough to break through the dream unicorn story.

Business models thus let you challenge on a systematic basis. By making it clear that your value proposition is P and your key customer segment is Q you can ask the question “What evidence is there that P solves Q’s problem?”

In many cases, entrepreneurs make a mistake and assume that if they create a value proposition P, then there will be a customer segment Q that will need it. It may be R, S or T, or Nul. There are many ways that we can test for these.

The simplest is:

  • What if X is true. Here you vary some input or environmental conditions to see if the assumptions hold out.
  • Do Nothing. Here you say what would happen if we did nothing here r we didn’t have that resource. It is a subset of the above, and it helps parse the model down to what is critical.

So, challenging an entrepreneur’s assumptions is a super powerful part of the business tool. The biggest benefit of this is that it cuts away a lot of the fat. What is critical for success? What do we need to do? And what do I focus my very limited time and resources on?

In the words of Tim Ferriss, it is the “difference between being busy and being effective.”

Using business models like this has the wonderful effect of making your pitches more powerful. Many entrepreneurs when they start pitching launch into a stream of consciousness talk that quickly loses their listener.

A basic pitch strategy that is an improvement on this is to say

I solve problem X for Group Y by doing Z and making money by K

That gets the message across in fifteen to thirty seconds. Then they ask you more. That is perfect because the whole aim of a pitch is to capture interest. If they have control of the questions, there are plenty of rabbit holes that they can take you down. So, the next stage is to use the structure of a business model to structure the next two to five minutes.

Using the structure of the business model canvas, it goes something like this.

We offer this value proposition to this group of customers. We reach them using this channel, and we interact with them like this. To deliver value to our customers, we do these activities and need these resources. To do all this efficiently, we have a range of partners. Our costs are driven by spending in these categories, and we cover these costs and make a profit by generating revenue from this.

Uber’s Business Model

We offer fast and convenient urban transport to middle-class city dwellers. They book our cars using a smartphone app with no human interaction. To do this we need an IT system that allows customers to be instantly matched with drivers and which ensures that supply and demand are kept in balance. This is all powered by powerful city-by-city marketing, driver recruitment and retention, and product development teams. Our partners are the drivers who ‘freelance’ for us on a part-time basis providing us with their time and their cars. Most of our costs are incurred in paying the drivers for their time and in marketing to gain market share and local dominance/quasi-monopolies. We make money from the fees that customers pay for the journeys they take.

This provides a powerful framework for pitches and allows investors, clients, and staff to quickly grasp what you are about.

Business models are also exceptionally good at allowing business ideas or concepts to be challenged. When a business model is laid out simply, and clearly it can be understood. This allows co-founders and mentors to ask detailed questions about each aspect. How and why does this work?

Business Model as a Challenge

Flipping that on the head, a business model can be used to challenge existing ways of working. Heading back to the example of Uber. Before ride-sharing, there were several taxi companies in most cities. There was a big problem in finding a taxi at the right place, time and price. So the Uber founders mapped out the business models of different taxi companies and then started looking at how they could be challenged.

Alternatively, when you need to pivot, it’s a clear and powerful way of saying “This is what we were doing. This is what we are going to do. This is why”. That can create a compelling narrative for both staff and investors.

If You Want to Read More

I keep everything structured on my niftily titled business model innovation book page. Head there to browse, binge, read straight through, or cherry pick. Please do take a moment to comment below or upvote comments that you agree with

Subscribe to the New Book Chapters

As I write each new section you can have them sent to your email. The plan is to write something 2 – 3 times a week. It is easy to unsubscribe, but I hope you won’t as the goal is to delight and entertain as well as educate and train you through this business model innovation journey.

This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at finding opportunities in this new world.

A business model is a way of quickly describing how a business works to make communication faster.

One of the memes of entrepreneurial pitches is to say that “We are the Uber for X” or the “Facebook for Y”. If you have familiarity with Uber or Facebook, you can quickly port the way they do business to a new situation, and understand the core of the idea in seconds.

When you look at a business model, you can break it down into its different parts. If you use a consistent way of describing all the different parts of your business, you have a shared language. Back when I did the first startup, I was advised to break my business plan into Marketing, Sales, Operations, and Finance.

In each section, I had to put down all the important information. But as we know, a business is far more than just those four sections. We have questions about how the operations impact finance and what impact sales have on operations etc. Trying to understand if those questions are answered or even addressed in a big business plan and walls of text is difficult.

How does a Business Model work?

So, a business model gives you a powerful way of communicating the important aspects of how the business works and how they relate to each other. In the process of communicating what you are doing more clearly, you invariably get far more understanding of what is involved.

This understanding is critical. Many entrepreneurs approach a new project and play to their strengths. We tend naturally to do what has worked before. When we do that, we have two choices; build a business around the strength or build a business around inappropriate use of the strength.
The strength: affiliate marketing, dev ops, partnerships may not be a fit for this business. Unless you recognize that, then your business model has a powerful flaw deep inside that will cause problems later.

A business model also helps you to prepare for the future. In my first startup, we entered a booming market and were initially very successful. When the great recession in 2008 hit, we saw our business model fail in so many areas as the market and the environment changed. Over the next 8 years, we moved through 27 major and minor versions of the business model. As we sought to identify new ways of doing business, pivots to finding new sources of revenue, and ways to maximize our strengths and minimize weaknesses.

If You Want to Read More

I keep everything structured on my niftily titled business model innovation book page. Head there to browse, binge, read straight through, or cherry pick. Please do take a moment to comment below or upvote comments that you agree with

Subscribe to the New Book Chapters

As I write each new section you can have them sent to your email. The plan is to write something 2 – 3 times a week. It is easy to unsubscribe, but I hope you won’t as the goal is to delight and entertain as well as educate and train you through this business model innovation journey

Blog