Designing Business Models Archives - Entrepreneurs with Denis Oakley

Entrepreneurs with Denis Oakley

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Designing Business Models

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Building Feedback Loops into Your Business Model

Now that we have spent some time thinking about other business models in the market place let’s start developing this one. Today we are going to look at key resources in the business model, and how feedback loops make your business model more powerful.

A good place to start next is to look at the key resources that you have or need. These are the building blocks that you use to create the value proposition. In other words, it’s what you know (in this case), the factories you have, the skilled staff, the patents and processes.

Business Model Key Resources

In our example, my key resource is ‘Denis Oakley’ as all the IP is contained within my head. Well, most of it. A lot of it can be found on this website (like this article) and other social media websites. Let’s separate this out.

  • IP
  • Brand & reputation
  • Platforms – website & social media accounts
Business model key resources - these are what you need in order to create the value that is going to solve your customers problem
Business model key resources – these are what you need in order to create the value that is going to solve your customers’ problem

We can phrase that in several different ways, I could break down IP into experience and processes for example. This is a good starter and lets us start exploring how we can develop the business model.

This key resources approach works better when you have an existing business. You want to leverage existing assets. Some may be relevant and useful. Others you may not want to use.

Key Resources in New Ventures

If you are creating a business model from scratch the approach here is to ask – what do I need to build the value proposition. If I was a new venture in car hire I could start by asking, what are the different types of key resources that I could use to create my value proposition.

Here are a few

  • I buy lots of cars
  • I lease lots of cars from a car leasor or manufacturer
  • I resell cars from an existing car rental company
  • I get consumers to lease me (or other consumers) the cars.

Straight off there are 4 different ways of getting the key resources. 1 asset-heavy. the others asset-light.

Business Model Feedback Loops

Let’s now have a look and check out the logic model that we are building for consulting. Experience and IP (key resources) enable me to deliver the value proposition. That solves the customer’s problem, and as I do that it generates more experience and IP making it easier to deliver better results as we keep doing this.

Business model feedback loop - here is an example of a feedback loop, where the better the business model works, the better it will work in future.
Business model feedback loop – here is an example of a feedback loop, where the better the business model works, the better it will work in future.

What we have now is a feedback loop.

These feedback loops are critical. What they do is they bring the different parts of the business model together. The better they are the tighter all the pieces are tied together. The tighter the pieces are tied together the strong and more powerful the business model is as a system for generating money and disrupting competitors.

Spend time to identify all your feedback loops

As we design the business model we will keep identifying them. I’m not going to do all of them as we go through each step. It is something that you should be doing. The value in the exercise is not the few minutes you spend writing on the paper. It’s the time that you spend suckling your pencil as you start seeing how things work.

As a rule of thumb – every component of the business model should be in one or more feedback loops. If you have written something down on the canvas and it is not in a feedback loop, then why is it there.

The feedback loops show how each component is critical to generating value or profit. If something is in the model and you can’t create a logical argument (feedback loop) for it to create value… cut it out.

As you look for feedback loops, sometimes you are going to spot gaps. Sometimes you will see that you need something else to make the feedback loop work. Fill that gap, and play with the new structure.

Uber Feedback Loop Example

Here’s an example that I have abstracted out of the canvas for Uber.

Uber business model feedback loops showing the power of driver acquisition
Uber business model feedback loops showing the power of driver acquisition

As they get more drivers they get more coverage. That means that Uber can do faster pickups, which delights customers, and so Uber is used more, and that creates more demand for drivers.

At the same time as coverage increases, drivers get more trips, which allows uber to offer lower prices (spreading fixed costs over more trips) which again generates more demand.

Use Feedback Loops to improve your business model

As you start seeing feedback loops like these arising from your business model it does a number of things.

You start to:

optimise the feedback loops

look for and design in feedback loops

These are critical ways to transform the way that you compete with other companies in the space.

What next?

If you don’t want to come back to the blog every day click this link to get posts in your inbox – http://go.denis-oakley.com/newsletter .

Do explore these links to get more insights on how to build better business models

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Don’t Copy Business Models

You have customers, value to offer them and a real problem that you are solving. That’s the core of your business model. A lot of entrepreneurs and business leaders get this far. It’s not rocket science. You can make some awful mistakes (not solving a problem). Once you know what the big mistakes are they are avoidable.

Don’t Copy Other People’s Business Models

What comes next isn’t rocket science either. It’s a simple insight that changes everything for a lot of those who hear it. Most startups and businesses at this point take the first business model that comes into their head and use it. This is a mistake. A bad one.

For example, if you are making a widget, your first thought may be, outsource to a factory in china and sell using Fulfilled by Amazon. Not a bad idea… but how many other people have done exactly the same? One reason why it came to mind so quickly.

Copying competitors business models can work in mature markets, but will generally lead to tough competition. Done unthinkingly it is a quick road to underperformance.
Copying competitors business models can work in mature markets, but will generally lead to tough competition. Done unthinkingly it is a quick road to underperformance.

Diversify or Differentiate Your Business Model

The insight that you need to get is this. If your business model is the same as everyone else you are at the mercy of the market. If the market grows fast, you will. If the market is brutal competition, you will suffer it. If the market tanks, you will sink with it.

Choosing a standard business model, not thinking about how you will get your value proposition to market will make everything so much harder. That wastes your time and your energy.

How do we make life easier for you?

Choose what your business model should look like

We pause at this stage and think about what the rest of the model should look like. You have choices. Lots of choices. Choosing to do something different here, makes you different and that can give you a huge competitive advantage.

When I work with clients I don’t let them go beyond this stage without doing a very simple exercise. I ask them for a list of their biggest competitors. Let’s say there are 3 of them.

Sketch Competitors Business Models

The first step is to draw out a business model canvas for each. Draw out that business model with what you can see on their website, off Glassdoor, google search ‘company name + business model’ and put it together.

If they are all the same, then doing the same thing is a bad idea a lot of the time. You need to do something different. If they are all very different your business model needs to be designed to exploit their weaknesses and break them.

Assume that they are all the same. The next step is to look at a number of big ideas about how you can pull your business model together.

Get a set of ideas

Let’s go back to the example that we have been working with, a consulting company that helps businesses that need to change their business models because they face too much competition, or their market is dying.

Once you have your value proposition in place and know your customs, pause, don't copy other business models, but start thinking about how you will choose your business model.
Once you have your value proposition in place and know your customs, pause, don’t copy other business models, but start thinking about how you will choose your business model.

What are some big ideas that we can play around with here?

Traditional consulting. I wine and dine clients to build relationships so I can get big contracts. I deliver these using bright young graduates (McKinsey/BCG model)

Thought leadership: I use the Philip Morgan colosseum model for independent consultants – develop amazing expertise and then create a number of products to upsell people who buy into the idea I am selling.

Silver bullet solutions – I target smaller customers with a high-pressure automated sales process. This is designed to upsell products, constantly maximising ticket prices.

Famous Author – I write a book and build a social media machine. This helps me become a new Gary V or Simon Sinek. I make money from speaking and high ticket consulting.

I’m going to leave it there. With another hour of thought, I’d have come up with another 10-20 ways of delivering the value that we identified in the previous post.

These are all business models that work and critically have lots of other people using them to deliver a similar value set.

Easy Approach: Niche

The simplest way of designing a business model is to niche. Choose a specific pain, solution and audience and use a standard business model. Are there enough people out there with the pain? Is the niche small enough that competitors won’t flock to it? Yes? Then that may be a good enough point for your business model innovation.

That’s what is taught in MBA courses. If someone else muscles in on you, your only defence is to be operationally better than they are.

If you want a better business model than that you have to put more thought in. That is what we are going to cover next time.

What next?

If you don’t want to come back to the blog every day click this link to get posts in your inbox – http://go.denis-oakley.com/newsletter .

Do explore these links to get more insights on how to build better business models

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Beginners Guide to the Business Model Canvas: Part 2 – Customer Segments

Yesterday we started off sketching out our business model canvases. Today we’re focusing on customers in the business model canvas. The goal is to quickly and easily extract the essence of your business into a business model. Use that to focus your attention on where you are, and then how to change to where you need to be.

If you missed yesterdays post – it’s here.

At the end of yesterday we had a business model canvas – almost totally blank, but we’d added the main problems that you are solving. I left it there because I wanted you to let your subconscious work on them overnight.

We added the problems that we are solving to the business model canvas to keep us non the straight and narrow. So making solutions for non-existent problems
We added the problems that we are solving to the business model canvas to keep us non the straight and narrow. So making solutions for non-existent problems

Often we think about solutions, not problems. It’s a classic trap that many engineers and logical people jump into. Powerful business models are built around customers. When we solve their problems we do better. Selling our solutions is always harder, especially if they are not solutions to real or important problems.

Have a look at the problems you wrote down. Are they real problems? Do have evidence for them? Real hard numbers, or just stuff inside your head. Think about it a bit more.

Now let’s get started for the day.

Customers in the Business Model Canvas

Starting with customers

We’re going to head over to the right side of the canvas and think about customers. You may have one group of customers. You may have a number.

The business model canvas works well when the value you create for each customer is similar and done in similar ways. This also includes platform designs where one group of customers has synergies with another.

If you are selling petrol to consumers and armoured vehicles to customers, these are too different to go on one sheet of paper. Create two. If you are in doubt just do one business model for each customer segment to start. Simplification is everything. The smaller steps everything is broken down into, the easier it is to understand and manipulate.

If you go-to simple, that’s ok. It’s easy to add more detail. If you have too much detail it’s also ok, you just spend a bit more time being confused and trapped in thorns. You can’t get it wrong.

Who are our customer segments in the business model

Let’s choose our target customers.

If we remember – the problems that I am solving are

Old business models are not working for lots of companies in many industries because of the pace of change – technological and environmental (used broadly)

New Ventures need business models to stand out from all the other startups chasing the same opportunities.

So who are my customers?

Adding customers onto the business model canvas.
Adding customers onto the business model canvas.

The people who have problems with a changing competitive landscape are SME owners (lump in directors and CxOs). The people who see opportunity in a changing competitive landscape are entrepreneurs.

At this stage, the customers should be able to say ‘I have this problem’. Here’s an example

The CEO of the Columbus Dispatch says the paper’s longstanding business model just isn’t working anymore

Colombus Business First

Can your customers say that they have the problem you think they have? If not, change problems or change customers, or change the way that you say it.

The other thing to look at is how large your customers are.

‘Mums’ or ‘Working women’ are huge segments. I haven’t looked up ILO data but I’d imagine the first is about 3 billion people and the second isn’t a lot less. That’s including everyone from New York, to Kyrgyzstan, to Kuala Lumpur, across dozens of cultures, social classes, religions and mindsets.

Do all of them care about the problem? Probably not. Or at least to a greater or lesser degree. Who has the problem more? Can you narrow down the focus on them? The fewer you are targeting the more resources you’ll have to solve each one’s problem (and persuade them that you can.)

We've now added customer segments to the business model canvas and shown how they relate to the problems they have
We’ve now added customer segments to the business model canvas and shown how they relate to the problems they have

Better Definition of Customer Segments

So let’s reformulate my answer because I made this mistake as well.

SME owners in the UK Midlands who have undifferentiated business models in at threat industries.

Global technology English speaking entrepreneurs pre Series A with a TAM greater than $1billion.

I’ll highlight what’s on the canvas – because that’s way too much text to clutter it with.

A useful tip is to always put what you write on the canvas in bubbles. It seems to act as a focus and allow you to absorb and manipulate information faster. If that works for you – let’s do it now.

Here we've added examples of customers to the business model canvas and circled them to make them stand out a little better
Here we’ve added examples of customers to the business model canvas and circled them to make them stand out a little better

At the end of today’s little exercise, you should have

  • checked that your problems are real
  • selected your customer segments
  • checked your customer segments againt the problems you are solving.

We’ll carry on tomorrow and start looking at the solution.

Bonus Tip

Bonus tip: At this point, it’s always worth trying to size your market. To do that you figure out how many customers there are in the segment. Then consider how much money they have. In the case of the SME’s, I’d go to the Office of National Statistics (ONS) in the UK and see how many SME businesses there are in the Midlands. Then I’d filter that down by the SIC (NAICS) codes that I am interested in. Then figure out their turnover. It can take a couple of hours. The maths is usually easy, finding the data requires a bit of imagination 😉

Go back to yesterdays post and start from the beginning

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Beginners Guide to the Business Model Canvas: Part 1

How do you use the business model canvas? I am going to walk through how to do your business model canvas and use it to make better decisions in a number of small steps. It will take a few days but we will slowly, together, layer levels of understanding . All you need to do is stech as I sketch, note as I note, and your own business will emerge.

This is ideal if you run, own, manage, lead or study a business. A little bit of learning in less than 5 minutes a day.

Let’s start.

Sketch the Business Model Canvas

Grab a piece of A4 (or any other size that works for you)

Sketch out the business model canvas

Beginners Guide to the Business Model Canvas: Part 1
Sketching the business model canvas out quickly makes it easy to use where and when you need it – even on a napkin in a restaurant.

An L on its side. Then another one to close the square. Don’t worry about making it pretty

Draw a line across, about 1/4 of the way up. Then Cut it in half.

Beginners Guide to the Business Model Canvas: Part 1
I’ve highlighted in green where the pen needs to go when you are sketching the business model canvas. I know this sounds obvious, but that’s what the awesome team at Scriberia.com showed me when I started drawing

Then four strokes in the upper block, equally spaced. Then cut the two middle panels in half.

That gives you your basic business model canvas.

It’s that simple

Don’t bother using a template unless you have an easy way of keeping them handy. Being precise just slows you down and your mental focus is on the drawing, not your business.

Starting on Your Business Model

To make this a little bit more real and give you an example to follow I’m going to put my business in. This makes it easier for you because like me, you’ll have a bunch of thoughts about your business and the process will help you structure them.

Beginners Guide to the Business Model Canvas: Part 1
Start with the problem that you want to solve

The first thing that I usually do is to write down the problems that the business is solving. I use the space at the bottom of the value proposition section.

Hit the Problem

In this case, I’ve written

  • The old business models don’t work any longer
  • finding new business models that work is tough

That captures the heart of it. Is it the best formulation? Probably not. As you repeat and iterate you get it smoother. It is however good enough – and gives us the focus that we need to build the rest of the model.

Really, what I want you to appreciate here is that you can’t get this wrong. Putting together a great business model is an iterative process.

It’s always going to be solving a problem. A big problem. A painful problem.

The data shows me that over the next couple of decades tens of millions of SMEs will be destroyed by market forces. At the same time, a similar number of startups will form. Trillions of dollars and hundreds of millions of lives will be affected.

Is that a problem worth solving? I think so. What’s the problem you are solving?

Condense it down into 2-3 bullet points. A couple of words in each. If you need to write an essay you aren’t there yet. You’re not wrong, so much as focused at the wrong level. You need to come up to a higher level.

As we go through the process, if you change the problem, that’s ok. Come back to this point and start over. As many times as you need.

Tomorrow we’ll carry on 🙂

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Business Model Diversity

In many industries, there are only a few types of business model. The lack of business model diversity leaves the industry and the businesses in it vulnerable to technological and environmental shocks.

Most industries have a few standard business models

Let’s jump straight in with a few examples. Airlines have Longhaul operators like British Airways, Low-Cost Carriers like SouthWest and Air Asia and Flag Carriers like Garuda. Most airlines fit into one of those three models.

Fastfood restaurants have single operator non-branded business models and franchised chain operations like McDonald’s and KFC. Logistics has shipping companies and NVOCCs. Car companies beyond speciality marques use a part assembler & franchise distribution model. Enterprise software uses on-site server/user licences and cloud-based SaaS models.

In most industries, if you map out your competitors business models using the business model canvas there will be a significant similarity between them. The differences are usually concentrated in what you are selling to who. For example, different lawyers may sell to people getting divorced and to people needing trusts and wills (two different customer groups) and have slightly different value propositions – but everything else remains the same.

This is a problem as it makes you vulnerable to change

Why is this a problem?

In normal times it isn’t. If a lawyer is making money in the next town over it seems likely that if you copy hir business model in your town you will make a similar amount of money (quality of the operations and town demographics being similar).

Through most of the twentieth century, this is what has happened. Some very successful business models spread widely and were almost universally adopted in some industries. Alcohol sales through pubs in the UK. Fish and chips being sold via the chippie on every high street. Milk being sold by dairies via milk floats.

Let’s take pubs for an example. In 1970 just before I was born there were over 75,000 pubs in the UK. Now there are less than 50,000 despite the population growing by 20% and becoming far wealthier. 30% of the businesses died because they weren’t able to adapt to supermarket alcohol sales and the rise of the mass market restaurant model. Their business models were not diverse.

Today the pub model has fragmented into lots of sub-models. Gastropubs, family-friendly pubs, post-work pubs, pre-club pubs and more. The underlying models are still very similar. Sell beer from a fixed location. So with an economic shock like Covid, the whole industry is incredibly vulnerable.

Cloning increases the risk

I am going to switch tack now and talk about bananas. This helps illustrate why business model diversity is so critical, so bear with me for a minute.

Most of the big long yellow bananas that we eat are cavendish bananas. They were developed about 150 years ago by gardeners in the UK trying to grow a banana for the Duke of Devonshire. The thing about these bananas is that they are all clones. That is every single one is identical genetically. A bug or a pest that finds a way to attack one plant can attack and kill every other plant.

That makes the Cavendish banana exceptionally vulnerable to disease shocks. In fact, the reason why the Cavendish banana is so popular today is that its predecessor the Gross Michel Banana, also a clone and grown in vast numbers, was wiped out by Panama Disease in the 1950s.

Identical and very similar business models in an industry make you vulnerable to external shocks and technological change. When this happens significant portions of the industry die
Identical and very similar business models in an industry make you vulnerable to external shocks and technological change. When this happens significant portions of the industry die

There are thousands of other banana varieties in the world, I’ve eaten wild ones deep in the Malaysian jungle that are so different that you’d barely call them bananas at all – and always covered with ants! None of these have the right properties that enable them to be handled shipped and priced so that they are economically viable to consumers.

Business model diversity is critical for resilience

What do we learn from this? Three rules.

  • Good business models spread far and wide.
  • Successful business models reduce diversity.
  • Diversity makes business models highly vulnerable.

Under good conditions, most business owners have very little incentive to diversify their business models. Why should they? the business model is there to help them maximise profits.

There’s also a powerful disincentive to switching to a new business model as times become uncertain. You reduce the resources available to a business as battens down to weather the storm. The perception is that you are reducing the businesses chance of survival.

And survival in times of high change

Think back to the bananas.

When Panama Disease infects a banana it starts at the roots. It then works up through the stem killing off all the leaves. They drape down the stem, black and brown. There is nothing the farmer can do to save the banana. If he digs out the banana and plants a new plant it will get infected as well and suffer the same fate.

This makes sense, doesn’t it? How many times do we see a restaurant open and close in a particular plot? Is it because it’s the wrong location or do they have the wrong business model?

The only way that the banana growers can grow bananas on land that is infected by Panama Disease is to grow different types of bananas. That means not growing a clone. It means something different. In times of change, when there is high uncertainty diversified business models makes more sense.

Business model diversity means that even if some business models are resilient to the economic or technological shock you have a much better chance of weathering it.
Business model diversity means that even if some business models are resilient to the economic or technological shock you have a much better chance of weathering it.

What we see today in the business world is that as business models start to seem vulnerable, that knowledge spreads across the world very quickly. The evolution of low-cost carrier business models since their genesis in South West Airlines has spread across the world and blighted traditional long haul operations.

One of the biggest reasons to do business model innovation is to increase this business model diversity. To innoculate businesses and industries from malign economic effects.

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What is sustainable business model innovation?

Sustainable business model innovation is the process of designing or creating new business models that increase sustainability.

Many traditional business models have negative impacts on the world and our environment and the creation of sustainable business models helps to reduce or improve the impact that they make.

When we look at sustainable business model innovation the process is much the same as for more traditional business model innovation.

Differences between BMI and Sustainable BMI

Sustainable business model innovation creates business models that disrupt markets, fertilise value propositions (rocket-powered acceleration is unsustainable) and create positive change
Sustainable business model innovation creates business models that disrupt markets, fertilise value propositions (rocket-powered acceleration is unsustainable) and create positive change

The substantial differences are that:

  • The why changes. We are no longer purely concerned with economic outputs.
  • The goals of business model innovation change from accelerating the the value proposition and disrupting competition to include having a positive sustainable impact.
  • In the revenue box in the business model canvas, we also capture the sustainable impact that we are making.
  • As we go through the process of business model design we are constrained in the sets of choices that we can make

What doesn’t change is

  • Analysis and understanding of competitors business models – though this can be usefully broadened to include more stakeholders, especially when complex supply chains are involved.
  • Consideration of the balance point within the model. Where are the key feedback loops in the business model going to be centred.
  • The process of drafting multiple business models to identify and capture insights.,
  • The need for a perceptual shift – seeing the world differently so that you don’t replicate what competitors are doing.
  • The test and validation process where new business models are repeatedely trested at greater scale to reduce the risk profile as quickly as possible.

Need to Disrupt Not to Replace

As I think about it more a sustainable business model has to disrupt existing non-sustainable business models. It has to provide a better alternative to existing business models and the products and services they make. It has to make it a lot harder to sell or manufacture those products.

If it doesn’t it’s not creating the change that we need.

So for example, if you are looking at creating a business model in the packaging industry it is relatively easy to come up with a product that is more sustainable than competitors selling single-use plastic solutions.

The sustainable business model innovation process needs to explore how non-sustainable competitors can be disrupted and single-use plastics taken out of the supply chain.

Greenwashing

When we are creating sustainable business models the goal is to create substantial positive environmental or social change. We are not creating the impression of change. Put another way – laying out green plastic grass on your patio is not a real change. Ripping up the patio and replacing it with a mix of grass to create a mini wildflower meadow is.

This comes back to the heart of business model innovation. If you aren’t making substantial changes that disrupt your industry then the changes you are making are part of normal business. A standard, limited, response to competitive pressures. Thinking small without creating impact doesn’t change anything.

Economic vs Sustainable Business Models

Many people will say that a sustainable business model is less profitable than an economic business model. This relies on several false assumptions.

It doesn’t accurately capture the future costs and risks of non-sustainable models

The value created by the business model is not measured by profits alone – wrong frame of reference

It doesn’t reflect the changing nature of the competitive marketplace – it’s not profits OR sustainability. It is profits AND sustainability.

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What is sustainable business model innovation?