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How to Design Business Models
Business models are your secret weapon. A strong business model enables you to compete successfully against better and cheaper products. These posts teach you how to design business models well
Done well a powerful business model enables you to disrupt industries and markets dramatically reducing competition and increasing profits.
How to Design Business Models
In this section of the website, the posts give you practical actionable advice. Use these posts to help you to design business models.
Some of the posts focus on learning how to use the business model canvas which is the best way I know of describing, exploring and designing business models. Other posts focus on the business model design process or dive deep into what you need to do at each stage.
I've developed the knowledge on this page through 20 years of working with startups and entrepreneurs. A lot of the tools have been developed through my personal experience. I've worked with thousands of entrepreneurs and business leaders. Others have been developed by academics and consultants, often tweaked and improved to do a better job.
That Make You Grow and Reduce Competition
The goal is relentless - build better business models that deliver more value to customers, disrupt the competition and let you capture more of the value that you create.
Understanding business models helps you win tactical battles against the competition. Then helps you outflank and move beyond them. With a better business model, a blue ocean is a real prospect for many businesses.
You need to design business models well in order to win
Once you understand how to design a business model you can use this knowledge across almost any business, industry or sector to increase sales, increase profits and reduces competition and reduce the stress involved.
Why do YOU Need a Better Business model?
If you are an entrepreneur you face thousands of other startups fighting for the same share of the market. They are just as good and well-funded as you. A powerful business model helps you stand out and survive.
If you are a business leader then your survival prospects are dim if you don't change. There are too many forces at large in the world that are breaking industries. To stay the same is to die. Better business models offer a better path forward than becoming the ever cutting cost king.
In this video, I look at one of the revenue stress tests that I use when stress testing an existing business model
Margins are a great test of the health of a business and how much customers value your value proposition. If they get a lot of value margins are often high. If you have a commodity product they are often low.
Watch on for more information. I do a systematic review of business models for startups and corporations using 83 metrics. This is a good way of establish the health of your business and ts threats and opportunities prior to making big strategic decisions
In this video I focus on the importance of understanding the problem that customers have and that you have to solve in order to run a successful business.
Using several examples I dig down into the emotional state and the change that customer require in order to resolve the problem. This s done using sequential why questions to understand the root cause of the customer’s angst.Â
I also use an extended analogy about finding the right shape of problems using wooden blocks as shown in the image above. Customers have lots of interestingly shaped problems. Your job is to understand the shapes and design solutions to fit one or more of them.Â
The modern business environment is constantly changing, driven by five major business threats. In this article I look at several different ways of responding to business threats and changes in the environment. How you respond to business threats is very context dependent – both with respect to your company and the threats that you face.Â
Doing Nothing
This is the most popular approach when managers respond to business threats. Doing nothing as a response to business threats is popular because of the risk and uncertainty businesses face. For example. You know that there are new entrants. What is uncertain is how effective they will be. Will they change the market or will it swallow them up? Deciding to use limited resources now to respond to the threat may be premature and have a significant impact in terms of lost opportunity.Â
The problem that you face with this approach is that you are like a frog in gradually warming water. If the temperature is slowly rising there is no point where it is obvious that an alarm should be triggered and action should be taken. No response to a business threat is often a bad response.
In fact what tends to happen is that only in the later stages of a business threat emerging do many businesses realise how severe it is going to be. Back in the day when I was a railway engineer there were two incredibly useful rules.Â
First was that the earlier you plan and prepare for something the less effort you have to put in later on. A design change made on day 1 is almost costless. The same design change made 3 years later when construction has started can be a $100 million problem
Second was the idea of passive provision. This is the idea that we know that something will happen sometime in the future. So we’ll adjust our design now to make it easier to deliver then. So for example if we think that in 15 years train lengths will increase by 50m we’ll design the signalling around the increase platform length. Then the platform can be extended with no impact on the rest of the railway system.
Even if we do nothing we should be looking ahead and seeing how we can design out the future impact of threats on our business. We also have to hope that our long range planning and the threat are working on the same timescale.Â
Doing It Better
When a threat to a business model appears on our horizon one of the most effective tool sets that managers have is ‘doing it better’. A common response to a business threat is to treat the symptoms and not the cause. Most managers and leaders are appointed on the basis of their skill at execution. They are good at optimising and managing a stable system.Â
Given a decrease in sales the first set of options on the table are to start looking at the sales process and how to increase the sales. As more understanding is gained about why sales have fallen marketing and operations are pulled in to help reduce costs or present the value offering better.Â
In good times this is a humming process. Every year operational managers are expected to improve productivity – deliver more output for reduced input.
That only works when the game remains the same. In terms of operational strategy managers are focusing on how to make incremental change rather than step changes. The approach is to do more better.
As Henry Ford pointed out – customers really wanted better horses. Responding to the automobile threat by building horses that could canter for longer and needed less grain and grooming to stay in tip top condition would not have had a significant impact on the Model T sales. Many livery stables in London and New York may have tried that approach
Doing It Differently
The third approach to responding to business threats is to start doing things differently. Many companies see the writing on the wall and believe that their core business is going to be destroyed. Or they believe that they will be able to take advantage of one of the many threats and create far more value by pivoting.
The larger the company the harder this is to do. The biggest reason is that by changing the business model there is a huge risk of losing sales from the existing business model before the sales from the new business model arrive. if they ever do.
Nokia was one company that took this approach. it realised that it’s traditional wood and rubber products were commodities and that the threat of electronics was a huge opportunity. As it exploited this opportunity it became one of the largest technology companies in the world. Then it died because it was’t aware of the smartphone threat and could not respond fast enough to it, as this article about RIM suggests
Another example is that of Kodak which correctly anticipated the move to digital and the decline in its core photographic film business. Being a chemical company at heart the transition to a digital company was hard (I still have a kodak digital camera gathering dust in a forgotten drawer) and it failed to change it’s business model to replace it’s dwindling revenues and eventually entered bankruptcy
How Do You Respond To Business Threats
How are you responding to threats to your business? Which approach is best? Why do you use the approaches that you do?
In today’s business environment few businesses can expect to be doing the same as they did last year and increase sales and profits. On every front there are major changes and these affect almost every aspect of your business model. In this article I discuss the major business threats that companies face today
Technological Innovation
Technological innovation is a major business threat. We are in the heart of a business revolution as profound as the agricultural or industrial revolutions. The way that people work is changing faster and more radically than it has since people left the fields and headed to factories for the first time.
The reason is that with computers and the software developed in the 80’s and 90’s we are now able to start using information to transform the way that we work, manage and automate systems and processes.
If something can be turned into data or shows a pattern there are companies that are trying to extract new information, design new systems and automate entire types of work out of existence. As they do this they create incredibly valuable companies and existing business models have to change or fail
Technological innovation is the business threat that creates the most valuable new companies and dismisses once giant companies to inconsequentiality.
New Entrants
As markets change many companies see their own market becoming a red ocean of competition. It is hard to generate decent profits doing what they have always done. So they set out in search of new opportunity. So do thousands up thousands of new start-ups riding the technology wave.
In many cases they are entering your market. They are not all entrepreneurs. Amazon has entered the pharmacy and supermarket sectors. With a billion dollar budget a new entrant can be profoundly disruptive. At the same time start-ups can now do for $5,000 what they needed $500,000 a decade or two ago.
Small and apparently inconsequential they are niche focused and their numbers mean you can die by a thousand small cuts – even if they don’t grow as much as the entrepreneurs hope.
New entrants are the business threat that many established companies dread most
New Regulations
Governments, States and Cities are slow to keep up with all the change. They do respond and each year they create more rules and regulations. These are designed to protect incumbents, protect the state, protect citizens and protect the environment.
There are many many battles are pressure groups and lobbies seek to influence the outcome of regulation. Laws can curtail or open markets. The alcohol market in the US was closed under prohibition. The Cannabis market is now opening up. Uber disrupted Taxi regulations and is not finding it is becoming ever more regulated as the status of it’s own drivers becomes fixed.
Where there is a problem with many people or businesses being hurt or disrupted regulations start to trickle through -many being a threat to the way that you work.
New regulations are a business threat that large companies can take in their stride, with lower margins, but which can act as huge barriers to entry for smaller companies
Social Change
Societies seem monolithic and unchanging. In reality they and the subgroups that make them up are in a constant state of change and flux as they respond to the world around them.
Women can drive cars and go to the cinema in Saudi Arabia. In the US they may lose the right to have an abortion. In Ireland they have just achieved hat. In Holland people have the right to die and in Singapore they march for Gay Pride.
In Turkey they become more conservative and in the Ukraine more corrupt. In Israel Arabs become disenfranchised and in Egypt increasing bars on religious belief.
Look back a few decades and see how your beliefs and your friends beliefs have change What did you tolerate and now accept. What was once tolerated that is now banned?
Social change is a business threat to every company as consumer behaviour changes making your value propositions less attractive
Demographic Change
Are your markets getting older or younger? Does that matter to you? In Japan there are huge numbers of pensioners – and they don’t spend as much as younger people do., In the US the baby boomers are seen as a huge market full of potential as they spend their retirement savings.
In China a male-female imbalance caused by the one child policy distorts the millenials and no one can make families go back to having 2 children – a demographic disaster in decades to come.
In Africa and many developing countries almost 50% of the country can be under eighteen providing huge opportunities for education and cheap labour. In the US lack of skilled workers is pushing factories to spend ever more on automation
Demographic change is a business threat to everyone as entire sectors grow and shrink.
Ash Maurya came up with the lean canvas a few years ago. The business model canvas is a powerful tool for many companies, and startups, to understand what they do and how to change. It’s not always that great for a startup trying to do something innovative. I was reminded of that today when I was working on a business model for a customer. Frankly I was struggling to get the business to work and reconcile what we wanted to do. We were going round in circles.
So I got out a copy of the lean canvas and started scribbling. Whether it was serendipity- or just a change of frame – everything started to come clear quite quickly. In the business model canvas the focus is often the Value Proposition – Customer Axis or the Value Proposition – Resources/Activities Axis.
Problem Focus in the Lean Canvas
In contrast the lean canvas is problem focused. The biggest box on the bard is the one that says PROBLEM. In the model I had been working on we’d been looking at how to design a marketplace. We’d focused as is the wont on the consumers problems not on the underlying problem that was the reason we felt a marketplace needed to exist.
So when we refocused everything on the problem(s) that the business side of the market faced it then became very clear that we could provide a single solution to the problem that would be acceptable in different ways to the different B2C segments. Cutting out the jargon – by changing the way that we looked at it it was super easy to make customers happy.
Everything fell into place in less than an hour because we used the lean canvas rather than the business model canvas.
So what is the Lean Canvas?
This is the Lean Canvas
As you can see it is very similar to the business model canvas. We keep the majority of the customer facing components – revenue – channels – customers and value proposition. At the same time we also remove the components that focus on delivery of the value proposition – Activities – Resources and Partnerships.
These are replaced by four new segments
Problem
Solution
Key Metrics
Unfair Advantage
Ash Maurya has a great description of how the lean canvas works and you can read it here.
Problems in the Lean Canvas
Every business solves a problem for their customers. If they don’t they tend to fail. One of the major problems that startups had during the dot com boom and after was that they tended to build first and hope to get customers after. This often meant that they built something that didn’t really solve a problem for the customer. The lean canvas corrects this by putting the problem front and centre.
The starting point is the key problems that you need or want to solve. These need to be validated so that you know that the problem is a real one. Once you have confirmed with the potential customers that the problem exists, it’s not trivial, they are willing to pay for a solution and are willing to switch from whatever solution the use at the moment we are in business.
Solutions in the Lean Canvas
The next step is to look at the solutions to the problem. How can you solve the problem? This is something that the business model canvas doesn’t pickup very well. The solution is similar to the value proposition. The way I look at it the solution is more practical and technical. It is the mechanism by which the value is delivered.
If we think about the original Amazon business model for a minute. The problem was that bookshops never had enough books in them to offer a good selection. The solution was to build a website where all books were available. The value proposition was Amazon was a place where it was simple and easy to buy any book that was in print in seconds (one click purchasing).
The Unfair Advantage
I often think of this as the defensive moat. It plays back to Michael Porter and his idea of sustainable competitive advantage. Many business models can be quickly and easily copied. Computing and design skills are plentiful. What is it about the model that gives you enough of an advantage to beat the competition? It’s normally something, for an internet company, that gives you an advantage until economies of scale, scope or the network effect kick in.
A classic unfair advantage is a patent or an official monopoly. Others could include a proprietary data set or even a particular culture at the company.
The Lean Canvas and Key Metrics
Key metrics is probably the weakest component of the Lean Canvas. If I’m not starting a company using a lean methodology it’s the easiest to leave out. Using a lean approach you are data focused. Life is a series of measured experiments. How else do you measure your success than by holding the results of your experiments to some standard of progress?
Thinking right at the beginning as you start your company what you want to measure is incredibly valuable. If you are driven by a profound “why” then the key metrics enable you to always be checking that you are delivering that why even as you grow the company. I don’t think that Google had a way of internally measuring whether it lived up to it’s “Don’t be Evil” ideal (dropped this year) and its interesting to think of what would have been different if it had.
As you know I am a big fan of the business model canvas. It’s a super flexible tool. It can be used to design your business model. It can also be used to stress test and analyse how well your business model is working. Think of it as a complete company strength audit in 40 questions. Without further ado here’s how to test your business model. (if you haven’t created a business model canvas yet – go here!)
What we have is a few questions for each segment of the business model canvas. The best way to test your business model is to have your latest iteration in front of you and look at each section in turn. For each question consider both the positive and negative side. So for example – if we look at the first question
Are they well aligned or poorly aligned? Are some value propositions better aligned than others? When I do this exercise with customers in a workshop we consider each value proposition in turn. Sometimes it becomes clear that there is a great deal of meat waiting to be discussed.
What we are doing at this initial stage is identifying the areas of the business model where you think you have problems. We’re doing it in a structured way. At this stage the point is to identify issues, then return and discuss them in more depth. If you schedule 5 minutes per question you can easily hit 2 1/2 hours which is exhausting for everyone.
An alternative approach is to put the questions into a Likert Scale and then have all key stakeholders fill that out as a questionnaire pre-workshop. If done like that the workshop can spend it’s time diving deep into the areas where the management team’s views differ rather than thinking too much about areas where there is consensus (unless there is a need to challenge)
Value Judgements
One risk with this approach is that it’s possible to make value judgements about some of the questions
Do you have synergies between your products and services?
You may have a presumption that synergies are a good thing and want to answer – yes – of course. The answers aren’t objectively true. They are useful only as they are relevant to your business model. So when you test your business model it may be entirely appropriate that your products and services have no synergies. That is ok. Many diversified conglomerates in India have no synergies for example but there are great, non-synergistic reasons why their business models are successful.
What is important is that you use the questions as a trigger to reassess the health of your company. You can then use the answers to help you form the basis of a revised and more effective strategy.
How to Test your Business model
Answer each question with a score between +5 and -5. If appropriate write a single sentence answer
Value Proposition
How well are your value propositions aligned to customer needs?
How strong are the network effects of your value propositions?
Do you have synergies between your products and services?
How satisfied are your customers?
Revenue
How strong are your margins?
How predictable are your revenues?
How much of your revenue is recurring?
Do customer repurchase frequently?
How diversified are your revenue streams?
How sustainable are your revenue streams?
Do costs come before revenue or vice versa?
How much of what customers are willing to pay for do you charge for?
How much money does your pricing leave on the table?
Costs
How predictable are your costs?
How well does your cost structure match your business model?
How cost efficient are your operations?
How much do you benefit from economies of scale?
Resources
How many of your key resources are unique and can’t be replicated by competitors?
How predictable are your resource requirements?
How easy is it for you to have your key resources in the right place at the right time?
Key Activities
How efficient are you are doing your key activities?
How easy are your key activities to copy?
How good are you at execution?
How well have you balanced in house vs outsourced delivery of key activities?
Partners
How well do you work with your key partners?
Do you have enough key partners?
Customers
How high are your customer churn rates?
How well segmented is your customer base?
How well do you acquire new customers?
Marketing & Distribution Channels
How efficient are your channels at acquiring new leads?
How effective are your channels in converting new leads?
How well do your channels reach your target customers?
How easy is it for target customers to find your channels?
How well are your channels integrated?
How strong are the economies of scope in your channels?
How well do your channels match your customers preferred channels?
Customer Relationships
How strong are your customer relationships?
How well does relationship quality match the requirements of customers?
How easy is it for customers to switch
How strong is your brand?
The outcome of this test of your business model is that you have completed a quick and systematic strategic review. You will have identified a number of areas of the model where you feel that you are weak, or where there is possibility for improvement. This is one of the ways that you can use the business model canvas to become more competitive
The next step is to decide what you need to change and how you need to do it
If you’d like me to help you test your business model or planning a workshop please reachout. I also have an excel version which I am happy to share. Do send me an email.
