Hello and welcome to this third video in our series: How To Build a Scalable Business.
In this video, we consider your business model – the second of three issues at the core of our Growth Mapping framework, on which this series and the associated toolkit are built.
Key areas that we’ll cover in this video are:
- What Is A Business Model
- The Challenge Of Business Modelling
- Why This Matters
- A Solution
- Value Of The Business Model Canvas
- Complementary Tools
- Future-Proof Your Business
- Next Steps
- Helpful Links
Let’s start by understanding what a business model is.
What Is A Business Model?
A business model describes the rationale of how an organisation creates, delivers and captures value 1 – three fundamental questions that apply to every business in every industry or sector, whether or not they exist to make a profit.
It follows that every ongoing business concern is operating one or more business models, consciously or otherwise. They are creating and delivering value to somebody, and either meeting or capturing enough of a surplus over their operating costs and other obligations to be able to continue doing so.
Consider a typical shoe repair business run by a solo entrepreneur: it creates value by repairing certain types of shoes for customers who walk into its store, and captures value by charging them for the service at a price that makes it worthwhile for customers to repair rather than replace their shoes. This is a straightforward retail business model.
The Challenge of Business Modelling
This depiction fails to tell the whole story however. For there are many other elements that the retailer has brought together to set up and operate their business successfully. These include the range of complementary products and services they offer – key cutting, for example, or selling shoe laces; the suppliers they source from; their premises type and location; how they build loyal relationships with customers; the precise sort of equipment they have and how they finance it; their relationship with a franchisor whose brand and management systems they pay to use; and so on.
As soon as we try to represent this more detailed story, the challenge of doing so succinctly and usefully becomes harder. Especially if you are a small business with limited time and resources.
Why Documenting Your Business Model Matters
If you cannot easily describe and review your business model, you and your team will struggle to evaluate the impact on it of changes in your trading or competitive environment, and then to react with the necessary agility. Such changes can flow from many sources: innovative new market entrants, new technologies, competitor alliances or changing customer preferences, for example.
An example of innovative market entrants operating a new business model are the app-based, 15-minute grocery delivery services that have launched in London and other major UK cities. These agile new service providers have recognised changing customer lifestyles and preferences, and configured a new business model to satisfy them that places (and charges for) a premium on very rapid, home delivery of a limited selection of fresh and packaged produce.
This presents a new challenge to incumbents who have invested heavily in pre-booked, slot-based, home-delivery of a wide selection of goods and which now accounts for around 20% of sales. It requires them to evaluate the potential impacts of this new business model on their own, and their possible responses in the short- and longer term.
Whilst this may be easier for corporates with all of their resources, SMEs face similar challenges and uncertainty.
Many SMEs, including some of our clients, have reacted to the pandemic by adopting new hybrid working arrangements, or even moving to a home working model by exiting or assigning leases. They have replaced a larger office with smaller meeting rooms for staff to use only when they need or want to.
This represents a significant evolution of their business model, which will have both commercial and cultural implications.
It might alter how they position themselves and are perceived in the market, for example. A company previously perceived (and perhaps perceiving itself) as a regional business due to their physical location, might choose to reposition themselves as a national business thanks to their virtual location.
This might in turn lead them to redefine the sort of relationships they want to develop with customers, and prospective new suppliers, and the infrastructure they will need to conduct those relationships over time to deliver a new and improved experience. It will equally impact how they continue to ensure effective line management of staff and leadership of teams.
They might also reconsider their marketing and pricing strategies, which in combination with cost savings from the downsizing of their premises, could create opportunities to increase margins. It could equally end up substituting premises costs with greater investment in IT and marketing to address a national market.
Another source of change might be the unprecedented speed and accuracy that AI and machine learning can bring to tasks that have historically been performed by specialists following years of apprenticeship.
One such application I have witnessed involves estimating the time and parts needed to safely repair collision-damaged, tech-laden cars: previously the domain of highly trained specialists, there is a real possibility that in future, all or part of this function will be performed by highly trained machines.
A few years from now, we may distribute replacement parts by email, and 3-D print them locally. What will that mean for current supply-chains and what new opportunities and business models will it inspire?
As consumers, we are increasingly searching for products and services in an omni-channel world using only our voices, interacting with digital assistants such as Siri or Alexa.
Google is increasingly applying machine learning and automation to the optimisation of online advertising campaigns in the face of increasingly complex customer journeys.
What does all this mean for agencies’ business models and creativity?
This continuous evolution in trading or competitive environments can transform business models and the value propositions at the heart of them: perhaps by rendering long-established, highly specialised work practices and processes completely or partially obsolete; by creating new channels and associated buying behaviours; or by opening up whole new vistas of opportunity in activities that were previously cost- or time-prohibitive.
To properly evaluate them and make well-informed decisions, the leaders and managers of a business need to be able to articulate, review and test different business models; both theirs and those of competitors.
Absent a team of analysts, they will need a simple yet effective way of doing so.
A solution to this challenge first arrived in 1995, when Dr. Alexander Osterwalder and Yves Pigneur created a tool called the Business Model Canvas.
This simple, yet ingenious solution breaks down a business model into nine, essential building blocks that are expressed simply and still hold true today: Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Activities, Key Resources, Key Partnerships, & Cost Structure.
Even better, it offers a way to plot them on one piece of paper that illustrates if and how they complement each other to offer something desirable to one or more groups of customers, that is feasible and sustainable to operate, and financially viable.
There is an excellent explanatory video provided by Strategyzer.com here: https://www.strategyzer.com/canvas/business-model-canvas.
Value Of The Business Model Canvas
As we have seen, this continuous evolution and its potential impacts can easily become overwhelming – given the many potential sources of change to consider. This is where the Business Model Canvas comes into its own.
By breaking out the nine essential components of a business model and representing how they interact, it offers you and your team a practical process for reducing this complexity into something more manageable. This will allow you to work through what the possible impact might be of one or more developments on each of the nine components, and generate alternative future scenarios.
Not only can you capture your own business model and consider opportunities to refine or change it, you can also map out your competitors’ to look for relative strengths and weaknesses to improve upon, or exploit.
What’s more, the format of the Business Model Canvas, embracing both words and visuals, lends itself to individual and group work, and enables people with different preferences and styles to engage with it. This is helpful if you have a diverse leadership team, for example, and need everyone to pool their respective talents using a shared, yet adaptable methodology.
Whilst this tool looks simple visually, it has proven itself over time as an effective planning tool that has been adopted by businesses of all sizes, from start-ups and small businesses, to mid-tier companies and even divisions of major corporations.
The creators of the Business Model Canvas, and others, have built on the original concept to create additional tools that offer further value to SMEs. Links to some of these are provided at the end of this video.
A great example is the Business Model Growth Map designed by Jen Van Der Meer, Founder of Reason Street. This will help you define and differentiate between the different business models you could deploy in future, as you plot your chosen path in pursuit of your purpose.
To help you, the same team has also created a fantastic library of business model archetypes that will help you identify and review options and consider which might be right for your business, alone or in combination.
A further example, developed by Dr Alexander Osterwalder, is the Value Proposition Canvas, which helps to unpick and optimise the fit between your product or service, and the needs of your target market.
Future-Proof Your Business
Imagine for a moment that you have documented and refined your business model using the Business Model Canvas. The exercise has identified that thanks to a change of client mix, a significant proportion of your revenues now relies heavily on the expertise of one of your founding shareholders. They are now, more than ever, a key resource.
What’s more, you believe that within five years, they or somebody like them will be able to leverage machine learning to deliver their expertise at scale, through an automated solution. This could transform the prospects for your business and all of its stakeholders.
Now imagine that this person falls seriously ill and will no longer be able to work. Yet you have neither a shareholders’ agreement in place, nor key person insurance to help them and your business navigate this challenge.
The implications for their shares in your business are uncertain: they may wish to liquidate some or all of them in light of their changed circumstances, and in the worst case scenario, they may pass to their spouse who has little or no relevant expertise.
You feel bereft of a business partner, and anxious that you will struggle financially to support them and their family through their illness as you would wish. You will also need to hire someone of sufficient calibre to step-in, which will add further expense and risks.
Most of the issues and risks in this imaginary scenario could have been mitigated. They need not have posed an existential threat to your business, if you had given them due consideration earlier, as recommended in part 2 of this series. Certainly where a shareholders’ agreement is concerned, this could also have been achieved at negligible cost and would have future-proofed your business.
A similar scenario could involve a key employee. Imagine that you have invested substantial time and money over several years to develop a member of your team from a graduate recruit to a top-performing sales manager. In your business plan, you have identified them as a potential leader to spearhead your drive into new overseas markets, made possible through a new strategic alliance.
Just as they are beginning to repay your investment and become pivotal to your plans, they are approached by a competitor with an offer that includes attractive share options.
You have no equivalent scheme in place and cannot react quickly enough to retain them. Your years of investment and their accumulated know-how walk out of the door and into the arms of your competition. You are frustrated beyond measure because you had recognised this possibility yet failed to take the preparatory steps needed to guard against it.
These two examples illustrate how important it is that your ownership arrangements are reviewed regularly in tandem with your present and anticipated business models and plans.
In particular, you should be looking for critical dependencies in your present and anticipated business models and ensuring that to the maximum extent possible at reasonable cost, your business is future-proofed against events that could threaten or undermine it.
At one level, this could of course involve straightforward management steps to mitigate risk by reducing your revenue concentration, for example. At another, it may require you to look more deeply at the ownership arrangements you have in place, not least to consider how these will support and sustain your business should unexpected or unwanted events occur.
As trading and competitive environments become more volatile, and the sources of potential disruption more varied, the ability of SMEs to review and if necessary, adapt your business model has become more important than ever. During the recent pandemic, we have seen many businesses in diverse sectors quickly adapt their models – to open up new channels to best serve their customers, for example; or by developing new partnerships or capabilities, such as managing a hybrid workforce and facilitating remote collaboration.
We have equally seen new business models emerge in response to changing lifestyles, needs and wants.
In many cases, this ability to adapt fast has been the difference between survival and failure.
Regular evaluation of your business model, and the alternative ways that you could create, deliver and capture value is a critical skill in building a scalable business.
The Business Model Canvas will quickly help you take a big, yet feasible step towards this, and is further enhanced by complementary tools that have since been developed by third parties. Together, these tools will help you manage your business in the face of this complexity.
As you review your business model and the critical resources, channels and partnerships that it depends on, make sure that in addition to sensible mitigation steps, your ownership arrangements will support and sustain your business should the unexpected occur. This will protect your interests and those of all your stakeholders.
We hope this brief review has reiterated the necessity of periodically evaluating your business model if you are to build a scalable business, and offered some practical steps and resources to help you do so. Please feel free to leave any questions or comments below, check out the helpful links that follow and if you want to discuss any of this further, book a call using the button provided.
The next entry in this series: How to Build a Scalable Business, will look at the third issue at the centre of our Growth Mapping framework: your operating system.
Thanks for watching and we wish you the very best of luck with your business.
1 This helpful definition of a business model is taken from the Business Model Canvas Explanatory Video, on the strategyzer.com website, for which a link is provided below.