Yesterday I looked at Eight Models of Business Models and Why They’re Important. However, in writing about how different people conceive of business models, I didn’t have enough space to address the really critical issue with them:
What can you actually do with a business model?
Once you’ve defined your business model, here are three ways that you can do with it:
- Test Your Organizational Design for Consistency: one of the key issues in looking at business models is that they must be internally consistent. If your value proposition is that you’re the cheapest, this has a direct impact on the choices you need to make about who to hire, how to train them, the relationships you’ll have with customers, who your customers need to be, etc.
In response to yesterday’s post, Graham Hill said on twitter:
None of the business model work passes muster. There are dozens, maybe hundreds of dependent variables. Not repeatable.
This is a valid point, if your objective is to try to replicate someone else’s business model. Bob Sutton makes a similar point in a great review of Inside Apple: How America’s Most Admired–and Secretive–Company Really Worksby Adam Lishinsky. It is one of those reviews that is just a nice piece of writing – worth reading whether or not you’re actually interested in the book.
Sutton raises an important point:
Apple is nearly the exact opposite of the kind of organization hyped by people like Gary Hamel and even Peter Drucker. It is centralized, secretive, fear-ridden, punitive, and not much fun for most people who work there. But it works because the pieces of the “organizational design” fit together, or at least did fit together when Jobs was there, in an elegant way. The secrecy is so severe that, when products are launched, even senior people are surprised by the final product because people are on a strictly “need to know” basis. But this is offset with a system of roles and responsibilities — and crucial to all of it– is what Apple calls the DRI, the directly responsible individual, a centerpiece of the organization. There is clear responsibility placed on individuals, not so much on groups and committees. Although groups and some committees do exist, the DRI can always be found and is where attention is focused. Which means that that it is clear where to go to provide guidance, to integrate their work with others, and who will be fired, blamed, and replaced — and celebrated too.
My point here, and this follows an old conceptual perspective called “contingency theory,” is that other organizations that want to be like Apple –and that seems like so many now — need to be especially careful about copying individual pieces, because the reason it works is that the multiple elements fit together.
The point here is to be wary of picking up one part of someone else’s business model and dropping it into yours. If the whole business model isn’t consistent, you’ve got problems. So unless you have Apple’s intuitive sense of what customers need, it’s very dangerous to say “Apple doesn’t do focus groups, so we won’t do focus groups.”
- Innovate the Business Model: Henry Chesbrough and Richard Rosenbloom tell two stories of business model innovation in the copier industry in their paper The Role of the Business Model in Capturing Value from Innovation. When Haloid Corporation tried to launch the first Xerox machine, they used the same business model as the mimeograph machines that they were competing against.
The initial launch of Xerox machines failed, because they cost six times the machines they were competing against. It took an innovation in the business model to succeed. Instead of trying to replace a mimeograph, Haloid decided to try to replace a secretary. This meant a new value proposition, a new market segment (only large firms), a new revenue model (leasing instead of purchasing), and so on. With the new business model, and with no change to the underlying technology, the Xerox machine took off.
Haloid Corporation changed their name to Xerox, and they dominated the market for nearly 30 years. Until another business model innovation started to seriously erode their market share.
Business model innovation is a powerful form of innovation. So once you’ve described your business model (or that of your industry), start thinking about how you can change it.
- Use it to Test Your Market and Your Assumptions: Steve Blank likes to say that a business model is just a set of hypotheses about the market. So you can use the business model to test your assumptions about what will work as you introduce new ideas.
Experimenting is a crucial part of innovation. You can use business model analysis to identify the assumptions that underlay your innovation – this tells what experiments you need to try.
Blank documents the process in his fantastic Lean Launchpad series, where he talks about nine teams in his entrepreneurship class at Stanford used the business model concepts to launch start-ups. Here is a description of one of the experiments:
The first team to present was D.C. Veritas, the team building a low cost, residential wind turbine. During the week they interviewed 7 more companies and consultants, developed case studies for 20 different cities in 5 states, and finalized the bill of materials for the wind turbine. But the big project for the week was testing and analyzing Customer Acquisition Costs. The team put together their sales funnel and started testing demand.
The results were disappointing. The most optimistic estimates showed that the residential wind turbine market was less than $20m in year 5 and the costs to acquire the customers made this a money-losing business.
After regrouping the team decided that a major pivot was in order. Perhaps residential customers were the wrong target? Maybe the wind turbine they were building was better suited to a different customer segment? They had gotten feedback from consultants and industry experts that cities and utilities might be a more receptive audience. What if they redesigned the wind turbine to be embedded into street and highway light poles? Then they could serve cities, lighting companies and utilities. Using the business model canvas, the changes to their business were obvious.
The business model can be a great tool for guiding innovation experiments.
Yesterday we mainly talked about how business models can be described. Once you’ve described your business model, then what? These are three ideas – you can use it to: test your organisation design, innovate the business model itself, and define innovation experiments to test the assumptions of your firm.
Mimeograph photo from flickr/nicksarebi under a Creative Commons License.