People will always stress that having a well researched business plan is key before you start your business. Although creating a business plan is often an important step in the evolution of a business, particularly if you need financing or you are not experienced at running a business, it is not necessarily the essential first step. There are two key elements that should be completed prior to the business plan:
What is a Business Model?
While the word model often stirs up images of mathematical formulas, a business model is in fact a story of how a business works. In general terms, a business model is the method of doing business by which a company can generate revenue. Both start-up ventures and established companies take new products and services to the market through a venture shaped by a specific business model. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a business model:
Joan Magretta in her article Why Business Models Matter took the concept of the business model a little further. Magretta suggests every business model needs to pass two critical tests, the narrative test and the numbers test. The narrative test must tell a good story and explain how the business works, who is the customer, what do they value and how a company can deliver value to the customer. The numbers test means your profit and loss assumptions must add up. At the most basic level, if your model doesn't work, then your model has failed one of the two tests.
To begin the modeling process you need to articulate a value proposition on the product or service being provided. The model must then describe the target market. The customer will then value the product on its ability to reduce costs, solve a problem or create new solutions. A market focus is needed to identify what product attributes need to be targeted and how to resolve product trade-offs such as quality versus cost. You also need to identify how much to charge and how the customer will pay.
Think of business modeling as the managerial equivalent of the scientific method - you start with a hypothesis, which you then test in action and revise when necessary. The business model also plays a part of a planning tool by focusing managements on how all the elements and activities of the business work together as a whole. At the end of the day, the business model should be condensed onto one page consisting of: a diagram outlining how the business generates revenue, how cash flows through the business and how the product flows through the business and; a narrative describing the product/ service components, financial projections or other important elements not captured in the diagram.
Business Models and Strategy
It is important to note that completing a business model does not constitute strategic planning. Strategic planning factors in the one thing a business model doesn't; competition.
What is strategy?
According to the Collins English Dictionary, strategy is "a particular long-term plan for success". For our purposes, we will consider the essence of strategy as a formula for coping with the competition. Competitive strategy is about being different and the goal for a corporate strategy is to find a position in the industry where the company is unique and can defend itself against market forces. To do this the company must choose a set of activities that can deliver a unique mix of value.
Market Forces and Strategy
The determination of a strategy is rooted in determining how a company stacks up against basic market forces, how it can defend itself against these forces and how it can influence these forces. Fortunately, Michael E. Porter in his article How Competitive Forces Shape Strategy defined these market forces for us. Known as Porter's 5 forces they consist of:
Once you assess how the market forces are affecting competition in your industry and their underlying causes, you can identify the underlying strength and weaknesses of your company, determine where it stands against each force and then determine a plan of action. Plans of action may include:
The framework for analyzing the industry and developing a strategy provides the road map for answering the question "what is the potential of this business?"
Reconciling the Business Model and Strategy
I will use a short example to illustrate the difference between a business model and strategy. Although you may think that Wal-Mart pioneered a new business model on its road to success, the reality is that the model was really no different than the one Kmart was using at the time. But it was what Sam Walton chose to do differently than Kmart, such as focusing on small towns as opposed to large cities and everyday low prices, that was the real reason for his success. Although Sam Walton's model was the same as Kmart's, his unique strategy made him a success.
About The Author
Jeff Schein is a CGA and offers advisory services in the areas of business planning, business modeling, strategic planning, business analysis and financial management for new ventures and growing small businesses. Visit www.companyworkshop.com or www.companyworkshop.com.
Beecher limo rentals ..As you reflect on this year and prepare for next... Read More
You're pretty proud of yourself! After all, only four months... Read More
Owning a small business in Wichita, KS might not be... Read More
After over thirty years advising small business it still comes... Read More
Increase your profit potential by identifying ? and avoiding ?... Read More
To get approval for your small business loan application, you... Read More
Cash is King?That is what everyone tells us and it... Read More
Your on-line success is based on your efforts and yours... Read More
Like most regulatory bodies in the United States, the Federal... Read More
When the recent Games of the XXVIII Olympiad came to... Read More
If you are thinking of turning your current into a... Read More
Top 3 Ways to Maximize Your Small Business Server Consulting... Read More
Over the years I heard the best way to learn... Read More
If you are a small business and qualify to participate... Read More
Rule 15C211Under SEC Rule 15C211, a U.S. securities broker or... Read More
We hear a lot of talk about junk mail nowadays.... Read More
You've been meaning to tend to the administration part of... Read More
Many businesses offer small business franchise opportunities. There are many... Read More
In today's marketplace the words 'job security' have become an... Read More
Remember the cleaning business is all about time ratio to... Read More
There is a great deal of abuse going on in... Read More
On Monday the Department of Corporations in California revoked franchise... Read More
Most folks in the pressure washing business are happier to... Read More
Articles abound advising the business community how to properly screen... Read More
You're a small business owner with a hot new product... Read More
Bridgeview limo Chicago ..Washing manufactured homes, mobile homes, can be a lucrative and... Read More
Most of us remember going to at least one garage... Read More
Completion not Perfection Five Keys To Doubling Your Productivity and... Read More
During the California Recall Election, I was very interested. Without... Read More
Bookkeeping?the "dreaded" word is something we all have to worry... Read More
Attorneys and Lawyers are ruining the franchise industry. It is... Read More
What are the best methods for keeping a good business... Read More
Do you have a Business Plan? Congratulations, but you are... Read More
1. Everyone Makes A Difference ? Despite not letting him... Read More
Do you operate your business as a series of projects,... Read More
Seems as though there are a lot of business closings... Read More
Hew Hampshire car wash market. Well we have visited every... Read More
Cash flow. To stay in business, you've got to keep... Read More
I agree that knowledge should be free, but the next... Read More
If you own a mobile service or home based franchise... Read More
When small businesses fail, the wreckage is often assigned to... Read More
Where do you find the right people for a business... Read More
You may find this Newsletter a little long winded but... Read More
Why? Because they have access to world class public relations... Read More
Am I the only one that does not have an... Read More
What are the 5 best ways to gain new contacts?There... Read More
Grow your Professional Organizer business by branching out into related... Read More
Remember those drawings from science class of how a lever... Read More
Many mobile pressure-washing companies turn to government contacts to make... Read More
Shopping for a franchise is easy if you know what... Read More
Small Business |