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Step Three - From Idea to Business Model

So you have what it takes. You understand what makes a sound business. You have a great idea which has stood up to market testing. It fulfils a need and offers perceived value by your target customers. There is sufficient demand to satisfy your needs? If not then please reconsider Step Two, else read on.

Now you are ready to start your project. You need to consider how you will transform your idea into a profitable business. This is like using a sketch to build a scale model. You are now testing not just the idea but how you will execute it in the real world. You need to be confident it will work before investing your time and money in the real thing and recruiting people. The risks and costs are not real at this stage but they will be at the next.

You need to define the business model. The good news is that you’ve already done some of this work whilst testing the market.

You then need to test that model to ‘destruction’, and modify it until it works, to maximise your chances of success in the real world. A small miscalculation at this stage costs you nothing but time, the same error five years down the line, could cost you an expensive failure.

What is a business model? In simplest terms it is defined by the answers to the ‘what, why, how and who’ of your enterprise. To define the model you start by asking yourself the following questions:

 What does your business do?

 Why are you doing it?

 To whom, where and when are you selling it?

 Why do customers need it?

 Why will customers choose you over competition?

 How do you sell it?

 Who are the stakeholders in the business?

 What are the resources of the business?

 How do you derive a profit from it i.e. What is the profit model?

 Will it have enough cash i.e. What is the cash flow model?

 How do you organise your stakeholders and resources to deliver it?

To build your model whilst answering the above questions, you can use the business model framework, depicted above, courtesy of www.biz-man.com.

This has at its core the profit model. This defines how your business is designed to make that all important profit. Notice this doesn’t just happen by chance, by looking at your bank balance now and again - that is a recipe for failure, sadly followed by many a poor business person.

We will revisit the profit model later but for now accept that it is simply part of the overall business model.

Encompassing the profit model we have the finance function, which is the source of funding and its flip side, accountability for the finances of the business. This determines the scope and reach of the outer functions - think of it as the energy source of your business.

Every successful business needs ‘cash flow’ or money in the bank, to operate and every business is accountable to the jurisdiction where it is domiciled and so must keep accounts. Accounts are not kept just for that reason though. They are for your own understanding and accountability to all interested parties. Again, sadly all too many people overlook this and think of them as ‘something accountants do to keep the government happy’- whilst partially true, that is a bad start in business.

Finance exists to support and grow operations - how you deliver your offering. Your operational design should be a closely guarded secret from your competitors. We like to think of operations as the engine of the business - delivering and supporting the offering to your customers.

Finally the most visible function is the marketing function which, in our simple model, includes sales and which is analogous to the gearbox providing leverage and ‘spinning’ out the offering to the real world allowing your business to gain traction. Marketing is also nourished by finance and your marketing strategy should be kept very private too.

Taking the simile a little further, perhaps to its limit. Once your business is running, marketing often drives it - a bit like our imaginary car rolling down a hill, the wheels spinning out of control - is this good or bad? Some businesses are ‘driven’ by marketing (sales driven), some by accounts (cost or return driven), some by operations (supply led). It depends often on who controls the business and the culture that pervades. Culture and strategy for growing businesses are beyond the scope of this book but you will find more on our website.

Observe for now, that for the business to work correctly, all functions must work together and within the boundaries of the energy supply (finance) and within the capabilities of the engine (operations) and the gearbox (marketing) must be well matched to the engine! Failure to recognise this and to control it is one of the biggest root causes of failure in growing businesses.

In the following steps, we will show you how to answer the key questions we raised above and thus derive your business model. By now you may have realised that each of them falls neatly into one or other of the key functions of our model. Spend a few minutes working out which goes where.

Before you can consider the key functions in detail you need to consider who the stakeholders are in your business. Think of these as the glue that binds and holds the functions together over time.

Finally, we said earlier that a business must be scalable, sustainable and return value to shareholders so we need to check that this premise holds for the business model. If so then it has a good chance of success in theory. You can then consider putting the theory into practice.

Who are the Stakeholders?

What is a stakeholder? Any person or party that has an interest in or is affected by your business.

stakeholders may include, in no particular order:

 Owners, and those that support them,

 shareholders,

 banks,

 other funding organisations,

 investors,

 directors,

 employees,

 associates, affiliates, partnerships working with your business,

 suppliers,

 customers,

 market influencers,

 people in the locality of your business premises or affected by it,

 or the government and local authorities, legal systems in your jurisdiction.

It is surprising how broad you can take that definition but given a moment’s thought it is obvious that your business affects many people in many ways and they all need to be kept happy for you to succeed.

biz-wisdom: Having a holistic approach to management is key to your success. Understanding how your team’s actions and decisions affect all stakeholders will serve you well. Often your employees, customers and suppliers will not understand your actions as you do. As your business grows, you will need to make many decisions on a daily basis and each will be a compromise - that’s the essence of sound management. Diplomacy and communication are key skills here. Many leaders fail on this point and don’t even know why. More on this on our website for subscription members under ‘Managing your Business’.

To understand how the various stakeholders affect your particular business it is helpful to draw a simple relationship diagram outlining the key relationships with your business. For example, if you are a plumber then you might have a direct customer and sometimes provide services via another contractor or subcontractor and so on. You will have suppliers and subcontractors that deliver services or goods to you that enable you to provide your service in turn.

This helps you identify the relative importance of the various stakeholders. You should consider the following. Who are the key stakeholders in your case? - understand key players and the relationships between them. What are their relative strengths and weaknesses? Are you in the ‘sweet spot’ of control (read profit)? When chips are down who owns the customer relationship (read profit)?

Who are the key stakeholders?

Consider your business were a play. Who would you need to hire to produce the play? Which actors play the key roles in day to day business? They are your key stakeholders. What are the relative strengths and weaknesses per actor? Which of the actors commands the highest fee? Who wields all the power? Who gets the red carpet?

Are you in the ‘sweet spot’?

The way your business interacts with the actors you have just identified determines how much power and control you can exercise over the other parties but more importantly how much they might control you and your business. It also determines therefore, how much profit you can make. Remember your business must be sustainable.

By example, imagine the plumbing business that is beholden to a master contractor for all it’s revenues. What happens if there is a falling out with the master contractor? One might say the master contractor was very much in the ‘sweet spot’. They get to negotiate hard on your price and control the amount of work that you will get. In this scenario your business is at risk of survival if it cannot source its own work.

Sometimes suppliers may ‘hold you to ransom’, sometimes it is a single large customer that provides all your income. Sometimes it is a key employee or an agent. The list is endless so you must do your homework before you start trading to ensure you are maximising your business chances of being as close as possible to the sweet spot.

When chips are down who owns the customer relationship (read profit)?

In many businesses the sales team has control over the relationship with ‘their’ customers - that’s how they see it. Be mindful that the customers should be loyal to your brand, your business, not individuals, not even you.

This is an important lesson for many people. The solution is to model your business correctly. Manage all stakeholders well to ensure that your business is always in control. Your business must earn and maintain customer loyalty. If you cannot achieve this you are beholden to the stakeholder that is in the sweet spot or worse a particular sales person or employee could hold your entire business asset to ransom.

This is an iterative and creative process. You need to consider changing your proposed business model to optimise your chances of success. Remember you can change anything. This is your business and it hasn’t started trading yet - you can re-model it as much as you want. Fun isn’t it?

If your business model looks depressingly in the ‘sour spot’ then you need to go back to Step One. Don’t fear this. It has probably saved you from a failed business.