How to Build a Business Model

oktober 25th, 2012 · by John · Weblog EN

You want to start a new business. What is the first thing you need to do? Most consultants would say, you have to write a business plan containing business goals, the reasons you think these objectives are attainable and a plan for reaching them. That no doubt is true, but I think that you always need to start with a business model.

A business model describes how your company will create, deliver and capture value for customers and other stakeholders. It is a high-level graphical representation of how the elements of a business fit together, and how they constitute a working system. Just as an architect makes a sketch of how a future building might look like before he makes detailed blueprints, you have to design a business model before thinking of objectives.

A business model contains for components: a value proposition, the customer, the organization and the money making formula.

Value Proposition and Customer

The concepts of value proposition and customer can be distinguished, but never discussed separately. An organization can create value for its customers by helping them to solve a fundamental problem. A value proposition contains: (1) a description of the issue the customer is confronted with, (2) a presentation of the product that addresses the problem, and (3) the value the product will bring, seen from the customer’s perspective.

Organization

Every organization has three building blocks: resources, processes and partnerships. All three are needed to sell, produce and deliver the value proposition.

  • Resources are assets such as people, technology, products, facilities, equipment and brand. Resources can be physical, financial, intellectual or human. They be owned by the company or acquired from partners.
  • Organizations have both operational and managerial processes. These can be activities like training, development, manufacturing, planning, sales and service, but they also include rules, metrics and norms.
  • In our era of specialization, individual firms can no longer control end-to-end value chains. They must specialize in areas where they command an advantage, and create alliances with suppliers and partners to optimize their processes, reduce risk or acquire resources.

Money Making Formula

The key question here is: how can a company create value, which basically is generating cash, for itself while providing value to the customer?

  • You have to generate revenue. By definition the value proposition creates value for the customer. The customer therefore is willing to pay for it.
  • You have to manage the business such that revenue exceeds the costs involved in deploying resources, operating processes and dealing with partnerships.
  • The profit received, after selling and delivering the value proposition should be higher than the change in working capital requirement. If you do not manage your debtors, creditors and inventory, you can end up making a nice profit but with no free cash.

Only when you have defined your value proposition for your customers, and have designed your future organization, can you start thinking of writing a business plan and setting objectives. A business model normally is a graphical representation of the company. It however makes sense to make a mathematical representation of the money making formula. Such a financial model will help you to make strategic projections and set objectives.

 

 

 

 

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