Two weeks ago we discussed business models and why entrepreneurs should strive to understand how the business that they hope to build delivers value. You can read that column here. Briefly, in that column we said; according to Michael Rappa; “In the most basic sense, a business model is the method of doing business by which a company can sustain itself – that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.” Alex Osterwalder and Yves Pigneur say that; “A business model describes the rationale of how an organization creates, delivers and captures value.”
Today we will conclude our conversation about business models, by discussing a few issues that may not have become apparent from our 3 previous conversations on this topic.
I am making the observations that follow with a single-product startup in mind. The entrepreneur has formed the startup to operate in an innovative new industry that is still undergoing rapid growth and development.
It is often tempting to assume that one company can simply copy or imitate the business model of one of its competitors. That may work in the short-term. In my opinion that is not an approach that confers a lasting competitive edge, certainly not in fledgling markets and industries, and often not in mature industries either. An important aspect of business model development is the deliberate selection among a number of alternative choices regarding product design, customer development, revenue models and cost structure; the wholesale copying of a business model simply because it has worked for another company suggests the entrepreneur has abdicated responsibility for understanding the dynamics at play in each of those critical areas. That is a recipe for a failed startup adventure and investors would be well advised to maintain a wide berth.
I oppose the wholesale copying of a business model that someone else has developed. However, I am a strong proponent of learning from the experience of others startups in the industry – the successes and the failures. There is real value in knowing what has ensured that some startups thrive. There is even more value in knowing what has proved fatal to others.
It might take several attempts before the startup discovers the business model that works best – reflecting an industry in its earliest stage of development. Even then the business model must evolve with the passage of time. Technology changes. Labor markets shift. National economies expand and contract. Opportunities not present in the past will present themselves in the future. Competitive threats that did not exist at the time the startup was formed appear as soon as other individuals notice a new chance to make money. Regulations emerge as a result of changes in political mood. A business model that does not adapt and evolve reflects a startup entrepreneur that does not grasp the nature, extent and complexity of the numerous challenges that lie ahead. Such startups are bound to fail.
The business model is not the business plan. Your business plan should certainly discuss your business model, yet the two are distinct and different. We will discuss business plans at another time. The business model is a framework within which the startup’s activities occur. The business plan is a document whose main purpose is to serve as a record of the startup’s goals, the reasons why those goals make sense and can be achieved, the manner in which the goals will be accomplished and the timeline within which the startup expects to implement its plan – presumably the plan is to become profitable as soon as possible within the tenets of the business model.
Do you understand the rationale behind how your startup creates, delivers and captures value?
Is your business model based on an understanding of the unique circumstances of your startup or is it an attempt to copy what has worked for a company you compete against? If it is an attempt to copy, you might be overlooking opportunities to capture value that are available only to your startup.
Let’s talk again in two weeks. On deck? A business model case study.