Business Models Are Not Outdated, Here's How to Choose the Right One
I am a great fan of Richard Branson. One of the things that fascinates me about him is his courage; he has powerful intuition. If you have a good idea he’ll say screw it, let's do it. What this tells us, is that Branson’s philosophy of what is crucially important in business is belief.
I love that self-confidence, but I must confess it scares me to death. I see shops opening and closing on the High Street and my heart goes out to them. These are investments by people who have a real belief in themselves and their idea. However, the statistics tell us that half of these new businesses fail in the first year and 80% fail within five years. Many hard-earned savings are put into something that, for whatever reason, ends up a cropper.
How business frameworks took man to the moon
It will soon be the golden anniversary of Apollo 11, which landed a man on the moon. To some people this was a great example of screw it, let's do it, but that could not be further from reality. In order to get a man on the moon, it took years of careful planning, training and testing.
The National Aeronautics and Space Administration published a fascinating document entitled What made Apollo a success?. In 75 pages it describes how they did it, beginning with the overall design of the mission – not dissimilar to a business’s vision and mission statement. This was followed by detailed planning of the operation with continuous tests to ensure that things would work as planned. Throughout this process, there was consideration of what could go wrong in order that it could be avoided from the start. My point being, that Apollo 11's success was not dependent on faith; it was the result of the assiduous use of frameworks.
There was a time when businesses didn't like frameworks. Arthur D Little, the grandfather of all consultants, began his career in 1886. In his early years, he opposed frameworks in the belief that every problem needed a unique solution. This was soon to change. Booz Allen Hamilton and McKinsey entered the fray and showed how the transposition of ideas from one company to another could be beneficial. They and other consultants developed tools which could be applied to almost any strategic or tactical business problem. Simple ideas such as "where are we now, where are we going, how are we going to get there?" were converted into business models that we know under acronyms such as SWOT (strengths, weaknesses, opportunities and threats), MBO (management by objectives) and AIDA (awareness, interest, desire, action).
Academics also got in on the act. Professor Igor Ansoff gave us the Ansoff Matrix; Professor Michael Porter gave name to a number of models including the five forces, four corners, generic strategies, and the theory of competitive advantage. Market researchers developed special tools to measure customer experience (Net Promoter Score), pricing (conjoint), customer value (Kano) and a host of other business challenges.
Choosing the right business model
Whereas a shop may open on the High Street based on little more than a whim, businesses of any reasonable size routinely use tools and frameworks to guide strategy and deal with day-to-day problems.
We use models all the time in business, often without realising it. They give us a sense of confidence. They are a sort of map; a plan of where we are and where we can go. The challenge can be finding the right model to solve the problem in hand.
There are three steps to finding the right model:
- Determining the nature of the problem
- Determining what is known about the problem
- Determining which business model is the best fit
Step one: the nature of the problem
Problems arise in every corner of a business. HR managers, financial managers, and product managers have specific models for their line of work. For the purposes of this discussion, the focus is on models that help business strategy. These can be classified as models for:
- Product management
- Customer analysis
- Long-term growth (General business strategy)
The Business Models Handbook contains 50 models which are classified into these six categories to help narrow down the model that should be used.
Step two: what is known about the problem?
You should assemble all the facts available relating to the business problem. Inevitably this will be patchy. Strategy is a long-term view and the future is never certain. The intelligence is likely to be a mixture of facts and opinions. These may originate internally or externally with their varying degrees of bias. Using the best judgement, the various data is assembled to build an understanding of the problem. This will highlight gaps that need filling and identify whether the intelligence is solid or shaky.
The aim of the data analysis is to answer three questions:
- Where are we now? (Situational analysis)
- Where are we going? (Marketing and business goals)
- How are we going to get there? (Action and recommendations)
Business models can be used to answer the questions. A SWOT model is a good starting point. This puts the problem in the context of your company and the marketplace. Other models are used for different purposes, for example, the 4Ps (Product, Price, Place, Promotion) provide a framework for a product launch. The 4Ps could also be used to add insights into the current strength and weaknesses of a product portfolio. A simple classification of models according to their purpose is as follows:
Type of analysis
Purpose of the model
Examples of models
To summarise the key issues and bring them together
SWOT, life-cycle, Ansoff grid, decision-making models
Marketing and business goals
To show what can be achieved
Porter’s generic strategies, Rogers adoption model, AIDA communication model
How to get there
To show what action is required
4Ps, XY grids, flow models and processes
Step three: which business model best fits the problem?
At the end of step two, you will have a good idea of where you are now and where you want to go.
An important point to note is that business models are flexible tools. If you are short of hard facts, you can produce two or three different scenarios using alternative judgement calls. The results will be such as an upper and lower forecast. Data can be applied to a couple of different models to see which works best. For example, if the business problem is looking at growth opportunities in a new geographical market, it would be relevant to employ a market sizing model - the Ansoff matrix and the 4Ps.
Think of the models as different tools and all with a relevance. You wouldn’t build a house with only a hammer. In the same way, the tradesperson develops skills with a range of tools, so too the strategic planner becomes familiar with different business models by working with them as much as possible.
The Business Models Handbook analyses 50 of the most popular business models and classifies them according to their application for general business strategy, marketing issues, pricing problems, innovation, product management, or customer analysis.