Understanding Business Models
Earlier in the semester, Professor Angelo Santinelli held a workshop around the concept of business models. A common problem entrepreneurs face is not knowing how to successfully create a good business model. Professor Santinelli shared insight on what a business model actually is, the different elements of the business model and how the business model canvas can be used to create a good business model.
The business model consists of two parts: the narrative and the numbers. The narrative is the description of the stakeholders in the venture, the needs and expectations that the venture seeks to satisfy, the value chain of the venture and the margin. The numbers part consists of the financial statements especially the profit and loss statement and how the finances set together to produce the desired results.
The four elements of a business model are Customer Value Proposition, Profit Formula, Key Resources and Key Processes:
• Customer Value Proposition consists of the target customer and how the venture’s product offering solves a problem being encountered by the target customer.
• The Profit formula consists of the financials especially the profit and loss statement and how the finances fit together to produce the desired results.
• Key Processes enable profitable, repeatable, scalable delivery of the customer value proposition. There are three sub-elements of the Key processes- norms, rules and metrics and the processes. The norms are the culture of the company and how it will approach channels and distributors. The rules and metrics are the credit terms, lead times, supplier terms and margin requirements of the business. The processes are the design and development, sourcing, manufacturing, lead times and supplier terms of the business.
• Key resources are the resources needed to deliver the customer value proposition profitably. These are the technology and equipment, the people, the channels, partnerships and the brand.
The feasibility analysis loop is a critical tool while using business model canvas in the business feasibility phase. There are four parts to the loop:
1. Problem/Solution fit: consists of questions such as “Is this a problem worth solving? Is it big enough/important enough? Is the target customer willing to pay?”
2. Product/Market fit: consists of questions such as “Is this a larger and/or growing market? Can the market be reached economically?”
3. Product/Industry & Competitive Fit: consists of questions such as “Are there barriers to entry or exit? Is rivalry fierce? Are there entrenched players?”
4. Product/Financial Fit: consists of questions such as “Is there sufficient margin to be made? What is the asset intensity required?”
The feasibility analysis loop helps the entrepreneur decide how good the business idea is.
This business model concept is essential for the success of the venture. Once this process is operationalized, it will give the venture a competitive advantage because the product/service is being constantly revised and updated to match the needs and wants of the target customer. As an entrepreneur, the skill to make a good business model is extremely useful to help determine success or failure.