Date: February 7, 2011

Author: JT

Tags: , , ,

1 Comment »

What Makes a Good Business Model?

imageThis was the question posed on the McKinsey Quarterly forum.  The responses were as you would expect: a litany of things a business model (plan) should do.

Yet, there is another family of generalities not addressed and which I find typically overlooked.

Yes, if you’re writing a business plan, defining your business’ model, there are a few things a basic business plan needs to address:

 

  • What must it do?
  • How must it do it?
  • Where is it done?
  • When is it done?
  • Why?

Here’s what is missing: Just as important, arguably more so, is addressing what the business is NOT:

  • What must it not do (if only for now)?
  • How should it not be done?
  • When should it not be done?
  • Why not?

The NOT component is very important. I speak to entrepreneurs about this monthly, at Ann Arbor SPARK events, and put the opening segment into a post, “Even a Piece of String Will Do.

For instance, as a product manager I may educate the Sales team about a new product offering. I may describe the product as being for customers generating at least $250M/yr gross revenue, in three industries (x,y,z), and typically having at least 1,200 employees. While I told them where the product’s focused, equally important, I told them where -not- to waste their time.

A good business model, a good business ‘plan,’ is of greatest value to the owner/writer. Crafting it helps them work through the issues. It also gives a constructive platform from which to make ongoing decisions—rather than by the seat of their pants.

The best business model? “Having one” is a good place to start.

(photo credit: Steven Goodwin)

1 Response to “What Makes a Good Business Model?”

  • JT February 9, 2011 at 1:16 pm

    This topic generated some interesting comments in other venues. The most notable was this:

    How can you develop a business plan if you don’t first understand where the business is, or needs to be, positioned in the value chain? In other words, how will you create, deliver or capture value? Are you a product company; import/export company, research company? Are you global, domestic, local? How will you and your customers reach one another? For every model there are multiple potential business plans. The model is strategic; the plan tends to be more tactical although there can be strategic elements to a business plan as well.

    In hindsight, rereading my post, the commentator is quite right. If you don’t know what it is you wish to build, how to you develop a plan to do it? I’ll take care not to commingle the terms in the future.

    As I thought further, it occurred to me that it can be easy to overlook the fact a model may have already been chosen, consciously or not, when starting to flesh out details of a plan. This made me think a bit further still. Why might someone seem not to consciously evaluate their business model?

    A simple example is deciding to build a new home for yourself. In deciding to build a home, you have stated your business model. After all, it wasn’t to ‘build a skyscraper’ was it? You decided on your business model without conscious thought.

    Consider launching a new product offering at a new company. The business model may already have been chosen for you, now you plan how to deliver within the context of your model. This is probably most true of domestic companies focused inward.

    If I need to deliver product internationally, or simply outside my ‘known’ environment, my model very well may not (probably not?) work at all. Now I have to think consciously about what it is I’ll really do (e.g. create a new model), followed later by defining execution.

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