A good business model converts innovation into economic value
Over the weekend I read and responded to a tweet from Bill Gross – a US-based serial entrepreneur who has founded over 100 companies in the last 30 years.
The tweet read:
I don’t fully disagree with Bill’s comment, however I do think that it requires further explanation, granularity and context.
It is certainly true that all companies have a business model. Some of these are good business models and some of these are bad business models. There are also business models that convert innovation into economic value, but there are plenty that do not.
I therefore do not believe that a business model can be simply defined as the conversion of innovation into economic value.
I believe a business model is better defined as how a company defines, creates, delivers, manages and optimises its value proposition.
The key to this definition resides in the definition, creation, delivery, management and optimisation of one or a series of value propositions.
Let’s explore these terms further.
Define – In the context of an overarching business model, searching for and defining a clearly articulated value proposition that resonates with real customers is central to every business model activity your company engages in. It is also the first step in the deliberately chronological list of terms that relate to the definition of a business model above.
In other terms, this is both the vision/concept and customer development phase.
Create – The creation of value can come in various forms, but primarily, at least in a technology company, through product development. This is essentially turning your vision/concept, as well as the value proposition you refined with customers into something that’s real, something that can be purchased or monetised in some repeatable and scalable way.
This could also form the customer creation phase.
Deliver – The delivery of value in the context of your overarching business model consists of the activities and channels through which you deliver the value proposition you’ve created to your customer segments.
This can mean marketing, sales, distribution, partner channels and various other relevant activities.
Manage – The management of your value proposition may also come in various forms, but put simply, consists of the activities that constitute effectively and repeatedly executing all nine building blocks within your business model.
This may mean a relevant process or procedure, but could also constitute any type of oversight activity that exists.
Optimise – Seeing that a business model is never complete, and that product market fit is merely a temporary state, constant optimisation of your value proposition and the various building blocks within your business model is necessary if you are to continue delivering unique value to your customers. Optimisation constitutes the activities that enable you to achieve this.
This may include data analysis, customer interviews, hypothesis testing or any other form of activity that enables you to test, learn and make something better.
This isn’t to say that you don’t explore and realise new innovation, products or value propositions, but simply aims to highlight how the definition above has clear relevance.
In order to define, test and iterate a business model, I tend to think the business model canvas is a great tool. But many like the lean canvas, or a flurry of other variations that now exist.
You’ll notice that each of the building blocks that exist within the business model canvas are linked to each other.
As an example – value proposition, channels and customer segments directly affect revenue whilst at the same time; key activities and resources directly affect cost structure (ultimately, as you’re probably now thinking, everything affects everything in some way or another).
This is a key insight as you begin the journey of developing a hypothetical business model that can be tested and validated, and then a validated business model that can be executed repeatedly at scale.
The definition above has certainly helped me create, articulate and validate an early stage business model, as well as work with large companies to do the same for their new initiatives.
Having said that, I’d be interested to see what your definition is. Do you have something better, or maybe something different?