People will always stress that having a well researched business plan is key before you start your business. Although the creation of a business plan is often an important step in the evolution of a business, especially if you need financing or you are not experienced in running a business, it is not necessarily the essential first step. There are two key elements that should be completed before the business plan:
- The business model
- The strategy
what is a business model?
While the word model often stirs images of mathematical formulas, a business model is actually a story of how a business works. In general terms, a business model is the method of doing business by which a company can generate revenue. Both start-ups and established companies take new products and services to the market through a company shaped by a specific business model. In their paper, The Role of the Business Model in Capturing value from innovation, Henry Chesbrough and Richard S. Rosenbloom outlined the six basic elements of a business model:
- articulate the value proposition - the value created for users using the product
- Identify the market segment - to whom and for what purpose is the useful product; specify how revenue is generated by the firm.
- Define the value chain - the sequence of activities and information needed to enable a company to design, produce, market, deliver and support its product or service.
- Estimate the cost structure and profit potential - using the value chain and proposed identified value.
- Describe the company's position in the value network - link suppliers, customers, competitors and its complementary.
- Formulate the competitive strategy - how will you gain and keep a competitive advantage over competitors or potential new entrants.
Joan Magretta in his article Why Business Models Matter took a bit 'below the concept of the business model. Magretta suggests every business model needs to pass two critical tests, the narrative test and the numbers test. The narrative test must tell a good story and explain how the business works, that is the customer, what you value and how a company can provide value to the customer. The numbers of tests means that the profits and loss assumptions must add up. At the most basic level, if your model does not work, then the model has failed one of two tests.
to start the molding process is necessary to articulate a value proposition on the product or service provided. The model must then describe the target market. The customer then evaluate the product on its ability to reduce costs, solve a problem or create new solutions. And one of the market's attention 'needed to identify which product attributes must be targeted and how to resolve product trade-offs such as quality over cost. You also need to identify how much to charge and how the customer will pay.
Think of business modeling as the managerial equivalent of the scientific method - you start with a hypothesis, then test in action and revise, if necessary. The business model also plays a part of a planning tool for management focusing on how all the elements and activities of the business work together as a whole. At the end of the day, the business model should be condensed into one page consists of: a diagram illustrating how the company generates revenue, how cash flows through the business and how the product flows through the business and; a narrative that describes the components of the product / service, financial projections or other important elements not captured in the diagram.
business models and strategy
It 'important to note that completing a business model does not constitute strategic planning. factors of strategic planning the only thing that a business model is not so; competition.
What is the strategy?
According to the Collins English Dictionary, strategy is "a particular long-term plan for success." For our purposes, we will consider the essence of the strategy as a formula to deal with the competition. competitive strategy is to be different and the aim of a corporate strategy is to find a position in the sector in which the company is unique and can defend itself against market forces. To do this the company must choose a set of activities that can provide a unique mix of value.
market forces and strategy
The determination of a strategy is rooted in determining how a company stacks against basic market forces, how it can defend itself against these forces and how it can influence these Strength . Fortunately, Michael E. Porter in his article How competitive forces shape strategy defined these market forces for us. Known as Porter's five forces are:
- The industry - this is the jockeying for position among current competitors, this can consists of price competition, introduction of new products or slugfests advertising.
- The threat of new entrants - the seriousness of the threat of entry depends on the barriers to entry and reaction from existing companies. There are six major barriers to entry: 1) economies of scale 2) product differentiation 3) capital requirements 4) cost disadvantages independent of size 5) access to distribution channels 6) government policy. A new company usually have second thoughts about entering an industry, if the incumbent has substantial resources to fight back, the incumbent seems likely to cut prices or industry growth is slow.
- The threat of substitute products / services - substitutes can place a ceiling on prices that are charged and limit the potential of a sector.
- The bargaining power of suppliers - suppliers can squeeze profitability by raising prices or lowering the quality of the goods.
- The bargaining power of buyers (customers) - customers can force down prices, demand better quality, more services or competitors playing off each other.
Once evaluate how market forces are influencing competition in the industry and their causes, it is possible to identify the underlying strengths and weaknesses of your company, to determine where she comes face-to-face strength and then determine a plan of action. The action plans can include:
- Positioning the company - match your strengths and weaknesses to the company's industry, build defenses against competitive forces or find a position in the industry where forces are the weakest. You need to know the capabilities of your company and the causes of the competitive forces
- affect the balance - take the offensive, for example innovative marketing can raise brand identification or differentiate the product.
- Exploiting industry change - the evolution of an industry can bring changes in competition. For example, in a sector of the life cycle growth rates change and / or descents product differentiation; anticipating changes in the factors underlying these forces and respond to them.
The reference framework for the analysis of the sector and the development of a strategy provides the road map to answer the question "what is the potential of this company?"
Reconciling the business model and strategy
I will use a short example to illustrate the difference between a business model and strategy. Although you might think that Wal-Mart pioneered a new business model for its road to success, the reality is that the model was very different from that Kmart was using at the time. But it was what Sam Walton chose to do differently than Kmart, such as focusing on small towns as opposed to large cities and the low prices every day, that was the real reason for his success. Although Sam Walton model was the same as Kmart's, his unique strategy made him a success.
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