Business Modelling: What is it? or What is it for?

Introduction

Historically, there has been no consensus on what business modelling is. Many publications attempt to define what business models are, however, they somewhat miss the mark, as they fail to determine – what business models are for.

I came cross a publication by Achtenhagen L. et al (2013) which took a close look at this issue. The authors asserted that business modelling does not aim to provide a solution. The purpose behind the whole process is to produce a snapshot which can be used as a starting point. This snapshot will undergo a dynamic change further down the road. Equally, there is a strong polarisation about what one ought to do with a complete business model. At one extreme, there is the belief that the business model is a ready-made recipe. According to this, the business model can be defined along the following lines:

Business models offer a novel perspective from which to understand how companies can become profitable, competitive, and sustainable. They offer distinct recipes for how companies do business, including activities and resources, customer relationships, partnering strategies, and revenue models."

On the other hand, others believe that the business model is static and clear-cut, however, it serves merely as a starting point for working out a business solution. What is written in the boxes and columns of a schematic instrument is not significant instead the focus is placed on the elements which do not present themselves readily to the eye:

It has been argued that business models cannot be completely anticipated in advance but instead must be learned over time through experimentation"

My experience as a start-up mentor has found that structuring a business model around a start-up idea is a perfect starting point. However, this will only provide a nice snapshot and as such it would be a major error to rely solely upon it.

When do we need to produce business modelling of start-ups?

Business modelling in the validation stage

What does the process of validating the start-up idea entail? This process builds upon the ‘idea’ which is fundamental in the discovery stage in the context of a real situation where the start-up business is going to operate. By implication, this shall investigate:

• Features of the geographical market: political, economic, social, and legal specifics.
• Features of the target market segments: client groups, preferences, channels to reach segments. 
• Industry features: verticals in the value chain/supply-chain, outsourcing/insourcing, partnerships, supply channels.
• Specifics of the product proposal: technologies, income sources, partnerships. 

Drawing upon this, the entrepreneur can become well prepared to produce a reasonable structure of the prospective company: shareholders, internal systems, culture.

Business modelling tools for validating business ideas: review and research results

Despite being a useful concept; business modelling has been labelled as a ‘management fad’. As expected with a management fad, there are plenty of information which are of no substantial use. Business modelling is believed to incorporate all management aspects into a single instrument, from clients, through to market segments, product, channels distributions, partnership networks, turnover resources, and cost structure, etc. The Business Model Canvas (BMC) by Strategyzer is a prime example of such an instrument.

This business modelling instrument is typically used with the Value Proposition Canvas (VPC), also developed by Strategyzer. Start-up incubators and accelerators for the most part use these two instruments in the business modelling of start-up ideas. A drawback of those two instruments is that they tend to focus on ‘extracting’ the idea from the mind of the entrepreneur so he or she may manage the pitching before an audience. However, the idea fails to apply in practice because it is stripped of its context. As such these instruments are here to study the start-up entity along with its direct clients-vendors. The attention is not called to the complete scope of clients and vendors down the value chain as further down as the ultimate customers as is the case in B2B relations. Additionally, these instruments are not of great use if produced for more than a single market segment.

Another approach to business modelling rests upon constituents of the idea which have to do with the product - market fit. Achieving a precise product-market fit is a major part of the validation stage which entails undertaking numerous pivots by the entrepreneur. A notable example for such an instrument has been developed by the team of Joseph V. Sinfield (Sinfield, J. et al., 2012). This is a simple matrix which studies and produces the answers to the following questions:

To answer these questions, the business modelling matrix requires the use of additional tools such as the Value Chain and 4 of the 7 Ps of the marketing mix.

As a start-up mentor, I have tested a host of business modelling instruments. I have found that the application of a business modelling instrument which focuses upon the product-market fit coupled complemented with further analysis instruments proves to be more effective as compared to the Business Model Canvas by Strategyzer.

Between 2017-2018 I conducted a survey of teams involved in two business simulations in entrepreneurship and digital entrepreneurship in Construction Startup Preaccelerator. The outcome of the study conveyed that 75 % of all participants believe that the set of BMC + VPC is by far short of validating if the idea is to made work. Participants in the pre-accelerator included both start-up founders and members of their teams. Had we merely considered the opinion of the start-up founders, the outcome would not be definitive. Arguably 100% of all start-up founders would contend that the set of BMC + VPC comes short in letting them validate their idea.

Which analysis tools have been the most helpful in validating business ideas: research results

In 2017-2018, I surveyed 100 participants along three business simulations in entrepreneurship. The outcome points out that the instruments which proved to be of greatest use to them in validating their ideas are:

• SWOT and TOWS scored higher, they were credited by 89% of the participants in the Digital Entrepreneurship in Construction, and 43% of the participants in the three simulations.
• Industry analysis and product analysis instruments were credited by 78% of the participants in the Digital Entrepreneurship in Construction.

In conclusion

Managers and consultants are continuously using their best effort to develop frameworks and matrices of a kind to be used as a shortcut and inner track towards diagnosing problems and generating solutions. However, experience suggests that there is no one-size-fits-all analysis instrument at present. Just as seasonal fashion trends come and go, it is more so with new management fads. In fact, there may well be a slight difference between a management fad and a good management instrument. This is exactly why we are advised to ‘test out’ the instruments as it is the only way to identify their constraints. We can then figure out what other instruments they can be coupled with to mitigate their drawbacks. 

In validating start-up ideas, this process is the most crucial, given that the wrong analysis instrument has the potential to turn the future of the company for worse. Comparatively, the right choice of analysis instrument may prove to be the ‘carte blanche’ and may provide a guarantee to securing a sustainable future development of the start-up company.

© Sylvia Pavlova 2019

Sylvia Pavlova MBA CMC Assoc CIPD

Sylvia Pavlova is an international start-up mentor. She has provided consultation to start-up companies operating in the UK, Greece, UAE, Bulgaria, and Austria. Sylvia specialises in start-ups operating in hybrid digital solutions. 

As the Managing Partner of Strategy+ Business Lab. She has created and completed several business simulations in entrepreneurship including the 1st start-up pre-accelerator for validating hybrid digital solutions for the construction industry in Bulgaria. 

Sylvia is also a registered strategy consultant on the ‘Advice for Small Business’ Programme with the European Bank for Reconstruction and Development. Connect with Sylvia on LinkedIn.