Saturday, September 11, 2010

Business model shift or drift?

It has been recognized that business models need to be adaptive and may change incrementally or radically, in particular in the early stages of a new venture, and need to be transformed when faced with disruptive innovations or changes in the environment.

However, how would one differentiate between the need to change the business model and the fact that often events take their own way and start drifting? And how to make a choice between sticking to the initial model or committing yourself to the new emerging model?

For example, in my work with a start-up company developing a potentially very innovative product, they need to do consulting to keep a cash flow. This consultancy is very successful but also time consuming, keeping then away from making major progress with their product. Should they maybe become a consultancy company?

In this area we can probably learn from strategic management, so a quick check of Wikipedia brings us to ‘strategic change’. Relevant concepts discussed there are ‘strategic drift’, a gradual change that occurs so subtly that it is not noticed until it is too late (Handy, 1989) and ‘strategic inflection point,’ a time in the life of a business when its fundamentals are about to change (Grove, 1999).

However, while this literature and the cases may give us some insight on how business model transformation for more established companies, it seems less suited for the more entrepreneurial start-up companies who operate much more in a greenfield scenario and have to deal with the fact that there is no proven, established business model to start with.

Here are some initial thought that may be considered in making a choice for a business model or business model change in a start-up scenario when it is it is hard to predict which business model is better in terms of profit or success and when you have to decide whether you should stick to your initial business model or commit yourself to a new business model.

First think about consistency (and synergy). Are the elements of the business model consistent with each other. Do they fit together and if possible reinforce each other so that they create synergies. This follows the age-old credo that the whole is more than the parts. [updated 15 October 2010]

Second think about scalability: Choose the one that has the biggest potential in terms of what can happen if it really takes off. In the previous example, it is the product model that can turn the start-up into a large company much faster than the consultancy model.

Third think about flexibility. Choose the business model that still keeps the most options open and is most easy to adapt until you know more about your customers, see also Osterwalder’s post on customer development.

Fourth think about innovativity. Choose the business model that differs most from existing business models, in particular if you need to differentiate yourself or what you want to achieve or offer is very different from the existing situation.

Fifth think about simplicity. Choose the business model that is the most straight forward. Complexity will follow automatically when you start going into the implementation details.

Sixth think about repeatability. Will it be possible to turn the business model into a formula that can be repeated. This makes it possible to grow outside of the current product/market combination. It may even be possible to enter completely unrelated industries where the same business model can be applied. [updated 15 October 2010]


Erwin Fielt said...

For scalability and repeatability in see also Steve Blank's discussion of startups: a startup is an organization formed to search for a repeatable and scalable business model.

Anonymous said...

Congratulations! It's a great post, I was looking for advise about how to evaluate and choose between several business models.

Jeet said...

Amazing!! for two notes, one the road to making a sound BM is explained in simple terms, second - i could clearly visualize where we are in our BM and what we need to do to adhere to the 6 maxims. Thanks for the thoughts.

Anonymous said...

Is there a sample BM with detail that you can share for a startup. Especially, one that employs the elements you discussed. Using the BMCanvas where and how is the details designed or reported--the "how to implement the 9 key points?

Thanks for your post it was very informative.

Niquenya Fulbright said...

This is a good checklist to hold yourself accountable to developing a solid business foundation.

Thank you for this simple method to evaluate your business model.