Five Steps to Enhance Your Business Model
with the new financial year approaching, now is the time to re-examine your business model
Every organisation must regularly reflect and examine their approach to stay relevant. What are the steps involved in enhancing or reinventing your business model?
1. Understand what your business model is today
Have you articulated your current business model and do you and your team understand it fully? Many executives are unclear what their organisation’s business model is, and that makes it challenging to fine tune it or even suggest a new one. How can you envisage a new model if you are unsure as to how the one you have really operates? Here are the nine components of a business model as conceived by Alex Osterwalder:
- Customer Segments: For whom are we creating value? Who are our most important customers?
- Value Propositions: What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of services are we offering to each customer segment? Which customer needs are we satisfying?
- Customer Relationships: What type of relationship does each of our customer segments expect us to establish and maintain with them? Which ones have we established? How are they integrated with the rest of our business model? How costly are they?
- Key Resources: Through which channels do our customer segments want to be reached? How are we reaching them now? How are our channels integrated? Which ones work best? Which ones are most cost-efficient? How are we integrating them with customer routines?
- Key Partners: Who are our key partners? Who are our key suppliers? Which key resources are we acquiring from partners? Which key activities do partners perform?
- Key Activities: What key activities do our value propositions require? Geographies? Client relationships? Revenue streams?
- Cost Structure: What are the most important costs inherent in our business model? Which key resources are most expensive? Which key activities are most expensive?
- Revenue Streams: For what value are customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each revenue stream contribute to overall revenue?
2. Become familiar with the Business Model Canvas
It is valuable to understand that the above elements interact with each other, and so it is helpful to visualise them on a Business Model Canvas (BMC). The BMC is useful to map your existing or envisaged business model on one page (often A3!).
3. Reimagine your business model
Now you have the opportunity to start to reimagine your business model. For most organisations the customers’ expectations, motivations and issues have changed in recent times. The starting point for a new business model is with the customer segments and the value proposition. Do you really understand the needs, gains and pains of your various customer segments? When did you last have a coffee with some of your customers and just ask them about their world, their ambitions and their challenges? Listening to your customers is a great starting point, because this will help you articulate the customer segment and value proposition sections of the BMC. Get out of the building and start talking to some key customers about their world, not yours. Document the conversations you initiate under the headings of Needs, Gains and Pains, and then get your team together to reimagine the organisation’s value proposition in the future, say in three years time.
Once the value proposition is complete, move to the other elements of the BMC, and re-imagine for your selected time period.
4. Validate Your Business Model using simple experiments.
You now have a reimagined Business Model Canvas. However, the elements of the BMC are no more than a bunch of assumptions. A collection of guesses. You could start to think about implementing some of the BMC elements, however first you should check that the assumptions you have made are valid. What you need to do is develop a series of simple, low cost experiments that validate/invalidate your assumptions in each of the nine boxes. Examples of experiments include making landing pages for new products or services to measure interest levels. As an example, look at the recent launch of the Tesla Model 3. On May 27th, 2016, Tesla opened pre-orders for their Model 3 and within 24 hours, more than 200,000 customers had paid deposits to reserve their place in line — without the physical product existing. Tesla’s cost of advertising was only $6 per car — less than 1/90th of the ad cost of their closest price-range competitor. And the assembly line for the car did not even exist.
5. Align the team around the new vision.
Once you have validated your Business Model Canvas, you need to bring your team along for the journey. Here are eight steps (courtesy of John Kotter) to assist in doing so:
- Create a sense of urgency
- Build a guiding coalition
- Form a strategic vision and derive initiatives
- Enlist a volunteer army
- Enable action by removing barriers
- Generate short term wins
- Sustain acceleration
- Institute change
In summary, Business Model re-invention is not easy. But it is essential to avoid stagnating and losing relevance. As we approach the new financial year it is well worth reassessing the business model of your organisation, business unit or team, to head into next year convinced of your relevance to your customer and knowing that you are heading in the right direction.
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