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Basis for business

Feb 17 2013 12:20 *Ian Mann


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Business Models Made Easy by Don Debelak

WHEN you decide to start a new business or branch out, you are taking a view that the business will succeed.

Whether it is your own money that is at risk or that of others, you should be able to demonstrate the basis for your confidence.

The traditional way of doing this is through your business plan, despite the fact that business plans have proven over time to be a very poor basis for the decision. This is especially true for new businesses in untested areas run by untested people based on untestable assumptions.

Consider the London to Paris Eurostar – a £19.5bn investment that was projected to carry 15 million passengers a year, at which level it would have been a successful and profitable investment. In its first year it carried only 3 million passengers and almost 20 years later has not reached two-thirds of the expected opening number.

There was a thoughtfully crafted business plan for the Eurostar, so why did they get it so wrong? The answer is simply “black-box forecasting”; the projection of the unknown and possibly unknowable.

This raises the question of what to use if business plans are so unreliable. I have long been a proponent of the business model as a more reliable alternative. Clearly, your business plan should contain a clear articulation of the business model, but a quick review of models and templates of business plans will show that this is not the case.

Once you have a clearly articulated business model, you will be able to adjust to reality as it unfolds and stand a good chance of success.

I have observed that people struggled to differentiate between the business model and the business plan. I have observed that even experienced business people cannot articulate the business model on which their businesses rest.

This puts them in danger of not being able to respond as factors change.

The book Business Models Made Easy is definitely the clearest account I have come across of what a business model is, and how to formulate one for your new business.

It will also be of great use to existing businesses as they should review their situation regularly against their business model.

Most new and existing businesses won’t have all the success elements in place at first or all the time. That is not an insurmountable barrier. A clearly articulated business model will enable you to consider modifications to your business operation so it will really produce.

Examples of the business models used in the book have been taken from retail, services, products, personal services, distribution, and the internet.

The author refers to three main characteristics for producing success: having great customers; sales that are relatively easy to make; and the ability to extend the lifespan of the business.

The process has been laid out in clear steps: for each factor there are two aspects and for each aspect three elements.

What are the characteristics of your customers? How many of them are there? How easy will it be for you to find them and what are their spending patterns on your type of product or service?

What is the value of these customers to you? What is the rand value to you of each sale and will there be repeat sales? Will each sale have to be made separately?

The answers to these questions will indicate that you do or do not have good customers.

How valuable is what you sell to your customer? How important is it to them that they have it? Do you have some sort of competitive advantage? What is the relationship between the price you wish to charge and the value the customers perceive they are getting?

What will it cost you to acquire each customer? Are there many ways to purchase or only one? Do you need to support the sale after the purchase? What sort of promotional activities are required to make the sales?

The answers to these questions will indicate the ease or difficulty you will have in selling.

Will this business continue to be profitable? Do you have large margins on each sale or only across sales? Can you up selling and cross-selling? What is the cost per sale?

What sort of investment does the business require? What will it cost to start the business? What will it cost to keep market share? What will it cost to stay on the cutting edge?

The answers to these questions will indicate the prospects for the lifespan of the business.

For investors, a business model is a way to evaluate whether a business will succeed. But for an entrepreneur, it is a tool to create a dynamic business.

The aim of this book is to help business owners deliberately choose a model, then analyse that model to give it the best chance of success, and then, finally, to use the model to write a business plan.

The three factor evaluation process isn’t a pass-fail test, rather is a way it’s to clarify what’s wrong with your business approach so that you can correct it.

Readability: Light -+--- Serious
Insights:      High -+--- Low
Practical :     High +---- Low
 
* Ian Mann of Gateways consults internationally on leadership and strategy. Opinions expressed are his own.    

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ian mann  |  entrepreneurs
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