New Venture Lab: Equipping Christian Entrepreneurs

In a previous post, I wrote about why business models matter and highlighted key differentiators with some examples.  This Harvard Business Review article summary sheds additional light on the matter of business models and offers some tips for entrepreneurs.

The Idea

The terms “business model” and “strategy” are among the most sloppily used in business. People use them interchangeably to refer to everything—so they mean nothing.

But no organization can afford fuzzy thinking about these fundamental concepts. A business model and a strategy are two different animals. One explains who your customers are and how you plan to make money by providing them with value; the other, how you’ll beat competitors by being different.

A well-thought-out business model also enables you to test and revise your assumptions about customers, think rigorously about your business, and align employees behind your company’s mission.

Sure, the business-model concept unraveled after flagrant misuse by dot bombs. But when you build a sound model that complements your strategy, you equip your company to beat even your toughest rivals.

The Idea in Practice

Two Tests

Powerful business models pass two tests:

1. The narrative test: The business model tells a logical story explaining who your customers are, what they value, and how you’ll make money providing them that value. The story’s plot may turn on one of two links in the generic business value chain:

• making something that satisfies an unmet need; e.g., American Express traveler’s checks gave travelers new peace of mind
• selling something in innovative ways; e.g., Eastern Exclusives distributes restaurant discount-coupon books in bulk to university housing departments, which distribute them free to dorms

2. The numbers test: A business model’s story holds up only if you tie assumptions about customers to sound economics—your P&L must add up. For example, on-line grocery models failed because customers declined to pay substantially more on-line than in stores. E-grocers couldn’t cover their marketing, technology, and delivery costs. Failing either test can prove fatal.

Example: When EuroDisney opened its Paris theme park, it assumed Europeans were like Americans. But instead of grazing all day at the park’s restaurants, Europeans wanted to eat meals at the same hour. Results? Overloaded restaurants, long lines, frustrated patrons. EuroDisney’s model failed the narrative test because it misunderstood customers’ motivations.

Models passing both tests clarify how your business’s various elements fit together.

Example: On-line auction giant eBay combined a compelling narrative with major profit potential. This on-line business “couldn’t be done offline” and still provide value to collectors, bargain hunters, and small-business people. Its narrow scope of activities creates a highly profitable cost structure. For example, sellers and buyers handle payment and shipping logistics—so eBay incurs no inventory or transportation costs and avoids credit risk.

A Strategy Complement

Having a solid business model isn’t enough. You also need a strategy, to plan how you’ll beat your rivals—by being different.

Example: Wal-Mart used Kmart’s business model—but implemented a unique strategy: Rather than trying to be just like its rivals, it promised different value to customers in different markets. It put big discount stores into “little one-horse towns” that competitors ignored. Founder Sam Walton bet—rightly—that if his stores beat city prices by offering name brands (not second-tier, private-label brands), townspeople would “shop [close to] home.”

By: Joan Magretta

Source: Harvard Business Review