Clarify your Business Model


30 ‘Condiments’ of Business Success
(Administrative concerns)
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Condiment 5: Clarify your Business Model
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Your business model is your plan to make revenue and generate profit from your business operations. This means identifying yo revenue streams and method of delivering your products. *1
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A business model is an “abstract representation of a business, be it conceptual, textual, and/or graphical, of all core interrelated architectural, co-operational, and financial arrangements designed and developed by an organization presently and in the future, as well as all core products and/or services the organization offers, or will offer, based on these arrangements that are needed to achieve its strategic goals and objectives.”
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This definition by Al-Debei, El-Haddadeh and Avison (2008) indicates that value proposition, value architecture (the organizational infrastructure and technological architecture that allows the movement of products, services, and information), value finance (modeling information related to total cost of ownership, pricing methods, and revenue structure), and value network articulate the primary constructs or dimensions of business models.
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A business model describes the rationale of how an
organization creates, delivers, and captures value, in economic, social, cultural or other contexts. The process of business model construction is part of business strategy.
In theory and practice, the term business model is used for a broad range of informal and formal descriptions to represent core aspects of a business , including purpose, business process, target customers, offerings, strategies, infrastructure, organizational structures, sourcing, trading practices, and operational processes and policies including culture. The literature has provided very diverse interpretations and definitions of a business model. A systematic review and analysis of manager responses to a survey defines business models as the design of organizational structures to enact a commercial opportunity.
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Further extensions to this design logic emphasize the use of narrative or coherence in business model descriptions as mechanisms by which entrepreneurs create extraordinarily successful growth firms.
Business models are used to describe and classify businesses, especially in an entrepreneurial setting, but they are also used by managers inside companies to explore possibilities for future development. Well-known business models can operate as “recipes” for creative managers. Business models are also referred to in some instances within the context of accounting for purposes of public reporting. *2
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*Business Model Components:
The two primary levers of a company’s business model are pricing and costs. A company can raise prices and it can find inventory at reduced costs. Both actions increase gross profit. Gross profit is often considered the first line of profitability because it only considers costs, not expenses. It focuses strictly on the way in which a company does business, not the efficiency of management. Investors that focus on business models are leaving room for an ineffective management team. They believe the best business models can run themselves. *3
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*6 parameters that make up a business model.
In 2002 Chesbrough & Rosenbloom tried to corner the important aspects to be considered in order to comprehensively describe the business model of a company.
They define six elements which make up the business model:
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1. Articulate the value proposition, that is, the value created for users by the offering based on the technology.
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2. Identify a market segment, that is, the users to whom the technology is useful and for what purpose.

3. Define the structure of the value chain within the firm required to create and distribute the offering.

4. Estimate the cost structure and profit potential of producing the offering, given the value proposition and value chain structure chosen.

5. Describe the position of the firm within the value network linking suppliers and customers, including identification of potential complementors and competitors.

6. Formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals.
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*Great business models start with the right questions
In order to start working with clarifying the business model of a company or an organization, one can start off by asking questions such as:
Which value creation proposition are we trying to sell to our customers and the users of our products?
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Which connections are we trying to optimize through the value creation of the company?
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In which way is the product/service of the company unique in comparison to those of major competitors?
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Are there any critical connections between the different phases of value creation undertaken?
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Can we describe the activities that we set in motion in order to become better at what we do?
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Which resources, systems and competences must we attain in order to be able to mobilize our strategy?.

What do we do in relation to ensuring access to and developing the necessary competences?
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Which risks can undermine the success of the chosen Business Model?
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What can we do to control and minimize these? *4
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*CREATING A BUSINESS MODEL
For those who are unfamiliar with designing business models, the business innovation factory gives a great five step process for how to make your design. Keep in mind that your model should always be human-centered! They say the five steps are:
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1. Shift: Keep a close eye out for what is happening in the business world. Subscribe to online business articles or magazines particular to your industry. If you find something you think could improve your business, be open to it and adjust accordingly.
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2. Create: Be creative. Use your strategic, problem solving, military brain to think outside of the box and come up with your own changes.
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3. Deliver: Put your thoughts onto paper. There are plenty of resources that will help you to hash out your ideas with a consultant.
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4. Capture: Figure out exactly what your business model is. In short, if you can’t explain it in one to three sentences, you don’t know your idea well enough and need to keep thinking through it.
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5. Prototype and Test: Once you have developed your idea and you are ready to put it into action, make sure you test it out through surveys or demo-runs before you make anything permanent.*5
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As always, trust in your gut, know your abilities, and use the skills of the people around you!
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*1- Tale Alimi, 2016
*2- https://en.m.wikipedia.org/wiki/Business_model
*3- http://www.investopedia.com/terms/b/businessmodel.asp
*4- bookboon.com/blog/2012/09/fundamental-facts-about-business-models/
*5- veteranfranchisecenters.com/business-models-in-2016/

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