Discover Problems with Traditional Business Models
Creating a business model can be simple. You simply come up with a great idea to create a product and sell it easily and profitably. Problem solved, right? If you’re lucky enough to create a great product, then yes, you may not need much more of a process. However, most businesspeople need more than just a great idea to become successful.
Business models are too complex to solve in your head
When creating a business model, even the brightest business minds can’t possibly consider the hundreds of factors involved. Sure, the obvious factors come immediately to mind, like:
Products that sell themselves
Little or no competition
Competitive advantage or barriers against competition
But what about the many finer points?
Excessive investment in fixed assets causing intensive rivalries in the industry
Upcoming technological developments that could potentially cut into margins or radically disrupt the industry (think smartphones, the Internet, or radio frequency identification)
Disruption of the industry value chain that could severely cut sales or margins (for example, the Internet’s effect on travel agents)
Proprietary learning curves
Higher buyer loyalty than anticipated
Lower buyer loyalty than anticipated
Unanticipated substitute products (for example, Internet TV)
Governmental action or inaction
Interruption of supply (for example, an oil embargo)
Threat of forward or backward integration of competitors or customers
Reversal of trends
And many more
No human being can factor all the variables in his or her head. Business models simply have too many facets to do the math in your head. Just like a calculator is needed to solve complex math, a structured process is needed to solve complex business models.
Complex interplay in business models
Aside from the hundreds of factors to consider in your business model, you’ll need to evaluate the interplay between the variables as well. What happens to your high-margin product (variable #1) when competitors knock it off and release their own version (variable #2)?
Add a recession into the mix (variable #3) and your supplier vertically integrating into one-half of your expected market (variable #4), and the math can no longer be done in your head.
Savvy businesspeople are subconsciously processing this interplay in the backs of their minds. Ideally, a business model evaluation process should bring the interplay to the forefront of analysis rather than rely on subconscious analysis.
Not all factors of a business model carry equal weight
In case your head isn’t spinning from the hundreds of variables and their complex interplay, don’t forget that some variables matter more than others. An easy-to-sell product with a good niche matters much more than the threat of governmental action. A product with great margin matters more than the ease of selling it.
Just like currency, different denominations carry different weights. To carry on the analogy, if you’re trying to create a $100 business model, it’s going to take way too many nickels to get to $100. You need some $5 bills and $20 bills. The same is true with a business model. The top factors (marketability and margin) are the $20 bills, while other factors are the quarters and nickels.
A business model analysis that weights all factors equally fails to duly emphasize the importance of the marketing and margin aspects. This figure shows such a model.
By weighing components, you can perform a more accurate analysis on the business model. This figure shows you a weighted business model.