Summary of
Contents:
Subject
More about Business Models
The Panel: Mary-Ann Massad, Mark Farrell, Pierre A Roberge
The Moderator: Bruce M. Firestone
What is a Business Model?
An Example—Grameen
Another Example—Digg.com
Business Model Tools
The Four Questions for the Panel Members
Answers Round 1
Answers Round 2
Answers Round 3
Answers Round 4
More
Subject:
"Getting the Business Model Right (so that the Harder you Work, the More Money you Make and the Harder it is for your Competition to Copy you)."
More about Business
Models:
Sam Palmisano, Chair of IBM, in
an interview with BusinessWeek (April 3rd, 2006),
put a great deal of emphasis on the importance of Business Model innovation.
Mr. Palmisano is quoted in the article as saying:
"...with product innovation, it's a certainty that your
competition is shortly going to copy what you have done. With business-model
innovation, though, if you can come up with a unique way of doing things, it's
much tougher to react to."
The reason Business Models are much tougher to copy is that the Business Model implies that there is a whole eco system that you have to copy before you can compete.
For example, Walmart's Business Model ties its supply chain intricately to its individual stores through a unintermediated electronic platform which basically means that the right number and sizes of hockey skates show up in a Walmart store in rural Ontario while basketballs are showing up in the right amount in the right stores in Talahasee. And many of these products direct ship from manufacturer to store reducing the intermediate step of warehousing the stuff in giant Walmart warehouses. It has proven exceedingly difficult to replicate this system.
For a newer business model, like, for example, Digg.com, you can easily copy their website voting system but it is exceedingly difficult to replace the relatively homogeneous readership of this new age Internet newspaper who also happen to act as headline writers, journalists and editors (at zero cost by the way).
So the questions we want to address are:
1. Are business models important?
2. How do they differ from business plans?
3. Do your clients, students, colleagues, customers, suppliers, competitors recognize the importance of business models?
4. Can innovation in business models help North Americans
compete against hard charging Chindia (
5. Can you give examples of innovative Business Models which: a) reverse out some of the work to customers and suppliers, b) produce custom products from standard inputs, c) can be largely self capitalized, d) can acquire new customers and clients efficiently at low cost using smart marketing and earned media, e) involve some innovation, f) have some differentiated value that make it harder for their competitors to copy, g) have short or even negative cash conversion cycles?
6. What tools or readings would you recommend to the audience?
7. So now that you have a sound business model, do you have what it takes to be an entrepreneur?
8. What are the characteristics of a successful entrepreneur?
Re. the latter question, some of the qualities required include:
a. The ability to execute.
b. The ability to sell (not only to clients and customers but to sell your ideas to employees, suppliers, partners, shareholders, banks, etc.)
c. The ability to set and achieve goals.
d. Demonstrate some flexibility in how you achieve your goals.
e. Bring some creativity and innovation to the endeavour.
f. The ability to bring in good staff.
g. The ability to make decisions with less than perfect data.
h. The ability to deal with stress and uncertainty.
i. The stamina to work hard.
j. The ability to lead.
k. The ability to do many things in parallel.
m. Access to finance.
The Panel:
- Mary-Ann Massad, University of Ottawa Alumni (B. Commerce Honours 1985) is the founder and CEO of the Knowsys Group, a strategic IT and management consulting services firm that has grown and flourished under her leadership into a multi-million dollar organization with an impeccable reputation with Fortune 100 companies in Canada, USA, and Europe.
Mary-Ann has enjoyed over 22 years of experience in management consulting, systems integration, and outsourcing working with government, financial services, and utilities industries. Her career before the establishment of Knowsys Group in 1995 included senior management, partner, and consulting roles with Quantum Information Resources, APG, CGI Group, IBM, Ernst and Young, and Keane Consulting.
Mary-Ann’s achievements include the management of portfolios of large scale systems integration, infrastructure, and applications development projects in excess of $400 MM. She has led and managed teams from 150 to 1000 people, and personally generated consulting services revenue in excess of $75 MM.
She leverages her knowledge in leadership, sales, marketing, finances, human resources and project management to teach would-be and up-and-coming women CEO's how to turn their businesses into multi-million dollar enterprises with her new book entitled, Move from Employee to CEO of Your Own Destiny, available on Amazon.com and www.knowsysinc.com. Mary-Ann is working on a second book which will be released in 2007, entitled, Master Your Corporate Destiny through Intrapreneurship – Harnessing the Entrepreneurial Spirit within the Corporation.
Mary-Ann is a two-time RBC Entrepreneur of the Year nominee and a member of the Women President’s Organization.
- Mark Farrell, B. Admin. – Chief Executive Officer, Director & Co-Founder
Mark Farrell is the co-founder of KidsFutures and has served as Chief Executive Officer since
its inception in June 2000. Mark brings a business background and leadership
skills to the Company, which was gained through an array of activities that
include owning and operating several successful businesses as well as
experience in professional sales and key account management. From November 1997
to May 2000, Mark owned and operated the exclusive distributorship for the Mars
Corporation in
Mark also serves as Director and Secretary of the
Foundation Board for the Child Development Institute, a not-for-profit
organization committed to strengthening families and promoting healthy child
development. He is also actively involved in Youth in Motion's Top 20 Under 20
national youth and awards program. Additionally, Mark volunteers annually as a
judge for the CIBC Entrepreneur of the Year Award hosted by Advanced Canadian
Entrepreneurship (ACE), a national not-for-profit organization dedicated to
fostering entrepreneurship in
Mark lives in
The Moderator:
Dr. Bruce M.
Firestone, B. Eng. Civil, M. Eng.-Sci., PhD.,
Entrepreneur-In-Residence, Entrepreneur en résidence,
School of Management, University of Ottawa, Founder, Ottawa Senators, Adjunct
Research Professor, School of Architecture, Carleton University, Commercial
Realtor, Metro Suburban Realty Ltd.
What is a Business Model?
Business Models are the ‘engine’ of a business or
organization. They describe, usually in graphical form on one page, the relationship between customers and clients on one
hand and the business and its suppliers on the other hand. They must also
include an ‘orthogonal’ dimension—the marketing dimension which will show how
the business will acquire customers and clients in a cost effective manner.
If your cost of acquiring clients or customers is too high,
your business is doomed. Remember Pets.com of the dot-com era of the late
1990s? They thought they could ‘invest’ in Super Bowl commercials (at more than
$2 million per 30 seconds) and sell dog food for Fido over the web. How dumb is
that? Someone is going to have to go into a warehouse somewhere and pick 10
pounds of dog food out; he or she is a low wage slave and they have to get the
right brand of dog food and the right size and then take it to the shipping
desk where someone else will get it ready for shipping—first by truck, then by
plane. Now Fido’s food is at the hub and it gets transferred to another plan to
come to your town to get put on another truck to be delivered to your door and
you are not home. You get a message posted on your door so you get in your car
to go to an industrial ‘park’ somewhere to pick up Fido’s food only to be told
that there are some custom and excise taxes owing which you pay. You only do
this once and Pets.com is long gone. It isn’t very good for the environment
either. It is a heck of a lot more efficient to ship 10,000 pounds of dog food
to the local grocery store and for you to simply pick up Fido’s food when you
are there anyway picking up everything else you need.
A business model with a spreadsheet showing a single
customer’s experience would probably have told the story and saved everyone a
lot of money.
So a business model typically shows your business in the
centre of the page. On the right hand side are your clients and customers and
on the left hand side are your suppliers. Goods and services and information flow from your suppliers to
you; somehow you add value and then goods and services and information flow out
the other side to your clients. Money and information
flow in the opposite direction. This is a typical business model. Sometimes
though, there are direct relationships between your suppliers and your
customers (e.g., some Spas allow direct contact between their suppliers (say,
for example, their customers make direct appointments with their hair stylists
or massage therapists or manicurists)).
Sometimes, money flows in the other direction—staying with
the Spa industry, occasionally a Spa might pay a customer. For example, the Spa
might find it beneficial to pay a local celebrity to have their hair done at
the Spa in the hope that it will attract more and better clientele.
A business model allows you to sort out all these
possibilities and makes you money or prevents you from losing it.
You will also want to look at who are the suppliers to your
suppliers and who are the customers of your customers. By looking at more than
one dimension, you may discover you are part of a whole business ecology and
there are still more relationships you can explore and exploit.
Additionally, you will probably find it useful to have
another single page spreadsheet that
demonstrates how the cash engine of your business actually works. This
spreadsheet is not a spreadsheet that forecasts revenues and expenses that you
see in so many business plans which typically show that if you capture some
percentage of the overall market within a certain number of years, you will
have ‘hockey stick’ growth and make you and all your investors millionaires.
These are usually not very helpful.
Instead, what you are focusing on, typically, is the value
you bring to a single client or
customer. Here is an example of how a HR professional could go about
demonstrating her value added proposition to a single client: http://www.eqjournalblog.com/?p=24.
There is also a spreadsheet available for download at: http://www.dramatispersonae.org/ValuePropositionHRProfessional.xls.
If you can demonstrate a compelling value proposition for a
single client, you can probably get one, two or three launch clients to sign up
with your new venture. Once you have three clients, you start to see a pattern
develop, you will gain confidence, you will receive feedback and you will learn
how to further improve your value proposition.
There is also a brief description of what Residential
Realtors are going to have to do to demonstrate their value proposition and
turn back the FSBO (For Sale By Owner) tide at: http://www.eqjournalblog.com/?p=23.
A recent
GradeATechs.com was started for less than $10,000 and now
operates in
Here is a spreadsheet
that shows their value proposition, one customer at a time. Note the return on
investment (the IRR for a client) is a fantastic 43% per day. Now that is a compelling business model and value
proposition.
Business models not only impose discipline on a for-profit
enterprise but are also a useful requirement for Non-Governmental
Organizations, charities, not-for-profit corporations and other types of enterprises.
A business model allows the entire organization to maintain its focus on its
core mission. In the case of for-profit businesses, it gives the enterprise a
greater opportunity to succeed.
Business models are not only essential for start-ups and established
enterprises but are as useful to the intrapreneur as to the entrepreneur.
Starting or managing a division or new initiative in an established
organization requires business modeling skills as well.
After all, who is more likely to succeed in a large,
established business? An employee who requires $10 million in start-up capital
from the enterprise or the one that has three pre-launch clients who will put
up half of the needed capital and take the first six months of production? To
obtain the latter requires a sound business model that pays attention to the
marketing dimension and cost of acquiring customers.
Customers are not just nice to have but they also play a
valuable role in designing new products and services—the entrepreneur or
intrapreneur can reverse out some of the work to them and obtain a superior
product (or service) as well.
As mentioned above, business models can also go a step
further; they can portray the entire business
eco-system, which may involve a second (or third) dimension on both the
demand-side and supply-side of the enterprise; e.g., the role that the clients’
clients and suppliers’ suppliers might play in the success of an enterprise.
Business models are a relatively new field of research and
play a key role in formulating a successful business plan. The BMC is designed
to generate interest in and research on business models and encourage
entrepreneurship and intrapreneurship on the part of
Business models are one of the essential ingredients to not
only launching successful companies in developed nations but less developed
countries have also come to recognize that unlocking entrepreneurial abilities
is one of the key ingredients to economic takeoff. It wasn’t until
An Example—Grameen
Look at the business model of Grameen
Bank in
Muhammad Yunus, Noble Peace Prize Winner 2006
Grameen Bank of
1. Other Banks will only lend to people with collateral. To him that means they only lend to people who don’t need money. Grameen Bank will only lend to people who do need the money. As a result, they don’t take or ask for any collateral.
2. By not taking any collateral, most Banks believe that loan losses will be unacceptable. Not so. Grameen Bank has a recovery rate of more than 97%.
3. The less money you have, the greater poverty you are experiencing and the greater your need, means you go to the front of the line for a loan at Grameen Bank.
4. Most banks in
5. The borrowers/members/depositors of Grameen
Bank are also the owners so borrowers feel a loyalty to their bank and feel the
need to make sure that their loans are repaid. It is similar in that way to
Co-op banks in
6. When you belong to a co-op, they treat you like a real person. They trust you. They will give you a loan when you need it. They don’t just use scoring machines (which all other Canadian Banks do) and, if you fail the machine test, sorry, the loans officer in a major Canadian Chartered Bank has no flexibility to approve even a $100 loan. Despite the fact that the Caisse still uses a human approach to lending based on trust, their loan loss ratio is less than .5%, significantly lower than most major chartered banks.
7. Grameen Bank has a $400,000,000 USD lending
book and over 2 million clients in
8. Muhammad Yunus has correctly identified micro credit as the most efficient and effective means of lifting people out of poverty by giving them the means to start a personal business that will sustain the borrowers and their families. A business has the unique advantage of producing recurring income. These are not handouts. They are giving people ‘fishing rods, not fish’.
9. Yunus criticizes development agencies as always doing things like studying ways to reduce poverty or working indirectly through still other government or NGO bodies to do things that again are indirect– like build a dam. He believes as I do that entrepreneurship is the most efficient user of scare capital and scarce resources; by giving micro capital directly to the people, he lets them decide how to self organize to the greatest effect. There are no intermediaries, no ‘wise’ bureaucrats telling them what to do. And by the way, making efficient use of scarce capital and scarce resources also happens to be better for the environment.
And Grameen makes a profit, every year.
Business models count and make a big difference in the
survivorship of new enterprises everywhere*.
(* To read more about conditions for economic takeoff and
the role of entrepreneurs, please refer to: http://www.eqjournalblog.com/?p=26)
Another
Example—Digg.com:
Digg.com’s founder, Kevin Rose made
$60 million in 18 months. Kevin is just 29 years of age so there is still time
for you!
Kevin Rose, Founder, Digg.com (BusinessWeek August
14, 2006)
While great execution is really important, having some type of innovation in your business model can help you create a sustainable advantage; i.e., you need to have some type of ‘pixie dust’ or differentiated value in your organization’s business model. This creates a franchise or concession for you that is hard for others to copy.
Let’s look at the Digg.com model. What makes it different? What is its differentiated value?
1.
It
is a new model for a newspaper uniquely adapted to the Internet.
2. It is not simply the online version of the New York Times or some classified advertising page transferred to the Internet.
3.
It
is a digital community made up of a fairly homogenous demographic—80% are male,
mainly young techie readers.
4.
Readers are also contributors.
5. Readers dig up interesting stories from all over the web and post brief synopses to the site and links to them whereupon other readers vote on them—the most popular ascend the page.
6. The site harnesses the competitive instincts of the readers/contributors to compete to see whose story will lead.
7. The site works because of its homogeneous demographic—contributors only post stories that will be of interest to the group.
8. The site is dynamic—leading stories change by the minute or hour.
9. Digg.com’s cost for headline writers = ZERO.
10. Digg.com’s cost for journalists = ZERO.
11. Digg.com’s cost for editors = ZERO.
12. Digg.com’s cost for distribution = ZERO (at least, the marginal cost is practically zero).
This is a lot of pixie dust. I think Digg.com is important for another reason—I believe that it is important for communities that are working together to be reading the same things, to share a common culture. If you think about it for a moment, many of the communications you have in a given day are made much easier by possessing a common culture; you don’t have to explain where you are coming from and the context of what you are saying in every conversation you have.
Because Digg.com has such a large, homogeneous readership base who are so involved in the whole enterprise, it would be pretty hard to knock off. It is easy to copy the voting system, but hard to duplicate the culture. That is why business models are so important—they are a defendable asset, a concession or franchise and can result in a long term sustainable competitive advantage and enterprise.
However, someone else could do something interesting with the Digg.com model but not in their space. For example, there are a lot of people interested in cooking or yoga or health or collecting art. So someone could start a ‘competitor’ to Digg.com (it wouldn’t really be a competitor, more like ‘coopetition’) focused on something like collecting art and probably be successful too.
One last thing about the Digg.com model—look at the complexity of the relationships. Digg.com’s clients are it advertisers. Its clients’ clients are it s readers. (Readers are obviously clients of Digg.com’s advertisers.) Digg.com’s suppliers are its readers (remember they dig up the stories, write the headlines and perform as editors through the voting system). But the suppliers to Digg.com’s suppliers are its advertisers. (That is, readers are supplied goods and services by Digg.com’s advertisers.) This incestuous nest of relationships makes Digg.com’ model powerful and self-reinforcing.
Now the innovative nature of Digg.com would be pretty useless without good execution so creativity is a necessary condition for the kind of success Mr. Rose has had but not a sufficient condition.
Business Model
Tools:
Business models will score well using our free online tool
(the Business
Model Scoring Test) when they tend to have the following characteristics:
a) significant
differentiated
value;
b) emphasis
on pre-sales
and building cashflow through early acquisition of customers and clients;
c) focus
on self-capitalization;
d) involve
smart
marketing to keep the cost of acquisition of customers and clients low;
e) reverse out some of the work to
clients or suppliers*;
f) design
an enterprise that creates
custom products (or services) from standard inputs;
g) has a short or negative cash
conversion cycle*;
h) provide
an opportunity that creates more value than a JOB and can outlive the founder
of the enterprise.
* For example, Dell's web site allows its
clients to design and customize their PCs for their individual needs. Dell then
builds only to order and can produce a bewildering variety of PCs and other
products from standard inputs. (Interestingly, Dell has a negative cash
conversion cycle—they get paid before they build anything and, indeed, they get
paid before they even have any inventory on hand. Their JIT inventory system
compels suppliers to provide inventory only minutes before the products are
assembled by Dell and after they have been paid.)
You are encouraged to use free online tools provided for
this competition including:
a) the
Business Model Generator, BMG;
b) the
Business Model Scoring test, BMS;
c) the
Guerrilla Marketing test, GM.
The Four Questions for the Panel Members:
- Can you give an example
of an innovation in a business model that you are personally familiar with
that made a significant difference in their or your own success?
- Can innovation in
business models help North American and European companies fend off
competition from hard charging
- Can you give us an
example of how the Internet has allowed companies or other organizations
to ‘mass customize’ their offerings or reverse out the work to their
client, customers or suppliers?
- What do you think is the
one most important quality that an entrepreneur or intrapreneur must have
to be successful?
Answers Round 1:
Mary Ann-
In my own business, the keys to my success were:
- Getting the best people
to work with me.
- Retaining them.
- Keeping staff churn to a
minimum.
- Compensating them well
above industry average by making most of them sub contractors not
employees.
- Keeping overheads low
when times in good times and lean times.
Mark-
In our business, we did the following:
- We white labeled our
product so unlike our competition (Aeroplan or Air
Miles), our clients’ brand were front and centre not our own.
- We shared consumer data
with our clients which our competitors didn’t or, if they did, they
charged a fortune for.
Let me give you an example of a revolutionary business
model that will inflict a lot of pain on traditional telecom companies—Skype:
- Used P2P computing.
- No central server/no
central office.
- As more people join the Skype network, more people can talk to each other over
the Internet for free and the more valuable their network becomes (Network
Effects similar to the advent of the fax machine. After all, if there was
only on or two fax machines on the whole planet, they wouldn’t be too
useful).
- People only pay Skype to make a call to outside lines.
- Skype
has a negative cash conversion cycle.
- Skype
users are a part of their culture which has become a defendable asset (a
franchise or concession…)
Answers Round 2:
Mary Ann-
We need to demonstrate flexibility. If the elephant is
invading your space, adapt or get out of the way. We also have intangible
assets like creativity, imagination and respect for IP (Intellectual Property.
Mark-
We still have a number of advantages including:
- A culture or risk
taking.
- A culture of Venture
Capital.
- By and large, a lack of corruption
and a respect for the sanctity of contracts.
- Also, we do all our
software development in
Much lower costs in
Moderator-
Education, including continuing education, is one of the
keys to continuing success for developed nations.
Answers Round 3:
Mary Ann-
Today, you can go online at Levis Strauss, for example, put
in your measurements, your preferences or whatever and get a pair of jeans
fabricated to your parameters and delivered to your door in not time.
Mark-
We can now do a la carte analytics for clients at a
fraction of the cost using a web interface.
If you go to Blue Nile.com, which I had to do recently
since I just got married (!), you can learn about diamonds in self taught
online tutorials, and then customize a ring and pay for it in less than 15
minutes. Fed/ex will bring it to your door in just two days.
The Internet is increasing personal productivity hugely—the
Blackberry is an example of that.
Answers Round 4:
Mary Ann-
If you want to know who really is keeping you from success,
just look in the mirror. Self knowledge is your key to success.
Mark-
Selling is Number 1 in my view. Not just selling to
customers but selling your ideas to your staff, your shareholders, your investors,
even to your suppliers to give you say better costs and delivery.
Pierre-
Trust. If people don’t trust you, they won’t buy from you,
employees won’t want to work for you, suppliers won’t deliver and customers
won’t pay you.
(End of event.)
To read more
about how entrepreneurs create value for themselves, their stakeholders and
their nations, and for other topics, please refer to:
http://www.dramatispersonae.org/UOttawaHomecomingSpeech16September2006_bilingual4.htm
http://www.dramatispersonae.org/UOttawaHomeComingSpeechSeptember2006PPT.pdf
http://www.dramatispersonae.org/BuildAndHold.htm
http://www.dramatispersonae.org/CreditorProofing.htm
http://www.dramatispersonae.org/BootstrapEntrepreneur.pdf
http://www.dramatispersonae.org/GTBR/GettingTheBusinessModelRightDefinition.htm
http://www.dramatispersonae.org/GTBR/GettingTheBusinessModelRight.htm
http://www.dramatispersonae.org/MayorsBreakfastPDFPartial.pdf
http://www.dramatispersonae.org/