You won’t hear me use the term “business model” too often. Because I am not sure exactly what it means. I asked a fellow teacher of entrepreneurship, and he said there were a bunch of different definitions. I looked it up in one of the leading textbooks on entrepreneurship, and could not make heads or tails of what they were trying to say. Just a bunch of words with little “content.” The best I can make out, what most people mean when they say business model is what I would call the combination of two ideas that I do understand:
First, strategy. I am going to create a national chain of large low-price, high-selection bookstores, the “Toys R Us” of books. Or, I am going to create an annual reference book which describes the most important companies in the world, a “Webster’s” or “World Almanac” of business. Or I am going to sell digital files of popular music in bite-sized one-tune-at-a-time downloadable form. As much as I would love to claim it, that last idea wasn’t mine – but the first two were.
Second, what I call the “economics” of a business. In my bookstore chain, I am going to sell my books 10-20% below everyone else but I will do more revenue per store and per square foot, lowering my rent, payroll, and other operating costs as a percent of sales by a substantial amount. Combined with my low investment relative to sales (less expensive fixtures, faster inventory turnover), my profits per dollar invested (Return on Investment) will be higher than existing bookstores. This should enable me to attract sufficient capital to build the chain.
So for me, if I understand the loose idea of the “business model,” it is really a combination of strategy and economics. From it flow tactics – where do I put the first store, which companies are in the first Hoover’s Handbook, who do I need to join me on the team to make the idea succeed, how much money do I need and who might be appropriate investors, etc, etc.
Since I always prefer to use language that I deeply and intuitively understand the meaning of, you won’t find me talking about business models too much. So when my friend Lee Wright suggested I look into a book called Business Model Generation, I was a bit skeptical. The fact the book is not yet available on Amazon and had to be shipped from Europe made me even more reticent to check it out. But the website (http://www.businessmodelgeneration.com/) lured me in.
Now, after spending some time reviewing this book, I have to give it “two thumbs up,” as they say. Authors Alexander Osterwalder and Yves Pigneur, working with hundreds of contributors, have studied many different business models and from them derived a simple building-block approach to thinking through a business idea.
One of the book’s great strengths is that it is almost totally visual. The same building block system is graphically applied throughout the book to numerous ideas, including real world ones like Amazon, Apple, Google, Nespresso, Wii, and Cirque Du Soliel. As much as I am reluctant to adopt buzzwords and formulaic approaches to entrepreneurship, this book’s clear system and level-headed approach would likely help most of us entrepreneurs think through our ideas.
I highly recommend it for both practicing business leaders and all of you who are thinking about starting a new venture of any type. You have nothing to lose by giving their methods a shot. Even if you do not adopt their entire system, I think you will find useful ideas about how to think visually – something I am a strong believer in, how to spot patterns – another big idea, and other topics related to the entrepreneurial process. Acquiring this book would be a great way to start the new year! I wish you the best in your ventures and will keep looking for tools and ideas that we all may find helpful.