Business Modelling for Validating Start-Up Business Ideas
A study of appropriate business modelling
© 2018 CMC Today and Sylvia Pavlova, MBA, CMC, Assoc CIPD
Business Modelling: What is it? or What is it for?
Not until recently has there been any agreement on what business modelling is.
Publications, for the most part, attempt to define what business models are. All these are good in their own right, however they somewhat miss the mark, for they fail to arrive at the very essentials, notably, What business models are for.
In my own research on this topic, I came upon a publication of Achtenhagen, L. et al (2013)1 which took a close look upon this issue. According to the authors, business modelling often does not aim by all means at producing a solution. Rather, the purpose behind the whole process is to produce a ‘snapshot’ which is to be made use of as a starting point, and to stimulate a dynamic change further down the road. Equally, there is a strong polarization in the beliefs on what one is to do with the ready business model. At one extreme, there is the belief that the business model is a ready-made recipe. As they hold it, the business model comes to be defined along the following line:
‘Business models offer a novel perspective from which to understand how companies can become profitable, competitive, and sustainable. They offer distinct recipes for how companies do business, including activities and resources, customer relationships, partnering strategies, and revenue models.’ 2
At the other extreme come those who believe that the business model is static and clear-cut; however, it serves just as a starting point for working out a particular business solution. Furthermore, it is no big deal what stays written in the boxes and columns of a given schematic instrument. A premium is placed on the realizations from dialogue and exploration which do not present themselves readily to the eye:
‘[I]t has been argued that business models cannot be anticipated fully in advance and that they rather must be learned over time through experimentation’ 3
My experience as a start-up mentor to hundreds of new companies, shows that the structuring of a business model around a start-up idea is a perfect starting point, a nice snapshot; however, it would be a major error to draw only upon one model. Leaders must be prepared to evolve their business model(s) over time.
When do we need to produce business modelling of start-ups?
The first application of business modelling comes in the stage of validation of the start-up idea. Validation is the second of all six Marmar Stages . As per this classification (Marmar et al, 2012), the six stages of business development from their opening down to their maturity are:
5) Profit Maximization
Business modelling in the Validation Stage
What is suggested by the process of validating the start-up idea?
This process builds upon the ‘idea’ which turned up on the Discovery stage in the context of a real situation where the start-up business is going to operate. Often, Models at this stage look into:
- Features of the geographical market: political, economical, social, and legal specifics
- Features of the target market segments: client groups, preferences, channels to reach such segments
- Industry features: verticals in the Value Chain/Supply-Chain, Outsourcing/Insourcing, partnerships, supply channels
- Specifics of the product proposal: technologies, income sources, partnerships
Drawing upon this, the entrepreneur comes well prepared to produce a reasonable structuring of the prospective company: shareholders, structure, internal systems, culture.
Business Modelling Tools for Validating business ideas: Review and Research results
Despite being useful concepts, business modelling have often been labelled as a ‘management fad’. And just as typical for a management fad, there is plenty of information regarding this issue; however, of little substantial use. The belief is held that business modelling should involve all management aspects, starting from clients, through to market segments, to product, to channels distributing the product down to the client, to partnership networks, to turnover resources, to cost structure, etc., and all of this in just a single instrument. As an example of such an instrument we may point to Business Model Canvas (BMC) by Strategyzer5.
This business modeling instrument is typically used coupled with the Value Proposition Canvas (VPC), the latter being developed again by Strategyzer. And these models of Strategyzer are just updated versions of previous instruments by earlier consultants. Start-up incubators and accelerators, for the most part, may make use of these two instruments in the business modelling of start-up ideas.
A drawback of these two instruments however, is that they tend to focus upon ‘extracting’ the idea from the mind/perspective of the entrepreneur so he may manage the pitching before the audience for some start-up event. The idea, however, fails to clip into practice for it is stripped of its context. As it turns out, these instruments are here to study none but the start-up entity along with its direct clients-vendors. The attention is not called to the complete scope of clients and vendors down the Value Chain, reaching further down so as to arrive at the ultimate customers as is in the instance of the B-2-B relations. Next, these instruments can prove to be hardly of any use if they are to be produced for more than a single market segment.
Another approach to business modelling rests upon nothing but those constituents of the idea which have to do with the Product - Market Fit. Arriving at a precise Product-Market Fit is the major study of the Validation stage which entails undertaking numerous pivots by the entrepreneur. A notable example for such an instrument is the one developed by the team of Joseph V. Sinfield6 (Sinfield, J. et al., 2012). This instrument is a simple matrix which is to study and produce the answers to the following questions:
- Who is the target customer?
- What need is met for the customer?
- What offering will we provide to address that need?
- How does the customer gain access to that offering?
- What role will our business play in providing the offering?
- How will our business earn a profit?
Evidently, in an effort to answer these questions the instrument entails the use of further instruments such as the Value Chain and the 4/7 Ps of the Marketing Mix in addition to the previously mentioned business modelling matrices.
As a start-up mentor, I have been practically testing a host of business modelling instruments. Bottom line, the application of a business modelling instrument which focuses upon the Product-Market Fit coupled with and complemented by further analysis instruments proves to be of much more effectiveness as compared to using only the Business Model Canvas by Strategyzer.
The outcome of the studies I did in 2017-2018 surveying the teams involved in 2 business simulations in Entrepreneurship and Digital Entrepreneurship in Construction Startup Preaccelerator showed that 75 % of all participants believe that using only the set of BMC + VPC fell far short of validating if their idea was workable. Participants in the pre-accelerator happened to be not only start-up founders, but also members of their teams.
If we are to consider just the opinion of the start-up founders, the outcome is by no means definite: 100 % of all start-up founders hold out the argument that the set of BMC + VPC fell short in letting them validate their idea.
Research results –
Which Analysis Tools have been the most helpful in Validating business ideas:
In 2017-2018, I surveyed 100 participants along three business simulations in Entrepreneurship that I taught. The results identified which of the various instruments proved to be of greatest use to them in validating their ideas:
• SWOT/TOWS scored higher as credited by 89 % of the participants in the Digital Entrepreneurship in Construction, and 43 % of the participants in the three simulations.
• Industry analysis and product analysis instruments as credited by 78 % of the participants in the Digital Entrepreneurship in Construction.
As managers and consultants alike we are ever making our best effort to advance our businesses and make it successful by utilizing various business modelling frameworks, or a matrix or other approach which might give us the shortcut and the inner track toward diagnosing problems and generating solutions. However, experience suggests that as yet there has not been discovered a one-size-fits-all analysis instrument. Meanwhile, just as the seasonal fashion trends come and go, it is continues to be so with the new management modelling fads. In fact, it may well be that the difference between a management fad and a tried and true, reputable business modelling approach or instrument is slight. This is exactly the reason why as reputable consultants, we should be advised to ‘test out’ the instruments we bring forward to our clients, for ourselves and in real-world application. This is the only way to find out what their benefits and constraints are; and allow us to figure out what other instruments could be coupled together so we may make up for each model’s drawbacks.
In validating entrepreneurial start-up ideas this process is all the more critical, given that just one wrong choice for analysis instrument could jeopardize the future of the company. Whereas the right choice of analysis instrument may well prove to be the insight providing and breakthrough stimulation towards securing a sustainable future of the start-up company.
About the Author
Sylvia Pavlova is an international startup mentor. She has consulted startup companies established and operating in the UK, Greece, UAE, Bulgaria, and Austria. She is specialized in consulting MBAs when establishing and running their startup companies. Her specialization includes also start-ups which introduce hybrid digital solutions. She mentors MBA alumni of OUBS – UK, Henley Business School – UK, SDA Bocconi School of Management – Italy, University of Leicester – UK.
Sylvia is the Managing Partner of Strategy+ Business Lab (www.spbusinesslab.com). She has created and completed a number of business simulations in Entrepreneurship, as well as the 1st Startup Preaccelerator for validating hybrid digital solutions for the Construction industry in Bulgaria.
Sylvia is also a registered consultant in Strategy in ‘Advice for Small Business’ Program of EBRD (European Bank for Reconstruction and Development).
She has achieved a Masters of Business Administration degree from the OUBS, UK. The MBA program ranks in top 1 % of MBA programs in the world.
E-mail address: email@example.com
1 Achtenhagen, L. Melin, L. Naldi, L. (2013), ‘Dynamics of Business Models – Strategizing, Critical Capabilities and Activities for Sustained Value Creation’, Long range Planning, 46 (6): 427-442
2 Nielsen, Ch. and Lund, M. (2017), ‘Building Scalable Business Models’, MIT Sloan Management Review
3 McGrath, R.G. (2010), ‘Business Model: A Discovery-Driven Approach’, Long Range Planning, 43: 247-261
4 Marmar, M. et al (2012), Startup Genome Report, ver. 1.1.
5 https://strategyzer.com/canvas/business-model-canvas, last accessed on 08/08/2018
6 Sinfield, J.V. et al. (2012), ‘How to Identify New Business Models’, MIT Sloan Management Review, Winter 2012 Research