Putting Theory Into Practice Part 4: Defining a Business Model and Identifying Key Assumptions
In our last blog – part 3 in our series – we applied design thinking to frame the overall business opportunity. Recall that there are three main criteria all successful new products need to achieve:
1) Desirability: a value proposition that makes sense to potential customer. A solution that address the jobs a customer is trying to get done by hiring the product. 2) Feasibility: what is functionally/technically possible within the foreseeable future. 3) Viability: what is likely to become a sustainable business model.
We applied the “jobs-to-be-done” marketing lens to hypothesize a preliminary “job statement,” also known as the “preliminary customer value proposition: “Construction (and field service) workers want to find missing tools quickly when working in messy and cluttered work sites to improve their productivity.”
We have also formulated a promising solution that we believe we have the technical and design skills to develop and launch. While there are still some technical issues that need to be addressed through prototyping and testing – there are no known show stoppers to prevent us from moving forward in the development process. Though before funding the development we want to make sure the opportunity has good business prospects.
Thus the final criteria we need to hypothesize and test is the viability of the opportunity. Viability can be defined as:
1) A big enough problem worth solving – i.e. the potential market that exist or will exist in the case of an emerging opportunity. a. Definition of market segments and sizes. In creating our job-statement, we have developed some idea or sense of what the market segments are … i.e. who the customers are and where they are located. 2) Our overall business and market strategy to execute and achieve market leadership in the segments we choose to compete.
These two elements form the foundation of our business model: · Customer Value Proposition (i.e. the Job Statement) · Customer Segments (i.e. who the job executers are that aren’t satisfied with their current results) · Profit formula – How do we make money? – (i.e. what is the customer willing to pay and can we build it at a cost that provides sustainable profit?) · Execution resources – What resources do we need to develop and consistently deliver value to our targeted customers?
We could dive into creating a pro-forma profit and loss statement (i.e. a forecast) with the information we have now but before we get into the forecast (and we will talk more about forecasting and the issues and traps of forecasting new products), let’s instead spend some time in formulating the business model to better understand the business situation and start developing our execution strategy.
Recall for our fictitious company “Teknovantage,” location aware product concept is outside of their current business model (i.e. in their white space) and they will need to formulate a new model that may or may not be in their comfort zone. Understanding the execution gaps upfront will help Teknovantage make better decisions.
A caveat though should be stated – while underestimating the execution gap and moving forward can lead to execution failure – it is also very easy to pass on an opportunity that seems too far outside a business’s comfort zone but could very well be the next “big thing”.. a root cause why many companies are poor at innovation is that they become too conservative and only bet on “sure things” which lead to the “me-too” product doldrums.
Thus the purpose of mapping out the business model is to address the white space (uncharted waters of innovation and new products) and help create the business hypotheses (key assumptions) that we can address in our iterative discovery based innovation process. Which leads us to our next innovation tool:
Business Model Canvas
In their book “Business Model Generation” written by Alexander Osterwalder and Yves Pigneur, they provide the following definition for a business model:
“A business model describes the rationale of how an organization creates, delivers, and captures value”
And they go on to say
“The business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems.”
A blueprint for an execution strategy is exactly what we are looking for, albeit at this stage in its early formulation built on our best assumptions. It’s the assumptions we want to pay particular attention to because as we all know what happens when we assume:
“Don’t assume because in makes an Ass out of U and Me!”
In the next installment I’ll dive deeper into the elements of the business model and how Teknovantage can use it to formulate their preliminary strategy that will test and refine as they go.
Here’s to creating an innovative business model starting with a clean business model canvas!