Why do we need business models or Mindset behind Business Model Approach

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Entrepreneurship is about creating innovative ideas and transforming them into ventures that generate value. Through the years the only way how entrepreneurs documented their ideas and presented to investors was writing business plans. However, it is widely recognized that business plans immediately become obsolete after first meeting with reality. Business plans are also too long to write, they are seldom updated, almost never read by others (even investors for whom they were written). Nowadays everyone in the entrepreneurship world speaks about business model as more important issue than business plan. There are plenty of materials about what is a business model, how to use them; more than 40 different types of business models appeared since 1985 (M. Porter). However, only a few words said about why and when particular model of business model should be used for idea development and venture creation. This article is aimed at disclosure of mindset behind business model approach to entrepreneurship. Second purpose is to define main ways how business models could be applied to entrepreneurship.

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Why do we need business models or Mindset behind Business Model Approach

  1. 1. CrowdSynergy Team Business Model Analysis Series Global Startup Platform Team Mindset behind Business Model Approach to Entrepreneurship Why do we use Business Models instead of Business Plans? Vasily Ryzhonkov Bauman Moscow State Technical University, Moscow IMIM Business School, Royal Institute of Technology (KTH), Stockholm Founder of Global Startup Platform, Partner of CrowdSynergy vryzhonkov@gmail.comAbstractEntrepreneurship is about creating innovative ideas and transforming them into ventures thatgenerate value. Through the years the only way how entrepreneurs documented their ideas andpresented to investors was writing business plans. However, it is widely recognized that businessplans immediately become obsolete after first meeting with reality. Business plans are also toolong to write, they are seldom updated, almost never read by others (even investors for whom theywere written). Nowadays everyone in the entrepreneurship world speaks about business model asmore important issue than business plan. There are plenty of materials about what is a businessmodel, how to use them; more than 40 different types of business models appeared since 1985 (M.Porter). However, only a few words said about why and when particular model of business modelshould be used for idea development and venture creation. This article is aimed at disclosure ofmindset behind business model approach to entrepreneurship. Second purpose is to define mainways how business models could be applied to entrepreneurship.Keywords: entrepreneurship, business model, business plan, business canvas model, NABC, leanstartup, lean canvas, TRIZ, TRL, Alex Osterwalder, Steve Blank.Copyright € 2012 Vasily Ryzhonkov. All rights reserved. -1-Authored by Vasily Ryzhonkov.
  2. 2. CrowdSynergy Team Business Model Analysis Series Global Startup Platform Team1. IntroductionEntrepreneurship world is overloaded with a plenty of materials, guides and methods on how tobuild your business. Throughout the years12 business plan was used mainly as an instrument ofdeveloping business ideas and as means ofcommunication between an entrepreneur and aninvestor. Certainly more applications could be named,but these are the most essential ones. However, almostevery business plan fails after meeting with reality (or“first customer”3). Many practicians stated the samethought in a different way (see quotes on the page).The funniest thing here that 90% of the entrepreneurs have used business plans in companies theyfounded but: - Only in 65% of the ventures (average total about 4 per entrepreneur) business plans are used. - For 63% of the ventures where plans made, the plans were made to get funding. - 67% of the entrepreneurs would not do business plans if they were not “forced to” do them.4Thus, business world faces contradiction: on the one hand planning is essential for thedevelopment of an idea; on the other hand plans are too long to write, seldom updated, almostnever read by others. The compromise solution appeared with business model concept5 whichcurrently replaces business plan approach (see Figure 1 below). Variety of models of businessmodels appeared since M. Porter in 1985 presented hisCompetitive Advantage model. Entrepreneurship worlduses business model concept more and more: fromacademia where entrepreneurship courses are taught(MIT, Stanford, online courses and others) toentrepreneurs applying it as a guiding principle to start-up.1 From 70s to 90s according to Steve Blank “The Four Steps to the Epiphany”, 20062 Google Books Ngram Viewer,http://books.google.com/ngrams/graph?content=business+plan%2Cbusiness+model%2Centrepreneurship%2Cventure+capital&year_start=1920&year_end=2008&corpus=0&smoothing=33 Quote from Steve Blank’s book “The Four Steps to the Epiphany”, 20064 Martin Vendel’s Research, KTH, Lectures on Entrepreneurship (Business Planning), 20125 Business Model is how an organization creates, delivers, and captures value. (A. Osterwalder)Copyright € 2012 Vasily Ryzhonkov. All rights reserved. -2-Authored by Vasily Ryzhonkov.
  3. 3. CrowdSynergy Team Business Model Analysis Series Global Startup Platform TeamHowever, there is a wide variety of models of business models. Some of them are extremelypopular (e.g. Business Canvas Model6 by A. Osterwalder and Steve Blank, Lean Canvas7 byAsh Maurya, mixed version8 of previous two), some not being extremely useful and effective too(e.g. NABC model9 by SRI International, Technology Readiness Level10 by NASA, TRIZ11 andothers). Comprehensive research “The evolution of the Business Model Concept”12 by AndersSandelin revealed 44 types of business models which have been produce from 1985 till 2010.Plenty of materials (articles, books, theses, presentations, video clips) have been made about howto use each particular model. Figure 1 – Occurrence frequency of selected phrases in a corpus of books from 1920 till 2008But being an early stage entrepreneur, it is difficult to understand and choose the most appropriatemodel of business model. Basically it’s really hard to figure out: - Why and when particular model of business model should be used for idea development and venture creation? - Which model of business model applies in which case (to which industry or project)? - What is business model thinking mindset? - What are common features of business model mindset?6 http://businessmodelgeneration.com7 http://leancanvas.com/8 http://www.businessmodelcreativity.net/business-model-framework/9 http://www.itu.dk/~jeppeh/DIKP/NABC.pdf10 http://en.wikipedia.org/wiki/Technology_readiness_level11 http://en.wikipedia.org/wiki/TRIZ12 http://tbmdb.blogspot.se/2010/09/evolution-of-business-model-concept.htmlCopyright € 2012 Vasily Ryzhonkov. All rights reserved. -3-Authored by Vasily Ryzhonkov.
  4. 4. CrowdSynergy Team Business Model Analysis Series Global Startup Platform TeamThis article is part of a series on business model analysis for entrepreneurs. The first article in theseries presents the mindset behind Business Model Thinking that entrepreneurs should considerwhen choosing and applying particular model of business model. Others articles in the series delveinto specific issues.2. Practical Framework and Mindset behind Business Model ThinkingAccording to Tim Kastelle13 and Steve Blank in the heart of each business model there is aquestion: HOW DO WE CREATE, DELIVER AND CAPTURE VALUE TO OUR CUSTOMERS?Consequently, main purposes of business models and ways how they can be applied are: 1. They can describe different kinds and types of businesses. This is critical if we are trying to study them analytically. 2. They can be short-hand descriptions of how firms operate – the primary value here is that you can use the business model to ensure that you have strategic fit across activities. 3. They can be role models – you can use them to describe how you want your organisation to function.14 4. Business models are hypotheses about how your organisation might be able to create value for customers15.Business Model is a kind of a buzzword nowadays. And it’s central to the lean startup approachdeveloped by Eric Ries16, Steve Blank17, and others. But what exactly a business model approachis? What makes different business models similar? Why this approach is better or worse thanbusiness plan approach?Keeping in mind four high-level purposes we can now make a comprehensive list of principlesbehind business models. What should be a mindset when we speak about them, apply them foridea development and venture creation? Below you will find a list of 10 features that are commonwhen you apply business models in practice – using a mindset of business models thinking.13 http://timkastelle.org/blog/2012/01/eight-models-of-business-models-why-theyre-important/14 http://www.lrp.ac/currentissues/43_2-3_April-May_2010.html Long Range Planning, Charles Baden-Fuller andMary Morgan15 http://timkastelle.org/blog/2011/03/how-to-test-a-business-model-like-a-scientist/16 http://www.startuplessonslearned.com/17 http://steveblank.com/Copyright € 2012 Vasily Ryzhonkov. All rights reserved. -4-Authored by Vasily Ryzhonkov.
  5. 5. CrowdSynergy Team Business Model Analysis Series Global Startup Platform Team1. Iterate-iterate-iterate…Iteration is key word for business model concept. There are two reasons for constant iteration. 1. World changes rapidly – you need to be fast, repeat a cycle often in order to stay competitive. It’s widely recognized that if your product or service time-to-market is too long, you easily could lose your competitive advantage. Thus, being a entrepreneur you’re forced to speed up. 2. Another issue is constant improvement which is derived from lean concept. This is also connected with scientific approach where you state and formulate hypotheses, make a research, validate and test hypotheses, change them, execute. This loop is done through constant iteration.2. Keep it simpleWhat made BMC18 really popular is nice and simple representation of business concepts throughpowerful pictures and one-page diagram. That’s why description of business models are perfectsubstitutes for business plans (which are too long to write, fails after first contact with customer,seldom updated, almost never read by others). It contains concepts and simple categories that couldbe understood by entrepreneurs without business education and MBAs.To summarize simple categories, one-page diagrams, visualization (pictures, mind maps, canvases)are those powerful instruments that replace 60-pages business plans full of text. Figure 2 – Business Model Canvas by A. Osterwalder18 Business Canvas ModelCopyright € 2012 Vasily Ryzhonkov. All rights reserved. -5-Authored by Vasily Ryzhonkov.
  6. 6. CrowdSynergy Team Business Model Analysis Series Global Startup Platform Team3. Systematic approachBusiness model allows you to keep the essence in one place. Business model representations couldbe still short and capture everything important. Many entrepreneurs really like business modelcanvas representation because it’s concise anddisciplines your brain (will not forget importantthings). Methodology behind it provides the “railwayfor a mind”. Moreover, you could formulate businessmodel through comprehensive checklist which almost every solid model has.4. Main principle is “Value proposition” or “Value creation”.The heart of each business model since Porter and Drucker is value creation for the customers. It isconsidered that for creating a business you need to answer simple questions “What business areyou in?” and “What is the purpose of a business”. And this is exactly what a business modelshould answer when used for strategizing. BUSINESS MODEL IS JUST A MODEL OF A BUSINESS 19However, it’s important to admit that this approach has a serious limitation if you would like toapply business model to idea generation and development. Many ideas may not have the purposeof creating value, or not have the purpose of monetization being social entrepreneurship ideas.5. You’re wrong by definitionThis important concept is embedded inside the business model canvas approach according to SteveBlank. In the very beginning of entrepreneurship journey you always don’t have enoughknowledge to accomplish and achieve results. Even if you will fill in all aspects of model, firstcontact with market, customers will reveal unexamined aspects of the model.6. You’re subjective by definition.Humans are subjective by definition. However, in order to achieve success, you need to developmethods of work that will allow you to put your fantasies on the ground and stay close to thereality. One of the key methods applied in business modeling is to be as much quantitative aspossible. Measure everything and put it in a quantitative way and SMART20 way.19 http://blog.business-model-innovation.com/2010/07/business-models-long-range-planning-baden-fuller-and-latency/20 http://en.wikipedia.org/wiki/SMART_criteriaCopyright € 2012 Vasily Ryzhonkov. All rights reserved. -6-Authored by Vasily Ryzhonkov.
  7. 7. CrowdSynergy Team Business Model Analysis Series Global Startup Platform Team7. AccessibilityUnlike business plan business model representation is easy to share and could be read by morepeople. Business Canvas Model became extremely popular because of this reason. It wasn’t theonly product on the market of business models. What Alexander Osterwalder made is he gave itaccessibility and simplicity. Thus, many entrepreneurs could download a canvas and startsketching on it. Then online tools appeared providing opportunities for collaborative design of abusiness model.8. Effectiveness.“Writing a business plan is a waste of time.” Many scholars and entrepreneurs continue repeat thisquote. Even though I don’t agree with that completely, we can understand whay do they mean.“Reduce waste (focus on the right stuff = time is really important)”, “right time, right action”, –these are mantras of business model approach. Issuing new canvases of business model, trackingthe progress allows you on the one hand keep the holistic vision of a project, on the other hand youcan iterate easily not losing results achieved before, remembering lessons learned.Moreover, business model framework allows founders and team leaders to delegate and assigntasks, responsibility in easy way.9. Methods in Business Model Canvas Approach don’t require MBA or business education.In order to create simple business model canvas you don’t need MBA. Just follow the natural wayof human thinking. Here are methods and techniques used for creating a canvas: - simple logic reasoning, - brainstorming, - sketching, - top-X approach – concentrate on top-3, top-5 issues, problems, points (allows to be focused), - SMART and quantitative approach, - questions – answers approach (checklist), - prioritizing, - tracking, - ongoing learning, - scientific method.Copyright € 2012 Vasily Ryzhonkov. All rights reserved. -7-Authored by Vasily Ryzhonkov.
  8. 8. CrowdSynergy Team Business Model Analysis Series Global Startup Platform TeamScientific approach is really important here: state and formulate hypotheses, search, validate andtest them, change them, execute them (see Figure 3 below).Also a lot of popular types of business models switch entrepreneurs thinking from product-centricto customer-centric perspective. Figure 3 – Scientific method10. Building a Learning Loop.The last but not least is building a learning loop while developing an idea. I believe that this is oneof the most outstanding features and advantages of business model mindset in comparison withbusiness plan approach. You are involved in a continuous loop of learning by doing. What’shappening is that you can track your progress and performance, see where, how, when, why you’vepivoted. Would like to remind you that pivoting is crucial issue and challenge along theentrepreneurship journey21. According to Startup Genome startups that pivot once or twice timesraise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scaleprematurely than startups that pivot more than 2 times or not at all. Thus, business model canvasacts as enabler for founders to learn more, have metrics, ultimately to be more successful.21 Startup Genome Report, 2011Copyright € 2012 Vasily Ryzhonkov. All rights reserved. -8-Authored by Vasily Ryzhonkov.
  9. 9. CrowdSynergy Team Business Model Analysis Series Global Startup Platform TeamReferencesYou can find all references as footprints on each page. However, we put the most important onesbelow: 1. http://timkastelle.org/blog/2011/03/how-to-test-a-business-model-like-a-scientist/ 2. http://timkastelle.org/blog/2012/01/eight-models-of-business-models-why-theyre-important/ 3. http://blog.business-model-innovation.com/2010/07/business-models-long-range-planning- baden-fuller-and-latency/ 4. http://www.lrp.ac/currentissues/43_2-3_April-May_2010.html 5. http://tbmdb.blogspot.se/ 6. http://tbmdb.blogspot.se/2010/01/getting-to-plan-b-2009.html 7. http://canvanizer.com/how-to-use/business-model-canvas-vs-lean-canvas 8. http://www.oulu.fi/english/research/support/inventions-and-business-ideas/tutli- funding/nabc-model 9. http://leancanvas.com/ 10. http://www.ashmaurya.com/2010/08/businessmodelcanvas/ 11. http://www.ashmaurya.com/2010/02/customer-development-checklist-for-my-web-startup- part-1/ 12. http://www.stanford.edu/group/e145/cgi-bin/winter/drupal/upload/handouts/Four_Steps.pdf 13. http://www.businessmodelcreativity.net/business-model-framework/ 14. http://www.businessmodelcreativity.net/bmc/introduction-into-business-model-creativity/ 15. http://www.businessmodelcreativity.net/bmc/tools-fur-business-model-creativity- workshops/Copyright € 2012 Vasily Ryzhonkov. All rights reserved. -9-Authored by Vasily Ryzhonkov.

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