Business Model : Part-1 What is Business Model

Just like that, with no warning nor signs nor indication, our lives changed overnight.  The chain effects of Covid-19 are (and I use this in the present since the effect is continuing) staggering and something we never thought could happen. Since 18 March 2020, we have had various forms of lockdowns, from complete to quasi, and now selected states lockdown.  There do not seem to be any relenting of lockdowns by our National Security Council.  Covid-19 and the lockdowns changed everyone’s lives in every-way.  Businesses saw drastic changes in consumers’ purchasing and spending behaviours.

It should be noted that change in consumers’ purchasing and spending behaviours are not new.  These changes have started since the advent of Industrial Revolution 4.0 and becoming more apparent in Malaysia circa 2013.  The first lockdown on 18 March 2020 merely changed the consumers’ behaviour exponentially.

So, these changes are here to stay.

The lockdowns and changes in consumers’ purchasing and spending behaviour have financially affected businesses across the board, both large and the SMEs.  The PRIHATIN package from the government had help some but not all and was only good for the shorter term.  For some, the package lasted only for two months.

To survive the storm caused by Covid-19, every media, financial webinars, and every form of advisory talked, and are still talking, that the one way to survive is for businesses to pivot their business models. The question is how many of the SMEs, or even large corporation, have a business model to even pivot?  And if they do have, how many of the SMEs do know which part of the business model to pivot?

My two parts articles on Business Model is aimed for (in particular) the SMEs who are not familiar with Business Model and/or unsure of how to pivot their business model. Part One of my article will start with understanding the Business Model and is intended for those who are not sure of how to build a business model.

What is Business Model?

Often, we hear terms such as Business Plan, Business Model and Business Strategy.  What are they and what are their differences?

Business Model is the blueprint of your business.  It defines what exactly do you want to sell to your known segment of consumers, how you will make the money and how you can profit.  Your business plan and business strategy hinge on how you develop your business model.

Business Plan is the roadmap of how you will make your business a reality and to get to where your business model is.

Business Strategy is a little more extensive to explain here since strategy is something you will need at almost every aspect of business.  Since the focus of this article is on Business Model, I will explain in its context.  In the context of business model, Business Strategy is defined as the action plan to achieve either parts of the business model, or parts of the business plan.

Why is Business Model so important? 

As the blueprint of your business, it is a big picture of your business, a reference for you to be focused as you implement it and, provide clear picture of your business to your investors and / or funders.

How to develop a Business Model?

The best structure to use when developing your business model is the Business Model Canvas (BMC).  The BMC is a template with the building blocks required to develop a business model.  The template will assist you in your thinking process as you will consider each building blocks that will form your business model.

At the core of a Business Model is the Value Proposition.  The whole fundamental reason for you to start a business is because you have idea on a product that you want to sell.  In deciding your value proposition, you will answer the questions – what problem are you trying to solve or what needs are you trying to fulfil?

The next step is to determine your Customer Segment.  Your value proposition is to solve problem or needs for a known group of people.  This group of people are your customers.  When you know who your customers are, you will also need to know where are they located, their wallet size, what are their behaviours?  To know your customer segment, you will need to research to understand them, or more essentially, be them.

You will then decide what is / are the Channel(s) that you will use to deliver your value proposition to your customers.  You may choose to deliver via your own store, partner store or e-commerce.  Your decision on the appropriate channel will be dependent on what is your value proposition as well as your deep understanding of your customer segment. 

You have your value proposition; you know your customer segment and you have decided what channel(s) to use.  The next step is for you to determine how you build Customer Relationship.  Building customer relationship starts with determining how you get them?  And once you get them, how to keep them and grow them for a long-term sustainable relationship?

The next is for you determine what are your Revenue Streams.  Revenue stream is not so much about how much to price, it is about your price model.  This is where you will have to establish the linkages between your value proposition, your customer segment and your channel(s) and answer the questions how and what are they willing to pay?

Then start thinking on what are the Resources that you need to make your business model work.  What are the assets you need, how much money do you need, what kind of human resource do you need?  You will need to identify resources needed for each building block of your business model.  Example for value proposition, if you choose to produce your product, will you invest in buying machineries required?

The next step is to think about who are the Key Partners of your business that you need to work with to make your business model work.  Do you need to partner with someone or, go into a joint-venture, or find collaboration with another business?  Key suppliers are also key partners of your business.

Then, determining what are the Key Activities of your business.  Depending on your value proposition, you will need to decide on what key activities do you want to be an expert in for you to be able to create your value proposition.

And in the last step, you need to think of the Cost Structure.  The cost structure of your business is essentially the cost to operate your business model.  A large proportion of your cost structure will be derived from what resources you need, who are your key partners and what are your key activities.

Figure 1 – Steps in developing Busines Model

Developing a business model in reality

Whilst I have explained the development of business model by steps, in reality when you embark on developing your business model, you will find that each building blocks are tightly inter-related.

As you work on each step, you will find that you will be going back to earlier steps and pivot earlier steps depending on outcome of subsequent building blocks.  This is especially true when you start working from steps 6 onwards.

In reality, the best way to approach the business model is to first approach according to the prescribed BCM steps.  Then to tweak to make your business model work, start reviewing the impact of one building block to other building blocks.  You may have to perform various iteration until you are comfortable that it is a business model that you can implement.  For example, you may find that your cost structure will not make your business model work, then you need to think about maybe changing your key activities or changing your key partners.  Sometimes, you may even end-up have to change your value proposition.  What is important, is that your business model can work and sustainable.

And please remember that your business model is a living document.  Your business is subject to various external factors beyond your control, such as the current Covid-19 pandemic.  When such external factors adversely impact your business, you will need to re-look at your business model and decide which part of your business model that you will need to tweak or change for the long term sustainability of your business.

In part 2 of the article on Business Model, I will discuss further on how to pivot your business using the business model.

Figure 2 – The real-world steps in developing Busines Model