What exactly is a business model?

What exactly is a business model?
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CONTENTS:

1. A reader asks...
2. Evolution of a definition...
3. My definition of a business model.
4. Are you stuck with "tribal knowledge?"
5. Help with your franchise manual.


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1. A reader asks...
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Dea.r Sirs,

What exactly is a business model? I could not
find a definition in common literature. I am a
student of business economy in Berlin, Germany. I
would be very happy if you could give me an
answer. Thanks and have a nice day.

Kind regards,

A. R., Berlin, Germany


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2. Evolution of a Definition...
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This question gives me a chance to review our
basic premises again.

I have heard people use the term "business model"
many ways. Often, people refer to a specific
business process as a business model.

For example, I've heard people call their sal'es
process a business model. Similarly, you could
program a simulation model for your manufacturing
process and call it a business model.

So, let's examine what the American HeritageÆ
Dictionary of the English Language says
(excerpts).

business:

1. a. The occupation, work, or trade in which a
person is engaged [...]
b. A specific occupation or pursuit [...]

2. Commercial, industrial, or professional
dealings [...]

3. A commercial enterprise or establishment [...]

4. [...]

model:

1. A small object, usually built to scale, that
represents in detail another, often lar'ger
object. [Bad news: A "Barbie Doll" model is NOT
built to scale!]

2. A preliminary work or construction that serves
as a plan from which a final product is to be
made[...]

3. A schematic description of a system, theory,
or phenomenon [...]

4. A style or design of an item [...]

5. [...]

Woops! If you combine these two words, you still
don't have a specific definition. So, I will use
my own definition.


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3. My definition of a business model.
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Generally, I define a business model as:

A set of plans for building your business,
A structural design for your business,
A "model" business to imitate or emulate,
Documented standards for your business.

So, let's say you were going to build a business.
You've decided you want to build the "McDonalds"
of shoeshine parlors - with parlors all over the
planet!

First, you'd need to design and build your model
business - your franchise prototype.

Your model would define the pattern for all your
shoeshine parlors to follow. It would specify
the services, the color scheme, the logo, the way
your business treats customers, everything - what
to say, what to do, and how to do it.

You would write all this stuff down in Operations
Manuals so you could duplicate the business over
and over.

You could then sell your franchise - your
turn-key shoeshine parlor business - to others
who want to own a business but don't want to
build it from the ground up.

My point is this.

Your model parlor defines how all the other
parlors must work to provide consistent quality,
service, value, etc.

All successful franchises use the "model"
concept, whether they call it that or not. That's
why your order of a Big Mac, chocolate shake,
and fries is exactly the same in Toronto,
Toledo, Topeka, or Timbuktu.

NOTE: The same idea applies to a single facility
business.

If all your business processes are documented, a
single business (big or small) can provide
consistent quality, service, value, etc.

If all your business processes are documented,
your business can provide the customer
extraordinary results using ordinary people.

You don't need to hire prima donnas!

It doesn't matter if your business is a small
sandwich shop, or a giant computer chip maker
like Intel.

My company, Senior Management Services, has more
than 13,000 pages in its Operations Manuals that
define all the business processes.

These Operations Manuals are "living documents"
that we update as times and markets change.

If I hire a new accountant, that person receives
applicable sections of the Operations Manual that
show the business processes necessary to do the
accounting successfully.

Since the work is documented, I don't need to
hire an accounting "expert."


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4. Are you stuck with "tribal knowledge?"
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If you have not documented your business model
and business processes, your business operates on
"tribal knowledge," which means your employees
transmit business processes (technology) by
word-of-mouth, from person to person.

Tribal knowledge means that as an employee you
must know the right guy - and he must be willing
to tell you how to do the job. (Good Luck!)

Why?

Some people keep the technology of their position
se'cret, calling it "job security." Ultimately,
this method will keep your company stuck.

Your company will be built around personalities,
instead of a working business model.

You should not give someone a promotion or raise
until they document their job. If they can't be
replaced, they're not promotable. And you should
document this policy in your Operations Manuals.

Long answer to a short question...


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5. Help with your franchise manual.
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Last week, a reader from LA called for assistance
with developing a franchise manual for some sort
of childcare facility. (A business I wouldn't
touch with a frozen rope!)

He wanted his manual to be 80-100 pages. He has
already opened five facilities in the Los Angeles
area.

Meanwhile, he must chase around LA everyday to
keep the businesses up and running. That's no way
to live!

Like "business model," there's no specific
definition for a "franchise manual." After some
discussion, I agreed to create an outline they
could use to get
started. (Pro Bono.)

In our discussion, I discovered that his new
franchise operation is not organized in a way
that will sustain continued growth.

So, I created a 7-page outline for him. My
outline emphasizes organizational strategy, which
amounts to a strategy for division of labor.

The same organizational strategy could be used
for a single-facility business.

I use a "franchise" model because franchises have
a 90+% SUCCESS rate, while typical startups have
a 90+% FAILURE rate.

(In Silicon Valley, I've seen hundreds, if not
thousands of companies fail - many due to ad-lib,
power-trip organizational strategies.)

The outline is simply that - an outline. However,
today I added an exercise for serious students of
business development.

You can download a copy of this franchise manual
outline at:

http://clicks.aweber.com/z/ct/?DJv.FaM6Jxy_cuVNUrBg8Q

A complete set of Operations Manuals for every
position on an Org Chart can grow to hundreds or
thousands of pages.


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Today's managers suffer increasing pressure...
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Most managers these days suffer increasing
pressure to slash costs and sell more with fewer
people. I work with managers and executives to
relieve this pressure of having to sell more. I
like to say, "We take the pressure off!"

Over two decades, SMS has saved time, mOney, and
effort for scores of companies in Silicon Valley
(and from Toronto to Hong Kong)! This means you
benefit from techniques proven successful on over
300 projects.

I can help.

You decide.

Don't let the lack of correct psychographic
positioning stunt the growth of your business!


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Mike Hayden, Principal/Consultant
Your partner in streamlining business.

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