What Is A Business Model Essence And Why It Matters

 

 By Gennaro Cuofano

A Business Model Essence, according to FourWeekMBA, is a way to find the critical characteristics of any business to have a clear understanding of that business in a few sentences. That can be used to analyze existing businesses. Or to draft your Business Model and keep a strategic and execution focus on the key elements to be implemented in the short-medium term.

What is and why a Business Model Essence is important

Not all businesses are born equal. We can categorize them based on several characteristics, and based on the level of granularity, we can find more or fewer differences.

A solo business isn’t as complex as a ten-person business, which in turn isn’t as complex as a hundred-person business. And the matter is complexity isn’t a simple game.

It works on exponential grounds. A group of ten people isn’t the same creature compared to a group of a hundred people. In short, in business, we have a problem with scaling due to the dynamics of complex systems.

Therefore, the system that I’m using here tries to reduce complexity by trying to find the essence of any business, which per se is a herculean task.

That essence might be useful for several reasons. For instance, as FourWeekMBA is followed by business students, professors, executives and entrepreneurs, each of those people will use a business model essence with a different aim in mind.

At the core, a business model essence wants to be a snapshot, yet it is essential not to take it too seriously otherwise, the risk is to make it become a cartoon.

A student or a professor of business will use it to summarize what she thinks a business is made of. An entrepreneur might use it to focus on how to grow their own business or how to compete with existing organizations in a specific industry.

Business models and their essence are made of assumptions. Assumptions need to be tested in the real world. And this is the whole point of business strategy.

A triad to find the business model essence of any company

Having specified the limitations of this approach, we can now turn to it and see what elements allow us to extract a business model essence.

In particular, I argue that there are three key elements any business will need to master to generate a successful business model:

• Core product or service: the whole process of finding product/market fit is about “being in a good market with a product that can satisfy that market” (quote by Marc Andreessen). You can have the best distribution strategy or sales team in the world, but without a product or service that the market needs (unless you have unlimited investors’ money), your company will go bankrupt.
• Core distribution strategy: while the product and the service matter. Once you do have a good product or service, the remaining success of the organization’s growth is a distribution strategy that allows an organization to grow over time.
• Core monetization strategy: what’s the part of the business that makes more money at higher margins? And who’s the customer (not the user) of a service/product? Thinking about the core monetization strategy emphasizes the customer rather than the user.

I use the term “core” as many companies (especially large ones) have a business model that is made of many products or services, delivered through several distribution channels, and where each of those might have a separate monetization strategy.

For the matter of finding the essence, we’ll look at the core product/service, distribution channel, and monetization strategy, as this is a good starting point to have a snapshot of a company.

Once we have figured out the essence of that company, we can understand what’s next and how the resources that are getting unlocked by their main products, distribution channels, and monetization strategies are getting used to create new ones!

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What is Core in your Business Model?

Focusing on what a business does best, is often argued the easiest and most efficient way for companies to grow and be profitable. In the 1980s Tom Peters and Robert Waterman referred to this as "sticking to your knitting" in their classic book In Search of Excellence,a decade later Gary Hamel and C.K. Prahalad described the concept as focusing on "core competencies" in the Harvard Business Review article The Core Competence of the Corporation.

The core is not only unique competences

For me working primarily in intellectual asset and intellectual property management, the core is very often a set of innovations, unique technology, patents or developed software. But the core in a business model can equally be a unique way of delivering services, a unique position within a network of actors, a strong relationship with a certain kind of customer, strong strategic alliances, a unique recipe, a low cost operation, an established brand etc.

Increasing levels of collaboration

The trends in many industries are that markets show high dynamics in rapid development of new products, rapid commoditization of products and high price erosion. This puts pressure on the companies to open up processes and collaborate with external actors to shorten time to market, get a lead time over competitors and obtain higher margins in early phase markets. So with the increased pressure on the companies and the possibility to use external assets and capabilities, what elements of the business model should you focus on? What elements are core in your business model?

Questions to find the core

Identifying what is core and what is not, is a great starting point for business model innovation. To identify what is core in your business model a systematic way to start is to map out the different components of the business model, using the business model canvas, listing the different parts in Excel or just drawing boxes on a whiteboard and for each of the components ask:

In relation to what others could provide, how unique is:

• Your assets and capabilities?
• Your value propositions?
• Your target customers?
• Your relationships with the customers?
• Your revenue model?
• Your distribution channel?
• Your control mechanisms?
• Your partnerships?
• Your cost structure?

Also:

• How important is each of the elements for your business and the positioning in your value network?
• How important is it for your overall business model, does it reinforce other parts or is it a weak link?
• How difficult is it for others to imitate?
• What future opportunities would you lose or gain if someone else provided it?
• What are the risks of letting someone else provide it?

Identifying and using what is core

When starting to analyze what is really core in your business model you often find opportunities for business model innovation. Perhaps it’s not what you deliver but how you deliver it, that makes people buy? - Perhaps you should deliver something else as well given your good way of delivering things? - Perhaps it’s not the gadget you sell but the software interface that people like? - Could other gadget manufacturers need your better software interfaces? - Perhaps the reason someone wants to collaborate with you is because your customer relationship and contracts with a governmental organization? - Could other companies be interested to get access to the same organization?

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