Over the past three blog posts, I have been exploring the application of the business model canvas to new venture realization. The focus is on startup iterations that facilitate the formulation of early assumptions about how your enterprise will provide value to the customer.
To date, we have reviewed four BMC elements, Customer Segments, Value Proposition, Customer Relations, and Channels. In aggregate, these business model elements help founders to make initial assumptions about target customers, their needs and pain points, and what a solution must do to provide value. Under the banner of customer engagement, the customer relations and channels elements help founders to hone in on vital touch points that facilitate customer acquisition and retention.
In general, the right side of the business model canvas focuses on essential elements to create a good fit between the customer’s problem and practical solutions. These elements highlight what strategies and actions are required to achieve problem-solution fit.
On the left side of the business model canvas, you have three elements that address what Key Activities, Key Resources, and Key Partnerships are essential to delivering your solution to the customer. This section of the business model canvas refers to the infrastructure of your enterprise.
Key Activities & Resources
To effectively execute your business model, specific Key Activities will be required. While many operational actions occur in any enterprise, I suggest you list activities associated with the fundamental requirements for offering your value proposition to the target customer. Usually related to your organization’s core competencies, these activities must operate at a very high quality and performance for your business model to be repeatable and scalable. These activities can be associated with a range of operations, including product development, manufacturing, supply chain management, and industrial design.
As a startup, you must identify the essential activities to create a repeatable transaction between you and the customer. To grow, you must first identify the operations necessary to execute each customer transaction in a standard, high-quality manner. There are several ways to predict the nature of these activities. One simple question to answer: What activities will you and your team spend the most time on regularly. For example, if you develop a new product in-house that will require frequent iterations, you will need to focus on development activities. Another approach to determining what activities are necessary to be successful is t investigate competitors’ core competencies or strengths. For example, if you learn that your competitors focus heavily on logistics and distribution, then need to consider how that influences your business model? Is it essential that you also develop a core competency in this area? On the other hand, your offer may differ, so logistics does not need to be an essential activity. In any case, it helps you understand your competitor’s strengths to assess better how you will develop the appropriate operational competencies that align with your business model.
Key Resources are the assets needed to deliver the solution to your customers. I suggest aligning these resources with the required core competency areas listed in the Key Activities element. Listed assets can be physical, financial, intellectual, or human. For example, if you are a technology-focused startup, your critical assets may include human resources with specific technical skills, such as scientists, engineering, or software developers. Assets associated with the intellectual property may be listed, such as patents or trademarks. If you plan to distribute multiple products globally, your key resources may include regional distribution centers. While there are many resources needed to execute your business model, focus on those assets that align with key activities and are essential to providing the solution outcomes required by your customers.
Some experts define a startup as an organization that has minimal resources to solve significant customer problems. However, as founders consider what it is going to take to solve the customer’s problem and provide the desired value, they quickly realize several critical activities, and associated resources are required to meet these goals.
Most startups do not have the requisite experience and expertise to execute many of these crucial activities. For example, I usually consider three operational areas that startups must have expertise in – product development, marketing, and finance. It is rare for all three competency areas to be present in a startup team. How many founders have said that they cannot move forward without a technology co-founder? The point is that there are many key activities and resources needed to create a repeatable and sustainable business model. And startups rarely have everything it takes.
Key Partnerships are those strategic relationships necessary to execute your business model. These types of non-customer relationships are critical for startups, as they can help lower operational costs, expand distribution channels, or help achieve competitive advantage. These strategic partnerships can be with manufacturers, suppliers, distributors, trade associations, regulatory agencies, competitors, and technology providers.
I advise founders to evaluate the gaps between competencies and resources to execute their business model. Then they can identify which partnerships are needed. Potential partnerships include domain experts, individuals, and organizations that provide specific key activity support, channel partners, and investors.
Domain Experts. You should identify who the “experts” are in your industry or science and technology area. This knowledge is vital if your product is differentiating itself based on emerging technologies or evidence-based science. Many entrepreneurs create products that provide a specific benefit to consumers. It is crucial to validate the efficacy of your product by working with domain experts in the particular field in question.
Key Activity Support. It is vital to discover other organizations and service providers that may fill in a gap in your core competencies and play an integral role in your success. List important ecosystem players that you will need to partner with and leverage to be successful. Examples include suppliers, manufacturers, distributors, support services, government agencies, universities, and industry networks.
Channel Partners. These partnerships are typically focused on helping you with customer acquisition and can be a significant part of your go-to-market strategy. There are many types of channel partners, from resellers to affiliates. The right channel partner arrangement enables you to reach more customers, expand geographical markets, and strengthen your brand. Of course, these arrangements take management, and there are risks. But channels partnerships can be an integral part of early traction and longer-term growth.
Funders. Finally, it is never too early to consider what capital you need to execute your business model. Your needs will change as your venture develops and grows. For this early BMC iteration, think about funding requirements for launching your venture and what capital needs are necessary for the first three years. Who do you need to engage for both immediate and longer-term needs? It can be beneficial to engage potential investors early if for no other reason than to be on their radar when you are ready for outside investors.
Profit Model Elements
The last two elements of the business model are what is sometimes called the profit model.
Cost Structure refers to the main costs incurred while running your business. At this point, you should be identifying the high percentage costs, those related to the core activities and resource requirements. These expenditures can include fixed asset and variable expenses and any high overhead costs that you anticipate to support the business model. Your cost structure must meet the operational requirements to execute your business model but be consistent with the projected revenues to emanate from your customer segments. Of course, if the costs are more than the revenues, you will need to revisit various business model elements.
By delivering your product and service offering to your target customer, you start to generate Revenue Streams. In this element, you can outline each possible way that your various offerings generate income. For example, you can list how customers prefer to pay for your services, cash or credit, one payment or several payments, and the like. In this element, you can also note the length of the sales cycle and the time it takes the customer to complete the purchase from the initial point when they are aware that the product is available.
Once you have completed your first iteration of your business model, it is an excellent time to dive deeper into your assumptions about the various elements of your business. I will discuss the different approaches to validate assumptions about how your venture will provide value to the customer in future posts.
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