Business ideas are best developed in a structured way. Making use of a template or a tool or a framework helps with examining the idea from multiple points of view. It's easier to think about and evaluate and compare different ideas, when they are structured in the same way and use the same vocabulary.
The right thinking tool can make tedious base covering exercises more efficient and systematic — even fun.
This piece is a collection of business model templates, strategy tools, and other venture planning devices.
For a while now, I've been trying to articulate an idea about a software system. I've come across an interesting problem and I think I can see a plausible solution, but something still doesn't quite click. The problem sits at the intersection of certain slow burning industry trends, but at the same time has something to do with human behaviours and institutional forces.
I want to organise my thoughts around this problem and to sketch out some kind of plan for addressing it, because the problem intrigues me. I think there's definitely a project here, but I believe what I'm thinking about might actually be a business idea. The trouble is that I know very little about what that even means. I feel like I need some thinking tools to help me make sense of these fragments in my head. I want to come up with something actionable.
This piece is about thinking tools for business models, a kind of a meta step in trying to figure out this idea in my head.
The Internet has a lot to offer for the entrepreneurially minded. There's all kinds of materials and guidance out there, something for every project and business idea. Silicon Valley legend Steve Blank has a nice list of stuff to get started with. The YC library is another great resource for startup materials. Mindtools is a nice reference for all kinds of business thinking tools, including strategy models.
I quite like the high quality materials and practical tools produced by Strategyzer. The Strategyzer mission is to get great strategy tools in the hands of every business strategy practitioner. I'll go through some of their tools here. I'll also pick out a few choice cuts from the Mindtools smörgåsbord. Finally, I'll throw in a few other venture thinking tools I've come across.
Painting the Canvas
More often than not, the tool for thinking about business is some kind of a canvas. The canvases are essentially just condensed business plans in a nice one-sheet form factor. There's boxes and segments for the main things to think about, when coming up with a startup plan or a business strategy. The canvases are often used for exploring new product ideas as well. Fundamentally, canvases are tools for thinking and communication — the canvas shapes the language with which strategy and business models are discussed.
The most famous of the canvas tools for strategizing is the Business Model Canvas (pdf) by Alex Osterwalder and friends. Their booklet, Business Model Generation, is a comprehensive guide to making the most out of this method. I'll also look at some of the other tools from Strategyzer.
The Lean Canvas is a popular variation of the standard canvas, a version optimised for Silicon Valley and what have come to be known as lean startups. The difference between the two is articulated in this comparison. The Lean Canvas has its own guide (pdf) as well.
Business Model Canvas
"A business model describes the rationale of how an organisation creates, delivers, and captures value."
Business Model Canvas
Designed for: [Company] — Designed by: [Person] — Date: [Date] — Version: [Version]
Customer Segments (CS): organisation and groups of people we wish to reach with a dedicated value proposition; an organisation serves one or several customer segments
Value Propositions (VP): the products and services that create value to a customer segment; the ways in which customer problems are solved and customer needs are satisfied
Channels (CH): how a VP is communicated an delivered to a customer; communication, distribution, sales
Customer Relationships (CR): outline of the relationships established and maintained with each customer segment; how are customers acquired and retained
Key Partnerships (KP): network of suppliers and partners that bring in external resources and activities; some activities are outsourced, some resources are acquired from outside the enterprise
Key Activities (KA): the most important activities to perform well
Key Resources (KR): the most important assets required to offer and deliver the VP
Cost Structure (C$): costs incurred to operate a business that generates the VP
Revenue Streams (R$): the result of a successful VP delivery to customer; how value is captured with a price that customers are willing to pay
Business Model Environment
It's useful to see how the main Business Model Canvas looks in context. The Strategyzer tool for this is the Business Model Environment map. The idea again is to provide a compact, structured and tangible representation of the context in which the new business idea can be explored.
The Strategyzer environment map has four major dimensions:
Key Trends / Foresight: regulatory trends, technology trends, socioeconomic trends, and societal/cultural trends
Market Forces / Market Analysis: market segments, needs and demands, market issues, switching costs, revenue attractiveness
Macro-Economic Forces / Macroeconomics: global market conditions, capital markets, commodities and other resources, economic infrastructure
Industry Forces / Competitive Analysis: suppliers and other value chain actors, stakeholders, incumbent competitors, new entrants (insurgents), substitute products and services
The way to think about the environment is to view the pressures of the environment as design constraints for the business idea. This can be helpful as well, because it narrows the space of infinite choices. The Strategyzer Business Model Design Space card deck (pdf) is a useful workshop tool for thinking about each dimension.
Studying the environment is great way to facilitate deep discussions and share understanding about the business domain. The tricky part is perhaps assembling a collection of things, a representative sample of stuff happening around the (tentative) business model. In a workshop context this could be printouts of news clippings, competitor websites, statistics, customer interactions, etc.
Technology trends that can threaten the biz model, or enable it to evolve and improve
- What are the major tech trends both inside and outside your market?
- Which technologies represent important opportunities or disruptive threats?
- Which emerging technologies are peripheral customers adopting?
Regulatory trends, regulations that influence the business model
- Which regulatory trends influence your market?
- What rules may affect your business model?
- Which regulations and taxes affect customer demand?
Socioeconomic trends relevant to the biz model
- What are the key demographic trends?
- How would you characterise income and wealth distribution in your market?
- How high are disposable incomes?
- Describe spending patterns in your market
- Population trends, are the customers urban or rural?
Societal and cultural trends
- Key societal trends that may influence the business model
- Shifts in cultural or societal values that may affect business model
- Which trends might influence buyer behaviour?
Market issues that drive and transform the market for customer and offer
- What issues affect the customer landscape?
- Which shifts are underway?
- Where is the market heading?
Market segments, their attractiveness; upcoming segments
- What are the most important customer segments?
- Where is the biggest growth potential?
- Which segments are declining?
- Which peripheral segments deserve attention?
Needs and demands, how well the market is being served
- What do customers need?
- Where are the biggest unsatisfied customer needs?
- What do customers really want to get done?
- Where is the demand increasing? Declining?
Switching costs, the elements related to switching business to competitors
- What binds customers to a company and its offer?
- What switching costs prevent customers defecting to competitors?
- Is it easy for customers to find and purchase similar products?
- How important is brand?
Revenue attractiveness, pricing power
- What are customers really willing to pay for?
- Where can the largest margins be achieved?
- Can customers easily find and purchase cheaper products and services?
Global market conditions, current overall macro perspective
- Is the economy booming or busting
- Describe general market sentiment
- What is the GDP growth rate?
- How high is unemployment?
- What's happening with housing and CPI?
Capital markets, the current conditions and relation to capital needs
- What is the state of the capital markets?
- How easy is it to obtain funding in this market?
- Is seed capital, venture capital, public funding, market capital or credit readily available?
- How costly is it to procure funds?
Commodities and other resources, prices and price trends for required resources
- Describe the current status of markets for commodities and other resources essential to your business
- How easy is it to obtain the resources needed to execute your business model (incl. talent)
- How costly are the resources?
- Where are prices headed?
Economic infrastructure in the operating market
- How good is the (public) infrastructure in your market?
- How would you characterise transportation, trade, school quality, access to suppliers and customers?
- How high are individual and corporate taxes?
- How good are public services for organisations?
- How would you rate the quality of life?
Incumbent competitors and their relative strengths
- Who are our competitors?
- Who are the dominant players in our sector?
- What are their competitive advantages and disadvantages?
- Describe their main offers
- Which customers are they focusing on?
- What is their cost structure?
- How much influence do they exert on our customers, revenue streams and margins?
New entrants, insurgent players and whether they compete with a differentiated biz model
- Who are the new entrants?
- How are they different?
- What are their competitive advantages and disadvantages?
- What barriers must they overcome?
- What are their value propositions?
- Which customers are they focused on?
- What is their cost structure?
- How much influence do they exert on our customers, revenue streams and margins?
Substitute products and service, including from other markets and industries
- Which products or service could replace ours?
- How much do they cost compared to ours?
- How easy is it to switch to these substitutes?
- What (engineering/service) traditions do these substitute products stem from?
Stakeholders, the actors that may influence my organisation and business model
- Which stakeholders might influence the business model?
- How influential are shareholders? Workers? The government? Lobbyists?
Suppliers and the value chain, the potential substitutes; the verticals
- Who are the key players in the industry value chain?
- To what extent is the business model dependent on other players?
- Are peripheral players emerging?
- Which players are most profitable?
Value Proposition Canvas
Strategyzer offers another canvas (pdf) to help with aligning value propositions and customer segments. The Value Proposition Canvas is in a sense a follow-up activity once the main canvas has found a shape. They have a handy instruction manual (pdf) for this process as well.
The idea here is to evaluate the "fit" between the value one aims to create and the expectations that customers have. The value proposition is about the design of benefits that meet customer characteristics. The fit is based on an understanding of the customer, as discovered through assumptions, observations and verification in the target market.
|Value Proposition||Customer Segment|
|Products & Services||Customer Job(s)|
|Gain Creators||Customer Gains|
|Pain Relievers||Customer Pains|
The main activity unfolds in two halves, both of which have three elements. The first half focuses on the customer, the other on the value proposition. Each half can be processes in two stages, namely the initial item discovery stage and the item ranking stage. They objective is to figure out what really matters about the customer and the value proposition.
General Strategyzer guidance on mistakes to avoid with the Value Proposition Canvas:
- Don't mix several customer segments in one profile
- Don't mix jobs and outcomes
- Don't focus on functional jobs only, forgetting social and emotional stories
- Don't work on the customer items with the value proposition in mind
- Don't settle for a small set of items — expand if you are coming up short
- Don't be overly vague in describing pains and gains
- Don't settle for superficial opposites in pains and gains
- Don't list all your products and service, only those that target a specific segment
- Don't add products in the pain reliever and gain creator sections
- Don't waste energy on solutions to pains and gains that the customer doesn't have
- Don't overplay your hand by attempting to address all customer pains and gains
Customer Jobs are all the tasks that customers are trying to perform or complete, the problems being solved, and all the needs customers are trying to satisfy. Having the customer's perspective is essential in this. Strategyzer guidance distinguishes between three key job types, and complements those with supporting jobs that arise from customers taking on roles as consumers of value.
- Functional jobs: specific tasks to solve a specific problem
- Social jobs: when customers want to look good or trendy, or wish to gain power or status
- Personal/emotional jobs: when customers seek a specific emotional state
- Support jobs: the buyer, the co-creator, the transferrer
Customer jobs happen in a particular context, which makes all the difference. The context imposes constraints and limitations on what is possible and convenient.
Not all jobs have equal importance, some matter more than others. Some jobs are essential to a customer's job or life, failing has serious consequences. Some jobs are secondary and can be deferred or ignored in favour of other activities. Frequent jobs are often important. Sometimes avoiding a bad outcome is more important than an chance at a good outcome.
Some jobs are easier to identify than others. It's important to frequently ask "Why?".
Customer Gains refers to outcomes and benefits that customers want. There's a gradient of relevance and importance with gains, ranging from essentials to nice to have features. Gains have a cost that may or mat not be worth it.
Some gains a true requirements, others can be unexpressed expectations or desires, others welcome surprises. Like pains, gains have functional, social and emotional dimension.
- Required: Gains without which a solution wouldn't be a solution
- Expected: The basics, the stuff that customers would be surprised not to have
- Desired: Gains beyond the baseline, the stuff customers love to have; "faster horses"
- Unexpected: Gains beyond desires, the stuff customers couldn't come up with; "the automobile"
As with pains, clarity and concrete examples help with nailing the gains. Measures are key for clarity. Strategyzer have prepared trigger questions for gains as well.
Example gains: happiness, saved time, saved money, saved effort, improved quality, more and less, delight, power features, performance, quality, easier life, lower cost of ownership, positive social consequences, looking good, increased status or power, finding what is being looked for, good design, guarantees, dreams and aspirations, big relief, success, avoiding failure, increased adoption, less investment, lower risk
Customer Pains are all of the things that get in the way of customers getting jobs done. The annoying things that happen before, during and after a task, or the things that prevent stuff from getting done. Pains is also about risks — potential bad outcomes — and the factors that result in poor results.
The Strategyzer guidance identifies several categories and subcategories of pain:
- Functional: Solution doesn't work or doesn't work well; negative side effects
- Social: "I look bad doing this"
- Emotional: "I feel bad every time I do this"
- Ancillary: A non-functional aspect of a solution is annoying
- Undesiderata: "This is boring"; "This is ugly"
- Obstacle: Things that prevent a customer from getting started; things that slow down
- Time: "I don't have time to do this (properly"
- Cost: "I can't afford any of the existing solutions"
- Risks: Solution can go wrong and have important negative consequences
- Personal: "I might lose credibility"
- Collective: "Security breach would be disastrous"
It's important to note pain severity, and to be as clear and concrete about the nature of the pain. How customers measure pain helps with designing a value proposition to address it. Strategyzer materials include a set of trigger questions that can be used to identify pains.
Example pains: slow, prohibitively expensive, requires substantial effort, feels bad, frustrating, annoying, headache inducing, under-performing, incomprehensible, challenging, difficult to do, restrained, repulsive, loss of face, loss of power/status, loss of trust, financial ruin, fear, concerns and worries, stress, common mistakes, mishandling, barriers, poor adoption, upfront costs, steep learning curve
Products and Services
Products and Services form the substance of the value proposition. Products and services help customers complete their functional, social and emotional jobs. Crucially, products and services don't create value in isolation: value is created in relationship with the customers.
Not all elements of the value proposition have equal relevance to a particular customer. Some products and service are essential to a particular customer, others are merely nice to have.
Products and service take many shapes, span various dimensions:
- Physical/tangible: Goods, manufactured products
- Intangible: Products without a physical dimension; services
- Digital: Products and service in a computational medium — new media
- Financial: Asset management and transaction services
Gain Creators outline the ways in which products and services create gains for the customer. How exactly products and services provide great benefits and positive outcomes. Again, it's not about addressing every identified gain. The main thing is to focus on the most relevant gains and areas where the proposed products and services can make a difference.
Some gain examples from Strategyzer: new savings, meeting expectations, exceeding expectations, higher quality, more of something, less of something, outperformance, making life easier, better usability, more accessibility, more service, better service, lower cost of ownership, positive social consequences, increased status or power, bespoke, better design, guarantees, fulfilling a dream, achieving aspirations, relief from hardship, avoid failure, easier adoption.
Pain Relievers describe how the value proposition will alleviate specific customer pains. The relievers help customers in completing their jobs. They help customers deal with annoying things before, during, and after the job. Relievers are detailed outlines of how this is done.
The greatest value propositions target the greatest customer pains. Not every pain needs addressing, and often it's better to do a few things extremely well than to spread out the solutions too thin. Pain relevance is key, determines the value of relieving it.
Some reliever examples: producing savings, feeling better, fixing under-performance, addressing difficulty, removing negative social consequences, eliminating risk, delivering peace of mind, removing common mistakes, eliminating barriers.
The Strategyzer guidance features great trigger questions that help with finding different ways in which products can help customers alleviate their pains.
Fit — Value Proposition Meets Customer
Customer pains and gains are not under the control of the value proposition. However the pain relievers and gain creators are. That is the job: designing the how value is created by building pain relievers to address the worst pains, and gain creators to address the worst gains.
A great fit is found when customer get excited about your value proposition. This happens when you address important jobs, alleviate extreme pains, and create essential gains. Fit is hard to achieve and maintain, but aiming for it is at the heart of value proposition design. The customer is the final arbiter.
The Strategyzer guidance suggests that fit happens in three parts. The first fit is the problem-solution fit, where you solve the value creation task on paper. The fit is not proven yet, but you have prototype value propositions to take to the market.
The second fit is the product-market fit, in which customers respond positively to the value proposition. There is market traction. It's all about validating the assumptions on which the value proposition is built. This is often a long, iterative process.
The third and final fit is the business model fit. If the value proposition works in the market, then the question is whether it can be embedded in a profitable, scalable business model. Value propositions cannot survive without a sound business model. Business model fit is a balance between creating value for customers and creating enough revenue to turn a profit.
Value proposition design is iterative, an endless cycle of design and test.
Ad-lib Value Proposition
Ad-lib templates offer an easy way to explore a business models. If you are trying to perfect the elevator pitch, this might be the tool for you.
The idea with ad-libs is to simply fill in the blanks in a value proposition template. The template provides focus and structure in way that helps a strategist articulate what is actually new about the idea — what the value proposition is in a nutshell. Ad-libs can also be used to generate alternative value propositions and variations of existing products and services.
Here's an example, from Strategyzer again:
Our [products and services]
help(s) [customer segment]
who want to [jobs to be done]
by [verb] [a customer pain]
and [verb] [a customer gain] (unlike [competing value proposition]).
"Business plans take too long to write, are seldom updated, and almost never read by others, but documenting your hypotheses is key."
Lean Canvas is a 1-page business plan template. The thinking here is that a single page business model is much easier to evaluate and share with others, which means it will be read by more people. It is also easier to maintain than a full business plan.
Further, the standard Business Model Canvas is not a perfect fit for the kinds of companies people set up in Silicon Valley. The Lean Canvas aims to adapt the framework for this particular market.
How to Lean Canvas:
- Identify the customer, the person who pays for the product; think of other users and roles as well
- Split broad customer segments into smaller ones
- Sketch a lean canvas for each customer segment
- Sketch it in one sitting
- It's okay to leave blanks: the canvas is supposed to evolve over time
- Think in the present
- Focus on the customer
- Pick the best business model and begin
- Ideal: Big enough reachable market of customers who need the product and will pay for it
The Lean Canvas
- Problem — List the top 1 to 3 problems (and how they are solved today)
- Customer — Target customers and users (and who could be the ideal early adopter)
- Unique Value Proposition — The carefully crafted message that will win over early adopters
- Solution — Top features and capabilities to address each problem (with late binding)
- Channels — The paths to the customer, inbound and outbound; retention before referral
- Cost Structure — Fixed and variable costs; break-even point
- Revenue Streams — Sources of revenue
- Key Metrics — The numbers that tell you how your business is doing in real time
- Unfair Advantage — The thing that cannot be easily copied or bought
"Lifeʼs Too Short to Build Something Nobody Wants."
Brief introductions to standard strategy tools from the MBA literature.
Lafley and Martin: Five Steps
"Without competitors there would be no need for strategy."
Lafley and Martin (2013) frame business strategy as a kind of game or a form of play, where the objective is to win over the competition. The emphasis is on explicit us vs. them thinking. The winning strategy is found by answering a series of five questions in order.
- What is our winning aspiration?
- Where will we play?
- How will we win?
- What capabilities must we have in place to win?
- What management systems are required to support our choices?
Figuring out the winning aspiration is founded on a clear idea about mission and vision. What are we trying to do here? Why are doing this? Once the overall direction is there, the challenge is to come up with a definition for winning. When can we say that we have won?
Once it's clear what winning means, the next step is about articulating where this playing — and eventually winning — will take place. What is the market segment in which we play? What are the channels? Where is the game decided?
The third step is figuring out the means of winning. This requires an understanding of the game being played, and of the players involved. What kinds of plays are possible? How will others play, how shall we react? What are the winning moves?
Once them game is well defined with its players and plays, it's time to prepare. The fourth step is all about assessing capabilities and making the necessary change to succeed in the game. What skills and abilities do we need? What resources? What capabilities and behaviours? What needs to be improved? How do we set ourselves up for winning?
The fifth and final step is about people. How do we get everybody to work together effectively and efficiently? How is the game and our playing managed? How do we make the right plays and execute on our winning strategy?
Hambrick and Fredrickson: Strategy Diamond
"Strategy has become a catchall term."
Hambrick and Fredrickson (2001) developed the Strategy Diamond as a response to what the authors perceived as a kind of dilution of the meaning of the word "strategy". Despite colourful language in the business literature of the day, executives at many companies seemed to struggle with articulating a functional strategy: an integrated, overarching concept of how the business will achieve its objectives.
According to the Strategy Diamond, a basic strategy has five components: four aspects of strategy execution and one core business idea.
- Arenas — Where will we be active?
- Vehicles — How will we get there?
- Differentiators — How will we win in the marketplace?
- Staging — What will be our speed and sequence of moves?
- Economic logic — How will we obtain our returns?
"In articulating arenas, it is important to be as specific as possible." In what arenas will the business be active? What are the product categories, the market segments, geographies, core technologies and value adding stages? The right emphasis across these dimensions is also important.
Vehicles are about the means of attaining market presence. How can we succeed in our chosen arenas, what action must we take? By what products and services do we add value, and how do we introduce them to the market? Do we need acquisitions or joint ventures or licensing or can we do it all in-house?
Differentiation is about winning in the marketplace. In a competitive world, winning is down to differentiating factors. "Edges don't just happen." Decisive action is needed to outmanoeuvre the competition. How do we gain an advantage in the marketplace? What is our brand, how are we perceived to be different?
Arenas, vehicles and differentiators are the foundation of a strategy. Staging is about execution. What is the speed and sequence of actions with which we enter and thrive in the market? What must happen first, what can happen later? What action do we have the resources for? What are the milestones? What are the early wins?
"At the heart of a business strategy must be a clear idea of how profits will be generated" — that is, profit in excess of the cost of capital. Successful strategies always have a certain economic logic, a "fulcrum for profit creation". This is sometimes based on a premium product. In other cases the driver can be huge scale and low production costs, which can be turned into a customer gain in the form of low prices. The economic logic of a strategy is not fleeting or transitory. Logical strategies help companies deliver great returns.
Porter: Five Forces
Porter's Five Forces (1979) is concerned with the dynamics of competitive industries. Every industry has its own economics, its own internal logic and market mechanisms, but different industries can be compared by analysing a standard set of competitive forces. Some industries have intense competition, while others are more temperate and therefore profitable in their character.
Understanding competitive forces and their collective strength in an industry helps with positioning. A business strategy is about choosing where and how to operate in such a way that one can effectively defend against these competitive forces — or even turn some of them in one's favour.
- Threat of new entrants — What are the barriers to entry? What might change the game?
- Threat of substitutes — How easy would it be for customers to switch? Why would go for it?
- Supplier bargaining power — How aligned are suppliers with the industry? How diverse is the pool?
- Customer bargaining power — How aligned are buyers with the industry? Does differentiation matter?
- Competitive rivalry — What factors and tactics shape the competitive landscape?
Some barriers to entry:
- Economies of scale
- Product differentiation
- Capital requirements
- Scale-free cost advantage (e.g., IP, advanced tech, access to resources)
- Distribution channel access
- Government policy, macroeconomics
- Patents and other IP
- Industry-wide trends
Some sources of supplier power:
- Concentration, dominant supply side players
- Unique, or differentiated product (e.g., TSMC is the only chipmaker with certain tech)
- Market independence
- Threat of upward integration
- Industry importance as target market
Some sources of customer power:
- Concentration, volume buyers
- Standard, undifferentiated products
- Price sensitivity from low value-add by buyer
- Price sensitivity from low cost-benefit for buyer
- Component quality insensitivity
- Threat of downward integration
Some factors of intense rivalry:
- Numerous competitors, roughly equal in size and power
- Slow industry growth leading to market share fights
- Limited lock-in potential
- High fixed costs
- Inflexible capacity
- High exit barriers
- Innovative industry
"As a rule, a company can sell to powerful buyers and still come away with above-average profitability only if it is a low-cost producer in its industry or if its product enjoys some unusual, if not unique, features."
Porter: Value Chain
The value chain is a model for how value is created within a business. The model is focused on the sequence of activities that a business does in refining resources into products. In a successful business, the value chain as a whole adds more value than each of the component activities contributes individually. The concept was introduced by Michael Porter in 1985.
The purpose of value chain analysis is to help businesses identify potential sources of competitive advantage. Viewing the flows within a company as an integrated system helps with understanding how value is created and where things could be done differently. This line of reasoning can be extended beyond the single business as well. When suppliers and distributors and customers are included in the model, this yields a broader set of activities, the industry value chain, or what Porter calls a value system.
Since the introduction and widespread adoption of the concept, many extension have been proposed. As business has exceeding become a global activity, it is natural to speak about global value chains, with associated activities. Similarly with the rise of digital businesses, it may be useful to study virtual value chains, where the flow of data and information is central to the activities.
Porter's value chain model features five primary activities and a set of supporting activities. The activities can then be split further into more granular sub-activities. The overall evaluation measure for all this effort is the profit margin, the value created and captured minus the cost of creating that value.
The primary activities:
- Inbound logistics — Supplier relationships and internal resource flows
- Operations — The transformation of inputs to outputs, the main value function
- Outbound logistics — Delivery to customers and related concerns, such as distribution and storage
- Marketing and sales — External communication and product positioning
- Service — Value maintenance after purchase
The support activities, which can make a difference to any or all of the primary activities:
- Procurement — Vendors, resources, and the mechanics of purchasing
- Human Resources — Recruitment, training, compensation; company culture
- Technology — Research and development; from manufacturing to IT
- Infrastructure — Accounting, legal, admin, general management
Porter: Generic Strategies
Porter's Generic Strategies is another way to look at business positioning and competitive advantage. Broadly speaking companies have a choice on whether to seek differentiation or low cost, and whether to focus on a specific segment in the market or the whole industry. These choices determine the business strategy. Michael Porter presented his thinking on generic strategies in several publications, starting with Competitive Strategy (1980).
The Cost Leadership strategy is about developing a competitive edge through cost reduction, either directly or through increased market share. In the direct case a reduction in costs results in increased profit, if the business can maintain industry average prices for the customer. The other way to win is by gaining market share through lower prices. While this results in lower profit per unit, overall profit will still increase, if the production costs go down in proportion. In other words, cost reduction and market share can together offset pricing pressure from competition.
The Differentiation strategy is all about building appealing products. The means of doing this vary across industries. Product desirability could be based on product features and functionality, durability, or simply consumer preference and perception. Brand is a differentiating factor. Differentiation allows businesses to charge a premium for their product, resulting in greater profit in relation to peers, if costs are held constant.
The Focus strategies, pursuing either low cost or differentiation, concentrate on specific target markets instead of the whole industry. Focused differentiation leverages target market understanding in developing appealing targeted products. The niche low-cost strategy also makes use of an improved understanding of a smaller market, but in this case the leverage is applied in cutting costs on the production side of things.
Kim and Mauborgne: Blue Ocean Strategy
"Competition is for losers."
"Red oceans are all the industries in existence today – the known market space. Blue oceans are all the industries not in existence today – the unknown market space." Cut-throat competition turns water red with blood, the vast blue oceans have lots of room for growth and opportunity.
Crucially, blue oceans are not zero-sum. In red oceans, somebody else has to lose — and profits take collateral damage.
Blue ocean strategy builds on the authors' earlier work on value innovation. Value innovation is about creating value both for the buyer and the company, including employees. The aim of value innovation is not to compete, but to make the competition irrelevant by changing the game.
The book outlines four actions to take in pursuit of blue oceans: Raise, Eliminate, Reduce, and Create. Each action is founded on asking the right question about the prevailing market:
- What has to go up within an industry in terms of product, pricing or service standards?
- What can be removed within a company or industry, to reduce costs and to create an entirely new market?
- What aspects of a product or service aren't entirely necessary, but still play a significant role? What can be substituted?
- What entirely new product or service can be created to form a new market through differentiation from the competition?
- AVOID competing in an existing market space, INSTEAD create uncontested market space.
- AVOID fighting the competition, INSTEAD make the competition irrelevant.
- AVOID exploiting existing demand, INSTEAD create and capture new demand.
- AVOID making the value-cost trade-off, INSTEAD break the value-cost trade-off.
- AVOID alignment with the idea of differentiation or low cost, INSTEAD pursue differentiation or low cost.
Unique Selling Proposition
"Unique Value Proposition: A single, clear compelling message that states why you are different and worth buying."
Unique Selling Proposition, or unique value proposition, or unique selling point, USP, refers to product features and properties that are appealing to the customer and are missing from the competitors' offering. Analysing USPs can help businesses position and differentiate themselves in the marketplace. The USP is a foundational building block for many marketing campaigns.
As a strategy tool, USP can be used to evaluate different players and positioning in an industry. Understanding the competition from this point of view can help with business focus and differentiation.
USP analysis can be viewed as a four stage process:
- Determine the evaluation criteria for the industry players
- Rank all the players accordingly — including your own business
- Analyse the results and formulate the USP
- Consider how the USP can be defended and developed further
Other tools and related things that could help with strategizing.
The Defense Advanced Research Projects Agency, DARPA, is a research funding body that seeks to generate big rewards by taking big risks. To think through and evaluate various research proposals, former DARPA director George H. Heilmeier devised a set of sharp questions with which program managers can evaluate ideas.
This questionnaire, the Heilmeier Catechism, has since acquired a prominent place in DARPA culture, and has remained a vital project evaluation tool to this day. If you don't have good answers to these questions, your project is not going to go anywhere.
I quite like the terseness and bluntness of the questionnaire, so I'll include it here as a counterpoint to the blue skies oriented business sketching exercises.
What are you trying to do? Articulate your objectives using absolutely no jargon.
How is it done today, and what are the limits of current practice?
What is new in your approach and why do you think it will be successful?
Who cares? If you are successful, what difference will it make?
What are the risks?
How much will it cost?
How long will it take?
What are the mid-term and final “exams” to check for success?
Scenario Analysis is a decision-making and planning methodology in which assumptions about the future are studied systematically. In scenario analysis the key activity is the exploration of possible future outcomes — scenarios — and their relative likelihood. By evaluating a range of scenarios, a business can identify both risks and opportunities, and then take appropriate actions to mitigate threats and to exploit favourable events.
The challenge with applying scenario analysis lies with the stochastic nature of the method. A rigorous scenario analysis study takes into account not just variability within single scenarios or parameters, but the relationships between scenarios. Assigning appropriate probabilities to various events can be a strenuous affair. As a relatively sophisticated method, scenario analysis requires a working understanding of probability, a famously unintuitive field.
Scenarios can be formulated in a number of ways, either by focusing on the change itself, or on the pattern that emerges over time.
- Base case — Nothing changes
- Bear case — Things get worse
- Bull case — Things get better
- Stress test — Everything goes wrong
- Best case — Everything goes right
- Wild card — Rare, extreme events happen
Common scenarios (Peter Schwartz)
- Evolution — Trends continue as before
- Revolution — Disruption, a new factor fundamentally changes the game
- Cycle — What goes around comes around; boom and bust
- Infinite Expansion — Explosion in growth opportunities
- Lone Ranger — One player takes on the establishment and wins
- My Generation — Culture and society can change the game
Scenario Analysis in five steps:
- Define the issue or question
- Collect relevant data
- Distinguish facts from uncertainties
- Develop scenarios around the data
- Evaluate the scenarios
Risto Siilasmaa, former Chairman of Nokia, talks about scenario analysis in his highly readable account Transforming Nokia: The Power of Paranoid Optimism To Lead Through Colossal Change. In particular, Siilasmaa talks about his frustration with disorganised board level forecasting efforts, and how he introduced scenario analysis to bring more structure to the board room discussions.
- Identify relevant scenarios for the future, both good and bad
- Figure out how to quantify those scenarios
- Find the necessary data to determine likelihoods
- Prepare for every scenario, both the likely and the less likely
- Evaluate which scenarios would be preferable
- Take action to render positive scenarios more likely and negative scenarios less likely
Kawasaki: 10 Slides
Guy Kawasaki's 10 slides (2015) template for the venture pitch is a tool for thinking about and presenting new venture ideas. There are numerous pitch deck templates like this one out there, but Kawasaki's strikes a nice balance and feels representative of the genre.
Kawasaki recommends ten slides, because most people can just about handle ten concepts in a meeting. The ten slides should be presentable in twenty minutes.
- Title — Company name and contact details
- Problem/Opportunity — "Describe the pain that you are alleviating or the pleasure you are providing."
- Value Proposition — Explain the value of the relieved pain or provided pleasure
- Underlying Magic — The tech, the secret sauce, the prototype, the demo
- Business Model — Who will pay for your product and how and why?
- Go-To-Market Plan — How will you reach your customers without breaking the bank?
- Competitive Analysis — Complete view of the competitive landscape; too much is better than too little
- Management Team — Team, board of directors, advisers, major investors
- Forecast and Key Metrics — Three-year forecast in dollars and key metrics; do a bottom-up forecast
- Timeline — Current status and what near future looks like; How will you use the money you raise?
Stratechery: Modern Strategy
Ben Thompson writes an influential blog on strategy and business in tech and media. I'll include some of his concepts here to balance the somewhat classical management view of strategy explored in the previously mentioned tools.
The concepts summarised here form a "tool" in the sense that any digital business strategy that fails to account for these phenomena is playing yesterday's game.
Aggregation Theory — In the Internet age, digital distribution is free and transaction costs are zero
Supplier Commoditisation — Aggregators own the demand and so have power over modularised and commoditised suppliers
Platforms — Platforms facilitate a relationship between 3rd-party suppliers and end users; aggregators mediate and control
Ecosystems — Building and managing platforms is extremely difficult and extremely rewarding
Disruption (Christensen) — A process whereby a smaller company with fewer resources is able to successfully challenge established incumbents
Innovator's Dilemma (Christensen) — "When New Technologies Cause Great Firms to Fail"
Modular/Integrated — Modularity and integration happen throughout the value chain, and are key to superior user experience and profit
User Experience — The best user experience wins, and it is the best hedge against disruption
Company Culture — Culture is the product of successful decisions and enables scale; Culture is a straitjacket when it is time to change
Organisation — The way a company is structured is reflected in what it produces, and how
Future — The future is all about the structures that are being destroyed and built today
The Social Epoch — Humans love to communicate; social is the dominant technology of this epoch
The Mobile Epoch — Mobile pushed technology into every part of life
New Media — The Internet unlocks new types of media, and they come with new business models
Premium Strategy — Greatest profits go to those who can maintain differentiation
Leverage — Understanding your strengths helps you decide how to proceed
Customer Acquisition — A sustainable business model is based on efficient customer acquisition
Horizontal/Vertical — Growth from peer acquisition, growth from upstream or downstream in the supply chain
Bundling/Unbundling — "The only way to make money is bundling and unbundling" (Jim Barksdale) — The Internet is driving both
Software-as-a-Service — The most important business model in enterprise tech today