Business Model vs. Business Plan

The cornerstone in preparing a successful strategic plan is the integrity and effectiveness of the business model that the company uses to exploit opportunities.  Too often energy and urgency is applied to developing a business plan without determining if the business model is structured and resourced for success.

What is the difference between a business
model and a business plan?

Business Model: A proprietary combination of values, strategic resources and culture designed to create and deliver products and or services that are valued in the market place. 

Business Plan: Details the business opportunity that company leadership will use the model to exploit.

Using a sports car analogy the business model can be viewed as the wheels, drive train, instrumentation, interior and suspension of the business.  Whereas the business plan would be the road map, fuel type, race strategy and drivers ability that used the sports car to be competitive in a race.   If the business model was reduced to graphic terms you might have the following:

Business Model


 

This graphic above describes the integration of the core business, suppliers, partners, channels, markets and most importantly – customers that constitutes the “business model.”

What makes the business model unique,
hopefully profitable and successful?

The combination of values, strategic resources and culture creates a unique environment that will influence attitudes and behavior that will be active and formative in defining the products and services to be delivered.
Two businesses may use common suppliers and have common partners but experience two very different outcomes from a business success point of view.  The primary difference starts with the business model of each business and the ability of the business leadership team to operate with the model to create a culture where the right strategic resources successfully execute the values of the company.

We have all bought products in the market place where alternative sources of supply existed.  Why did we choose one above the others?

  • The purchasing experience where you were given more confidence in dealing with company A over company B?
  • You recognized that the product or service was designed to meet your need.
  • Contact with the organization demonstrated that they were interested and ready to take action on what you said.
  • The company was highly recommended by others as being a reliable source for high quality products and services.
  • The selected company was recognized as the market leader for products and services that met your needs?
  • You recognized a customer-centric orientation in your contact with the company that convinced you that they were the best to work with.

These characteristics do not occur by accident and are the result of a conscious decision to select and consistently live by a set of special values that are adopted by a team of exceptional people that create a customer-centric culture. This commitment to these foundational practices is core to competitive success.

There are other business best practices that are important in the success equation but they do not on their own make up for what the right values, strategic resources and culture provide.

How do I evaluate my business model?

The accepted methods to evaluate a business model are to look at it from the outside in.  The underlying objective is to ascertain how stable the business is.  Some key questions to ask of your business model are:

  1. Financial strength – good cash flow, strong margins.
  2. Quality and loyalty of customers – do they value quality and value and are repeat buyers or do they make purchase decisions solely on price?
  3. Difficulty in selling your product or service – do your products sell themselves or does it require a significant effort to sell possibly due to poor value proposition, dependant upon a highly skilled sales person to successfully sell it, limited access to market, etc?
  4. How are key staff (i.e. sales, engineering, operations) rated in the marketplace – are talented staff attracted to the company and is it easy to retain them?
  5. Do barriers to entry of competitors exist such as intellectual property, brick and mortar facilities, direct sales network, complexity of technology infrastructure, etc?
  6. Are you conducting business in markets that have longevity – are they expanding, are you growing market share?
  7. Strength and value of partner alliances that leverage cost effectiveness, competitive advantage or reduces key resources that your business needs.
  8. How well do all of the components of the business work together?
  9. Is your business dependant upon one seasonal line of business or multiple lines having complementary business cycles?
  10. How well does your customer understand and appreciate your value proposition?

Examples of Good Business Models

Starbucks places their stores close together thereby saturating the market and driving up sales.  Having stores just blocks from each other and in some cases in the same shopping center makes access to a coffee urge nearly immediate, more stores reduces lines for coffee at more popular outlets. 

McDonalds has engineered their business franchise model so well that they have reversed the typical success failure rate of food service businesses from 20/80 to 80/20.  They have taken the business model to a level where every aspect of the providing a consistently good customer experience is managed which is fundamental in building customer loyalty and repeat customers.

Amazon is effective in constantly altering its business model leveraging its assets and capabilities to generate new business.  It also realized that it could share its technology platform used for its business as a source of revenue by providing e-commerce services to other companies.

Gillette perfected the “razor blade” model by selling the razor handle at or below cost but enjoying the repeat sales of the razor blades with a good margin.  It has used strong patents to protect it position spending a lot of money on R&D to maintain its technological position in the market.

Xerox perfected the business model of leasing capital equipment at a relatively low cost but charging a per use fee above a minimum.  By leasing the equipment Xerox was in an “inside” position to upgrade the existing copier to the next version of the existing copier or new technology equipment providing the customer new features and cost benefit.

Your business may be smaller than the examples above but the significance of your business model is just as important to your success as it is to theirs.  Do not discount the importance of developing your business model.  It is what differentiates your products and services in the marketplace and why you are either the market leader and conversely may be the market follower.

Summary
Do not underestimate the value of your business model in the success of your business?  It needs regular attention, maintenance and focused effort to make sure it remains competitive.

Using the car analogy again: Don’t just put fuel in the tank!  Keep it maintained with experienced professional mechanics, replace worn out components with high quality high performance ones that have longevity and will withstand stress over time.

Committing to an investment of time and energy developing your annual business plan process is critical to a healthy business organization.  Complement that investment with a consistent cycle of monitoring, maintaining and where necessary adjusting your business model.

Work on your business as well as working in your business!!


Author’s Note: Please click here to request information on how you can get an assessment of your business model.

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