Business Model: If You Can’t Draw It, You Don’t Understand It.

Business owner’s, CEO’s or Senior Executive’s are responsibleBusinessModel for not only operating their business but also perfecting the business model of that business.  Many people run a business but do not look at it as a business model, which defines the unique manner in which the various operations of the company interact as a system to provide competitive products and/or services.

The true test of an owner or CEO is to ask them to describe (in many cases this means illustratively in a drawing) the business model of their business that provides the business a unique advantage in the market.  Many can deliver an eloquent elevator speech but few can do a reasonable job laying out their business model when called upon.

It is like having to teach a subject to a group, then you really have to understand the subject matter in order to teach others. A good business leader will not only know their business but will also have the ability to capably present the business model on an ad hoc basis.

Example: What is my business model?
I recently worked with a business owner who wanted to set the stage to sell their business at some time in the future.  While the business was “profitable” they were unable to describe what it was about the business model that made it unique, competitive, and would improve the certainty of return for a prospective buyer.
Working with the owner I directed their attention to understanding and developing the business model, which consisted of:

  1. Cost structure.
  2. Source of revenue (or where the money was made).
  3. How the various activities of the business created the value experience for the customer, which resulted in reoccurring business, new customers and business growth.

This was a new experience for the owner and required a new way of viewing the business.  While they had been running the business for many years they did not understand the business model concept and how improving the business model would make the business more attractive to customers and ultimately represent a premium value to a prospective buyer.

Diagram your business model
You really have to draw your business model in order to share it with others. The person who can draw it will understand it. The real test is to draw it roughly the same every time.  The drawing will be the rendering of a formal diagram that the owner has in their office, on a conference room wall or business plan binder.  It is often the sum total of how lower levels of the business operate where each department or operation has their own “business model” of process chart on how they operate.

Example: Why can’t my staff see the business as I see it?
Working with another business owner it was clear he new his business but few below him did.  This was evident in the amount of crisis management that he was involved in on a daily basis.  He devoted a major part of his day and energy reminding his staff what they were to do but did not leave them with anything to help them deal with the next crisis and how to operate.
I suggested he needed to share how the business operated. He said that was easy and that it would just take a “couple of hours.” It took far more than a couple of hours and each time we completed a session there were many blank boxes and broken legs on how the business operated. He intuitively new how to make his business work, at great effort, but he could not draw it.
When he saw the completed diagram of the business model and what part of the business created value it was an “ahah” moment for he then knew where he needed to devote his energies to make the business successful and increase customer value with far less effort and stress on his part. He was then able to show-and-tell his staff how he wanted the business to operate and where the important customer touch points were. The result of this was that many of the customer and employee issues that the owner used to fight personally each day reduced significantly after that.

Can you draw your business model?
If you do not already have a drawing of how your business operates take the time and draft one.  Include what you believe constitute the major functions and processes that are critical to the operation of your business. Identify the processes how you contain cost, influence revenue (where you make money) and the unique processes that you use to create value for the customer.

Your first draft will be rough and lines will cross and you may not like the way it looks but the key question is “Does it represent how you operate?”  The next step is to ask your management group to do the same and compare them.  This is an excellent exercise to see who understands the business and who dos not.

Be prepared to learn and share what you as you compile results. Develop a composite version and then show it to other principle people in (or outside as well) the business and get their perspective and critique and see what feedback they can provide to make the definition of the business model stronger.  I will wager that your end result will be far different from your first draft – and that you will have a much different appreciation of what your business model consists of.  You will also have discovered some changes that you can make to eliminate waste, improve efficiency and resolve inconsistencies to make the business model more efficient.

Summary
Managing a business can be very demanding and it is easy to get consumed in making things happen from day-to-day.  You cannot forget that your success is the result of perfecting your business model. Knowing what is needed to contain cost, make money and create value for your customer.  Do not loose site of this important principle and regularly validate that your business model is one that you and your organization understand and are in compliance with.

The true test is if you understand your business model then you should be able to draw it and explain it effectively to someone.

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