MODELLING YOUR BUSINESS FOR GREATER PROFITS

 

Long ago in the dot-com era, business models were the rage. But along with other questionable notions like cost-per-eyeball and stickiness, the concept of business models has fallen into disuse. It’s now time to revive this powerful shortcut to profitable thinking.

What is a business model and why would you need one?

A business model succinctly describes how your business will make money. It is shorthand, a model–insuring that all your business bases are covered, detailing only the essential elements: how you produce a product or service people need and want, how you put that product in their hands, and how you make a profit.

That seems simple enough, doesn’t it? But have you actually gone through this exercise?

Have you taken the time to consider the critical factors for your business success, making sure you have adequately addressed each one?

Suppose your business is already generating a profit. Do you need a business model?

Consider this: If you can’t describe–briefly and to the point–how your business performs each critical function, you are probably not earning the most money possible from the opportunities available to you.

But a business model is more than just a list of the essential elements–it is a cohesive narrative which you can communicate easily–to customers, vendors, lenders, investors, employees, anyone…

And just like a financial model–which allows you to identify and tweak various components like lead conversion rates or the cost of money–a business model helps you identify, then tweak, individual components to increase your profit.

There are four key parts to a solid business model:

The Value Proposition

Your value proposition links the individuals and organizations in your market segment to the products and services you offer, via the unique constellation of ‘value elements.’ Your value proposition answers the questions: who are they buyers, what will they buy, and why will they buy it.

The Production System

Some people call these operations. We like ‘production system’; it states clearly that this is about producing value. Your production system is the way you deliver your company’s unique value to your customers, in the form of products, services or both. It could involve creating something in-house or outsourcing. It could involve manufacturing from raw materials, assembling components, or even buying finished goods for resale. It could involve providing services with your own staff, using outside contractors, or assembling a team of virtual contributors.

The Distribution System

Your distribution system includes those parts of your business which identify potential buyers and helps them buy your product or service. This is what people traditionally think of as marketing and sales. It also includes logistics decisions like format, packaging, and delivery mechanisms.

The Profit Formula

This is how your company is going to make money. As it is said, do the math! You cannot buy high and sell low expecting to make it up on volume, regardless of what people hoped in the dot-com era.

Buy low and sell high will make you money, but unfortunately that little bit of info that doesn’t tell you quite enough to get rich. You must buy low, make whatever you buy worth more via some kind of added value, and then sell high enough, over and over again. Your profit formula describes how you are going to do that.

Of course, there are numerous other secondary components to running a business, but your business model will only include them when they are pivotal to your particular business design. For instance, a company which provides on-call engineers would include its special method for recruiting qualified engineers, which in most companies would be considered part of the HR function.

If each element works well on its own, the value proposition is sufficiently unique and compelling, you can economically and reliably produce value for your market, you have a repeatable and cost effective way of identifying and selling to customers, and finally you can sell things for more money than they cost. You will make money. But if any part of the model does not work, in the long run, and the long run could come quite quickly, you will go broke.

Your first step to profiting from a business model is to describe your own. List each of the four headings on its own fresh sheet of paper. Then write, in narrative form, how each works in your business. This may take one paragraph, it may take a page. If it takes any more it is likely too complicated.

Make sure you can describe each clearly and simply, value proposition, production system, distribution system, and profit formula. If an area is not sufficiently clear to you, it needs work, immediately. Because this area is holding back your business and costing you money.

Avi E. Ram

www.Araytha.com

 

Accountability: The New Body Odor

During my college days, I remember that hygiene often became an afterthought. Showering, washing clothes, having clean sheets and towels were not on the priority list. It just wasn’t that important to us. Rolling on the ban deodorant took care of everything. This one daily activity allowed us to attend classes without being repulsive. Working together was not inhibited by a foul, distracting odor. Our interests were not derailed by anything that distracted us or tempered our thoughts about the situation or individual. Ban deodorant always did its work.

In today’s business community, accountability seems to have become the new “body odor.” Whisper the word “accountability” and people run away and hide. Obviously, it isn’t the smell that turns people away – it is the personal commitment that is required.

Finding Money in Your Company

One of my business school professors quipped, “That business doesn’t have any problems that money won’t solve!” However, when you are that business and you need cash to stay in operation – it really isn’t that funny. Here are some tips to keep you going,

Start by looking for quarters in the sofa. When cleaning your house, and you lift up the cushions and find a few quarters – or when you reach in a pair of pants and find a five-spot, it gives you a great but short-lived feeling of wealth. The same can be true in your business if you look hard enough.

Cavete vendit

Caveat emptor, which means “beware the buyer,” resonates with anyone who buys goods or services on the web. The credit card industry has created a safety net where we feel that providing our credit card information for web purchases is probably safer than giving a credit card to an unscrupulous waitress or bartender.

However, as a merchant that sells over the web, the words “Cavete vendit” should ring clear in your mind meaning “Seller beware.” Merchants carry a tremendous of risk in taking credit cards and you need to plan accordingly.

I experienced a frustrating run with a credit card scammer and learned how vulnerable merchants are in the process. The experience also showed us where the gaps were in our security and gave us pause as to why we hadn’t taken these measures in the first place.

Roadmap to Startup Investment

ROADMAP TO START-UP EQUITY INVESTMENT

There is more investment capital available for start-ups then there are fundable start-ups to invest in. The key word is “fundable.” In this case the word fundable means that there is a 50+% chance that the start-up business will meet their business plan milestones.

 THE ROADBLOCKS

Today’s Sophisticated Investors Don’t Invest In:

• Ideas
• Technology
• Business Plans
• Hype
• New paradigms

Today’s sophisticated investors do invest in a solution to a well-defined business problem that will generate revenue when executed by a highly motivated team of entrepreneurs possessing an “unfair advantage”.

Want Some Help Attracting New Customers? Try The Best Kept Secret In Town!

Quick – which metro area in the country has had more undergraduate entrepreneurship programs ranked in the Top 25 in the past five years? Thinking Bay Area, Boston, Chicago? Nope, Greater Cincinnati takes the prize and it’s the best kept secret in town.

Entrepreneurship programs at Miami, NKU, Xavier and UC are either currently ranked among top 25 undergraduate programs nationally or have been within the past five years. If this were college hoops, we would be talking about four perennial tournament teams.

Like all winning teams, our local entrepreneurship programs have high quality players. Entrepreneurship students are learning the latest methods and ways of thinking that can help add value to your business. And, they employ the newest techniques to identify and develop new growth opportunities.

Students may be able to receive course credit for their experience. Some entrepreneurship programs like Miami’s also offer a compensation reimbursement match to the employer depending on the nature of the internship. You can engage entrepreneurship students through class assignments, student consulting projects and both full-time and part-time internships.

If you really want to receive full value from your involvement with entrepreneurship students, turn them loose on the right assignments.

Tech-tock, tech-tock…

“This time, like all times, is a very good one, if we but know what to do with it.”  Ralph Waldo Emerson

In 1998, I sent my first text message using my mobile phone.  To paraphrase a popular mobile carrier television commercial, “That is so 14 years ago.”  When I traveled abroad in 1987, in order to make a long distance call back to the U.S., it was not uncommon to have to wait for an overseas operator to place my call and ring me back.  Fast forward to 2012, I can be just about anywhere in the world and make calls, send text messages, email, access the Internet and more all on my mobile phone, virtually instantaneously at a fraction of the cost of that call in 1987.

The excitement of sending a text message on a mobile phone has been replaced with a veritable alphabet soup of digital world acronyms that have permanently changed how we do business. E-Business, M-Commerce, CRM, RFID, Smart Grid, Cloud Computing, EDI, Extranets, Product Visualization, the Digital Economy, Web 2.0, 3.0, 4.0 (and counting).  That list prompts a very simple question that I posed back in 1998, “Is your small business equipped with technology tools or toys”?  In 2012, we struggle to understand a dizzying array of new technology and applications, entrepreneurs must still address to follow-on questions: How can you use technology to your competitive advantage? When is it better to be “high tech” versus “high touch”?

Tech Tools Versus Tech Toys

 If you own and operate a business, you cannot ignore the fast change and high impact of technology in the workplace.  It used to be sufficient to review new technologies once a year or even every few year.  More recently, however, the pace of change emanating from the “high tech” sector seems to be quickening with new products, applications, and innovative uses popping up everywhere all the time.  For example, Google recently announced it is developing what it calls Google Glasses – smart glasses that push the envelope of the computer user interface with audio, visual/heads-up display, and connectivity to voice, mail, data and more.  While it still remains to be seen if this will lead to the next entrepreneurial tech tool, as a small business owner, you still need to ask and answer two basic questions: How can I best use information technology to gain competitive advantage? What steps do I need to take?

Gaining a Competitive Advantage

Simply put, the best, and some might add the only, reason to embrace technology in your small business is its ability to make your business more competitive. In general, technology needs to be part of your on-going strategic planning process.  It is always in order to explore the possibilities, but do so within the context of mini technology/strategy audit, so to speak.  Having an audit trail of past, current, and current technology applications gives you an advantage knowing where you have been, are, and want to go. One thing to keep in mind, technology will not fix a bad manual system.  Address the problem first and then introduce technology to increase effectiveness.  On the other hand, technology can often provide a solution to a problem that was elusive using a manual system.  In this case, technology can trump a manual system.  For example, one area where technology can greatly enhance manual systems is use of restocking, order entry, and GPS systems to track routing and delivery processes from suppliers.

Essentially, match needs with current and potential technologies.  Identify areas in which you may use technology to build resources and capabilities that will make your business more efficient and competitive. For example, if you attend trade shows, either business-to-business or business-to-consumer, and on-site sales can be facilitated by taking credit cards, you need to check out the latest mobile phone credit card processing technology such as Square and others.

High Tech Versus High Touch

 As alluring as technology can be, it is not always the answer.  If there is one thing that stands at the forefront of Management education today, it is the delineation of the limits of technology counterbalanced with a limitless capacity for human interaction.  That is just a fancy way of saying we are human.  As consumers, we can all relate to the moment where we don’t want another phone tree that takes us nowhere, promises of 24/7 Internet access that ends up limiting our access, or a seemingly endless need to provide unnecessary personal information for the so-called convenience of doing business online.  No to mention the painful process of reading one more 64 page, 8 pt font, single spaced “terms of agreement” form which prompts a confirmation that it has been read, when we are lucky to have even opened it, let along absorbed the mind numbing legalese densely packed into the pop-up box.

Bottom line, define your technology needs; develop a budget; integrate hardware and software solutions; track the impact on resources and cash flows; evaluate, review and make the necessary changes.  More importantly, plan, assess, and review the impact and customer response.  When it comes to keeping customers, sometimes, high touch trumps high tech.

You can find more on our web site at https://cincyentre.wordpress.com.  Till next time, all the best for continued entrepreneurial success!

Manufacturing Myths and Entrepreneurial Opportunity…

An economist’s guess is liable to be as good as anybody else’s. Will Rogers

Are there entrepreneurial opportunities in the manufacturing sector?  Given the relatively rough treatment that U.S. manufacturing tends to take these days, it is an interesting and timely question.

I often ask my students in class and audiences during talks the following two questions: 1) What percentage of the world’s manufactured goods are produced in the United States? and 2) What percentage of the world’s manufactured goods are produced in China?  Overwhelmingly, the response I get both from my students as well as the general public is less than ten percent for the U.S. and sixty to eighty percent for China.

Three persistent myths.  The answers are emblematic of the first persistent myth that U.S. manufacturing is dead at worst or on life-support at best.  The reality is that the U.S. is the world’s largest manufacturing economy consistently producing 21-23% of global manufactured products.  There is no denying that China has made a remarkable advancement in the manufacturing sector, today producing upwards of 15% of the world’s manufactured goods, but U.S. manufacturing is estimated to produce over $1.5 trillion of value or over 11% of the U.S. Gross Domestic Product.

That brings us to the second persistent myth – there are no entrepreneurial opportunities in U.S. manufacturing.  There are.

Finding Your Right Space

If you are in business, you have to do it someplace! The someplace is usually a rented space for most of us who are not working out of our homes. If you are thinking about purchasing your space, then think long and hard – because now you will be running two businesses – your current operation and the business of being your own landlord.

Your space defines your company in many ways. Attention retailers! — Your marketing program includes your space. The look and feel of your store communicates what you do – with the aim of persuading consumers to enter your space, shop and buy!

Hello white-collar office workers! — Most of your people spend most of their time in this space, then the layout and appearance impacts productivity, employee retention and attracting new ones.

Dear Mr./Ms. Manufacturer! — Proper layout of the site can make or break your production process. Designing production systems requires as much artistic talent as well as science. Improper design creates unnecessary costs which reduces profits. Well designed systems enable companies and workers to do more with less and do it faster.

When looking for your first space or if you need to move from your current space, ask yourself some of these questions to decide what is the best space for your long-term success.

Rainy Days

It’s always good to save for a rainy day. What if the rainy day becomes a monsoon? Will you and your business be able to handle a tidal wave? Events surrounding your business can be as unpredictable as the weather. Let’s take a look at what you can do to keep your business warm, safe and dry!

Suppose your rainy day comes in the form of a competitor opening up across the street. What should you do? First of all, the time to think about something like that is now – you will usually be pretty anxious when it happens – and that is never a good time to put together a tactical plan to compete. Let’s say you are a local gourmet coffee shop and a large national chain coffee shop opens a block away. Here are some ideas that come to mind.

Make sure your existing customers know the value of your products and services.  Accentuate and emphasize the “character” of your business versus a “big company” franchise. Try to attract some attention to your shop with a new banner or sign – that might suggest your uniqueness and differentiation from that corporate coffee seller. “Try our STORE ROASTED COFFEE, the only one in town.” This may draw some traffic from your newly found competitor.

Suppose your rainy day comes in the form of you contracting a life threatening illness. You may be out of commission for a week, month or even longer. Can your business survive?