Business Models

What is a business model anyway?

Behind a business model lies a basic rule in management: when you run or work in a company, you need to know what you want. You need to have a plan for the company – this is common sense. A business model is a method for running a specific business activity over a specific future period. A business plan is the document that sets out this method in writing.

The business activity could be that of a single person or a large international company. The future period could be the next six months or, for certain sectors the next 40 or 50 years. A business plan should be comprehensive in other words, it should encompass all the activities of a business.

At the core of a business model is a financial model, which is used to produce the financial statements and projections found in the business plan.

Uses for a business model

There are internal and external uses for a business model. Building a financial model and preparing a business plan allows entrepreneurs to allocate resources and spend time and effort where it is most needed at the different stages of a company’s development. It also allows effective monitoring of the company’s value.

The company’s external stakeholders (including banks and investors) will use the financial model and the business plan to assess investment opportunities and once invested, to check the company’s performance.

How to write a business plan – a short introduction

The following is a basic template for a business plan:

  1. Introduction
  2. Contact information and team profile
  3. Definitions
  4. Market analysis
  5. Products (or services)
  6. Strategy
  7. Financial forecasts and analysis
  8. Risk factors and analysis
  9. Conclusion
  10. Appendix

The following is a quick guide to the contents of a classic business plan. Note that this format does not necessarily apply to all projects, particularly those that plan to follow an innovative business model. The aim here is simply to offer a quick practical guide to the contents of a business plan.

Section 1: Introduction
Consists in an executive summary of the business plan. Usually this is written in the end, when all the other sections are complete.

Section 2: Contact Details and team profile
This is a practical section in which you give contact details for yourself and the team. It is also used to present the team. The decision to invest depends on a large extent on a relationship of trust between the investor and the team which is going to manage the company on a day-to-day basis hence the importance of this section.

Section 3: Definitions
A formal section in which you define any technical terms to follow.

Section 4: Market analysis
Define your market, give an overview of the competitors. In this section you should at least identify your market and define its size. Analyse the market into its main segments and describe the main growth drivers.

Section 5: Products (or services)
Define the product or service that you aim to offer. A key section.

Section 6: Strategy
Perhaps the most important section. Define your strategy and explain how it is different (and better) than your competitors’.

Section 7: Financial forecasts and analysis
An important section. The forecasts can follow standard template, based on market and economic assumptions. A certain degree of adaptation to the specific project being proposed is recommended. See below for more details.

Section 8: Risk factors and analysis
Any investment involves risks. It is better to name those risks upfront than to get asked tricky questions by investors at a later stage.

The remaining sections consist in the conclusion and appendices, both of which should be brief.

A business model remains a commercial document and its aim is to sell a particular project to an investor or a group of investors. Avoid getting into excessive detail.

Business model templates: financial projections

The financial projections mentioned above vary according to the business, sector, region and strategy, among others. I prepared a simple Excel template showing the basic profit and loss statement for a standard business plan, which can be downloaded here.

Open Source and co-creation business models

Open Source software uses a source code which can be accessed by anyone and, under certain conditions, can be adapted by any user or developer to his particular needs. Open Source software is just an example of a larger reality: Open Source and co-creation business models.
 
One of the most frequent questions that gets asked about Open Source and co-creation business models is “How do you make money if you give away your product for free?”. This is a fair question with a simple answer.Only part of the product or service is given away for free.

Many products involve more than an initial sale. For instance, software products have associated installation, customization, maintenance, training and upgrade. So in the case of software, it sometimes makes sense to give away the first installation of a common source code for free as this then opens the door for a number of paid follow-on services. Co-creation business models use their customers’ creativity for product development.
 
Consider LEGO: LEGO clubs around the world and its members are more than happy to offer good ideas for product development. It makes sense to use this creativity and there is no monetary compensation (in most cases).
 
Common themes
 
Are there common themes between LEGO and Ubuntu? In both cases, consumers and the companies are passionate about the product. Ubuntu’s founders and many of its users are convinced that an operating system is too important an issue to be left to a single company. LEGO is a well-known brand with a unique product.
 
There are also differences between these two specific examples. Ubuntu software can be used under the terms of a license but in principle anyone can aspire to contribute to its development where in the case of LEGO, the designs are owned by a private company and only a few users can aspire to have a say in product development.