Tuesday, May 30, 2006

First was the business model

Over the past couple of months I came across several articles claiming that there are investors today on the market who are more interested in product features than in a company’s business model. That is tragic.

Perhaps this line of reasoning is why we are seeing (again, as it was the case back in 2000) so many initiatives that are merely nice online tools but not businesses. I was really surprised to discover a number of online todo lists and I am not too sure how these guys are actually going to make money. Ditto for a number of online tools aimed at building the so-called “social Internet”.

A company’s business model is of the essence and it’s worth spending time to define and refine it. It’s the core of business sustainability and no company in the world can afford not to be clear about its business model. And because I now have some experience with entrepreneurs, let me add this: pick one and stick to it. Few things are worse in strategy execution than trying to have two or three business models because you can’t make up your mind.

Defining a business model sometimes involves disruptive thinking (not always though). And to do the job of business modelling properly one must take industry practices and economics into account as they are shaped by available technical means of production. InfoTech is a revolution in that respect. Economic phenomena previously considered to be marginal or exceptional are becoming mainstream with the advent of InfoTech; the network effect (or network externalities) is one such example. But that does not mean that the rules of business are radically transformed. As mentioned in an article published just after the downturn of 2000:

“[…]you can't give things away for free and you can't sell things for less than they cost”.

In the same article, a venture capitalist says that what sets apart a successful start-up from a failed one is the business model. There are other factors of course and I personally consider people to be more and more important. Fundamental in fact, which is why, done properly, the HR job will be one of the sexiest areas of the 21st century. And I am not talking about payroll administration but about finding, nurturing and developing talent in human organizations.

At its core a business model shows how an entity is going to be profitable by selling a product or providing a service. So, if the idea is that an individual (the entity) has a cool idea (product or service) with nice features that would be valuable as a component of another business but not as a standalone business, then, at a higher level, that individuals personal business model is that of the inventor, not that of the entrepreneur.

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