How a Good Business Is Structured, From the Inside Out

A blueprint is to an architect what a business model is to an entrepreneur. They're foundational planning documents that force an ambitious and creative mind to distill, describe, prioritize, organize, and harmonize ideas from their nebulous origins into specifics that work together to support the big picture.

You'd be in your right mind to run out of any building that wasn't built using a meticulous blueprint. Oddly, many entrepreneurs run their businesses into a market without the equivalent thing there to support them and their teams. Such behavior is, quite frankly, not sound judgment because of the significant risks left unchecked by such a cavalier attitude. Granted, a total collapse is not guaranteed to occur if a business model is absent or rushed, but the chance of that outcome happening is significantly higher.

“I get it,” you say. “I'll organize my entrepreneurial dream into an actual business model, but what in the heck is that?”

First, it's not what you're probably dreading—namely, it's not some horribly complex thing-a-ma-jig that only scholars can understand. Second, it doesn't have to take you a month to create. Third, it isn't something that should be worked on just once and then collect dust on a shelf (or get lost in the ether of your cloud drive). And fourth, there isn't a right way of creating one, though there are some best practices to consider, as we'll soon see.

So what is a business model?

I like Joan Magretta's answer in her Harvard Business Review (HBR) article, “Why Business Models Matter.” In the piece, Margretta, a senior associate at the Harvard Business School, writes that business models are “at heart, stories—stories that explain how enterprises work. A good business model answers Peter Drucker’s age-old questions, ‘Who is the customer? And what does the customer value?’ It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”

Magretta neatly summaries the practice of business modeling—the act of actually creating your business model—as “the managerial equivalent of the scientific method—you start with a hypothesis, which you then test in action and revise when necessary.” To her, it's as simple as “tying narrative to numbers,” and then testing both parameters: (a) for narrative, does the story make sense?, and (b) for numbers, does the profit & loss statement (P&L) hold up?

Don't worry about testing. That, naturally, comes later once you have a good model built that's gone to market and generated data to analyze. For our purposes here in this chapter, we'll stay focused on the business modeling part, which raises the next logical question likely buzzing in your head: “Now that I know what a business model is, how do I make one?”

Let's ask Alex Osterwalder.

Osterwalder is an entrepreneur, speaker, author, and—most notably—creator of the Business Model Canvas. While there are many methods and resources out there to help you develop your business model, his canvas is, according to HBR senior editor Andrea Ovans, “arguably the most comprehensive template on which to construct those hypotheses.”

The Business Model Canvas looks like this:

As you can see, Osterwalder's canvas comprises nine interconnected components, as follows:

1. Value Proposition—(What do you do?) What core value do you deliver to your audience? Which needs are you satisfying?
2. Customer Segment(s)—(Who do you help?) Which groups are you creating value for? Who is your most important audience?
3. Customer Relationships—(How do you interact?) What relationship does the target audience expect you to establish? How can you integrate that into your work in terms of cost and format?
4. Distribution Channels—(How do you reach them?) Through which channel does your audience want to be reached? Which channels work best? How much do they cost? How can they be integrated into your and your audience’s routines?
5. Revenue Streams—(How much will you make?) For what value is your audience willing to pay? What and how do they recently pay? How would they prefer to pay? How much does every revenue stream contribute to the overall revenues?
6. Key Resources—(What do you need?) What key resources does your value proposition require?
7. Key Activities—(How do you do it?) What key activities does your value proposition require? What activities are most important for your distribution channels, customer relationships, revenue streams, etc?
8. Key Partners—(Who will help you?) Who are your key partners/suppliers? What are the most important motivations for the partnerships?
9. Cost Structure—(What will it cost?) What are the most important costs in your work? Which key resources/ activities are the most expensive?

These nine components partition off nicely into three important groups that represent distinct and valuable concepts for your business, as follows:

1. Value Delivery (right three columns)—Your value proposition (the value itself) flows to-and-from through your customer relationships and distribution channels with your customer segments to create a virtuous loop.
2. Value Creation (left two columns)—Value is created and prepared for delivery by integrating your key Resources, key Activities, and key partners together like well-fitting Legos.
3. Value Capture (foundation)—Value is measured by you (as a business) in economic terms, namely the revenue generated by the revenue streams in association with the expenses incurred via your cost structure.

If you choose to model your business using Osterwalder's canvas—and I highly suggest that you do, at the very least as a first go—then you'll need to flesh out all nine of those elements.

Best practices suggest to first start with your value proposition (What do you do?), which sits central in the model's visual layout. Why start here? Because your value proposition—sometimes referred to as your unique selling proposition (USP)—is the soul of your narrative, your story, your reason for being. It guides a ton of your contemplation of and decision making for the other elements.

Second, develop the rest of your value delivery. You don’t need to worry over the order in which you develop the three included components. Some guidance suggests proceeding from customer segments to distribution channels and then to customer relationships. But really, the three of these ping-pong off each other to inform one another. So, if anything, go a couple of rounds on all three until you feel good about your value delivery as a whole.

Next, dive into your value creation. Tackle this section in the same manner as the value proposition—namely, without too rigid a path through the included components. Rather, circulate among them and hone them together to a point where you feel the whole is developed and integrated with your value proposition.

Finally, build out your value capture. Here's where numbers and math jump into the mix, which is always an area that tickles my nerdy heart. Roughing out your cost structure at a high level is the beginning of your business's operating budget. Doing the same for your revenue streams starts to give definition to your business plan. Combined, these two components are each distinct halves of the P&L coin.

Osterwalder's framework has become so popular that it's been replicated and spread far and wide. A simple Google search for the term “business model canvas” will yield many variants that you can use for your purposes as well as examples (such as the business model canvas for Netflix and Tesla) to use as comparable references. Definitely check out Osterwalder's own strategyzer.com site for the original creations.

I especially like DIYtoolkit.org’s variant of the business model canvas. The core canvas template is free to download (as it is in most cases elsewhere) and includes useful instructional content along with the canvas. And the purpose of the DIY organization—to provide “practical tools to trigger and support social innovation”—is top notch.

While entrepreneurs should fortify their thinking at the outset of their new venture using a framework such as this one, the startup moment is not the only time when it's applicable. So, in the event that your new thing has already taken flight but is lacking in a fully developed business model, it's absolutely not too late to develop one.

Additionally, when a business enters a new major phase of growth within its lifecycle, it's often advisable to revisit the underlying assumptions of its business model and adapt from there. Assumptions change over time. Marketplace conditions also change. As a consequence, your business model will need to adapt to new demands and opportunities in the future. Be ready for that, and look forward to it.

We are heeding our own advice here at SPI. Pat's original SPI model was almost entirely rooted in affiliate revenues fueled through content marketing. Those days are long gone. New offerings such as online courses entered the mix gradually over the years. Most new things begin as experiments, which is a healthy way to validate or invalidate the assumptions at the root of the thing. Today, we're revisiting our core business model assumptions again and making major new commitments to how we want to structure and grow our business into the future so that we fully live out our mission. We're excited to expand our capabilities as a means of increasing our value creation and value delivery to others.

Now that you have a better understanding of how a strong business model is structured, let’s turn to what it takes to properly form and launch a business. We'll delve into those important topics in the next chapter.