By Bob Norton
Designing a business is more art than science because it is something that takes lots and lots of real-world experience. Personally I do not think you can learn it at any university, or by any amount of study, until after you have spent many years working in management to understand people and business well. It would be like someone reading for ten years about painting, without ever picking up a brush, and then when they finally pick up a paintbrush to paint their first person or landscape; and expect to paint a masterpiece. Pretty unlikely huh? We may be able to teach strategy in school, but even that is just a small part of overall business design.
I suspect most people do not even consider business design a process because few people get to the point in their career where they can understand all the skills or disciplines needed to actually do it. Business design is NOT just a flash of inspiration, or how you will charge and make money. It is the complete strategy for sales, marketing, finance, operations and product development, which are tightly interconnected, and must all work together, smoothly to create any real value for customers and stakeholders. As Edison once said, Genius is 1% inspiration and 99% perspiration. Nothing could be truer about the business design process.
We spend at least the entire first day at our, CEO and Entrepreneur Boot Camp - The Art and Science of Business DesignTM teaching these first four steps of the Rapid Growth By DesignTM process, so I don-t want to pretend you can get it all from reading the few pages here. This is at least an entire large book by itself; however, what I can do here is summarize the first four steps at a very high level. My hope is that reading this can open people's eyes to the fact that business design is its own process, art and science and must be done very early when founding any new business. Doing anything else first, except market research, is almost always a complete waste of time and money.
Many executives seem to think of business design as coming up with a business model, but this is only a small fraction of a complete business design. A complete business design must include far more, including a complete strategy for each discipline needed to run the business. Without all these areas working together there isn't any business.
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For purposes of this discussion let us consider the inner concentric circle of the vision pie below as the definition of a business design. Therefore:
DEFINITION: A Business Design - The sum of the complete strategies for each of the business disciplines required to deliver a product or service to the market.
We can assume the tactics can be driven by, or fall out of, the strategies developed. Certainly, this is best at any early stage of development. This is a simple, straightforward definition and very useful for our purposes. Note, however, that this definition does not mean the business design actually works, only that you have a design. A successful business design process would also need ways to test, or validate if the business design will actually work in the real world. More on this later.
So let's say you have a widget you invented that you want to sell. Let's even say it is a mousetrap, and you have already figured out that the saying: Invent a better mouse-trap and the world will beat a path to your door. became completely invalid somewhere around 30 years ago when people had too many options and very few driving needs left to serve. You probably have also figured out that due to overly fragmented marketing channels and other factors today, narrow niche-marketing is the only way to go, to both get established and avoid direct competition with larger companies. If you do not believe this you must read the book The Purple Cow which explains clearly the breakdown of the traditional advertising model product/business launch.
Since it is probably unfair to define this without an example I hope you enjoy reading this, somewhat comical, yet vastly incomplete business design example designed to demonstrate the minimum level of thinking that might be appropriate after running the four-step business process design cycle (coming soon) just once or twice.
Overly Simple Business Design Example:
The Mouse House
Tagline: We Catch'em Quicker and More Humanly
Product Development Strategy - Done in my garage and testing and improved over the last six years since I inherited my uncle's wheat farm with the largest mouse population per acre north of Mexico. Product tested and proven to catch a mouse every four days with enhanced bait recipe and instant superglue technology triggered by the slightest movement inside the "Mouse House". Fully designed and tested. To be refined and improved, based on customer feedback with new version expected twice a year and product-line extensions using same patents. Add the Double-decker Mouse House with Lemon Scent unit in the second year to allow cleaning and disposal monthly instead of weekly. In year three, add waterproof, non-disposable multi-unit Mouse Condo unit for outdoor perimeter population reduction to break reproductive cycle up to 300 yards outside grain factory walls. Upsell this to grain factories we already have as customers. Offer monthly pickup service at low cost to collect these mice and sell them to labs for drug and cosmetics testing.
Finance Strategy - Use personal savings to make the first 5,000 units, sell them and double the production order each time with the resulting gross profit, living off spaghetti and my spouse's salary for first 18 months of operation. Get 90-day payment terms from manufacturer in exchange for volume guarantee over 2 years. Offer 5% off for a 50% deposit with full payment within 20 days. Hire a bookkeeper and bring in a local accounting partner to do monthly books and taxes annually after market is proven and revenue is going. Sell company to first corporate offer over $6 million for patents, or $2 million plus a royalty for five years of 5% based on sales projection at the time of offer. Excel spreadsheet budget and revenue projection generated to verify all this works financially.
Marketing Strategy - Go after grain processors who would need over 600 units per year. Develop the market research myself with help from brother-in-law, who is a VP and Brand Manager at Proctor and Gamble in the household cleaning products division. He sold his table wax business to P & G five years ago and is an experienced entrepreneur. Possibly sell on the Internet to identify additional types of people and niche markets that we do not understand (idea flow). Investigate direct sales to small and medium sized commercial property exterminators who may have high volume and be able to offer a better guarantee as a competitive advantage if they leave our traps behind with their logo and phone number. Use Internet leads to investigate and test other additional market niche ideas. Investigate the restaurant, water park (Jumbo Rat House product) and low income housing apartment markets in year two after initial base of customers is established and revenue reaches $1.6 million. Investigate public relations potential getting support from animal rights groups and others who protest poison and slap-trap solutions.
Sales Strategy - Direct mailer waves with telemarketing follow-up during prime mouse season each year to all 5,356 grain processors in the midwest breadbasket, where the mouse problem is largest and cats are too well fed to solve the problem. Expect a 0.5% response rate to each four-page color direct mailer campaign to wheat warehouses and wheat processing factory operations directors. Send a free sample case of 12 units with follow-up calls weekly to insure testing is completed over 45 days. Expect a 32% closing rate from the free trial case to regular customers generating an average of 200 units per month at a gross profit of about $150 per month. Implying a 5-year customer value of $150 X 12 months X 5 years = $9,000 and an average fully loaded customer acquisition cost of $720. Get customers on an automatic monthly reorder plan with 10% discount offer to keep staff needs predictable and at minimum level. Assume telemarketers cost $15 per hour fully-loaded with 33% of that being commission based on sales.
Operations Strategy - Outsource production at $0.23 per unit locally for first 6,000 disposable units sold at $2.00 each. Order in amounts of 100,000 from overseas bidder in China who will produce for $0.02 per unit plus $0.02 cents shipping to U.S. after reaching 24,000 units per month with local manufacture as backup and fill in for some orders given the 45-day shipping time. Hire an office manager to take customer service calls for first six months and scale internal staff as needed, hiring a manager when we reach three phone support people. Use outside telemarketing group if sales ramp quickly. Drop ship directly from manufacturer in minimum quantities of 60 units. Visit customers for feedback and product improvement ideas annually. Take Internet and phone orders at 30-unit minimum shipped from our office weekly.
You see that idea is to develop an idea of how everything in the business will work at a fairly high level so we can begin to iterate the business design from some initial assumption point. Few people will know everything to come up with all this stuff without some help from others though, but the assumption is, this help is not a lot of time or expense at this stage.
The sad fact is, most businesses should not be run as originally envisioned by the founders for two main reasons:
1) You never, never, ever know enough when you found a business not to make many, many adjustments along the way, and
2) It is highly unlikely the founder has exactly all the right experience for this new business across the many business disciplines needed.
With the many thousands of business models possible for any given product or service expecting to pick the best purely based on one person's previous experience out of the gate is almost absurd. Only if this business is tremendously simple and the founder has spent decades in that exact niche could this really be possible. However, even then the odds are many unknowns will be learned early on that will necessitate the business plan and model being adjusted. In fact, one of the traits common to all successful entrepreneurs is lots of flexibility to adjust their business as more information becomes available. Very little is written in stone in the mind of a good serial entrepreneur and they are always open to discussions with people who know more than them about certain areas. The key here is to accept that you do not know what the business will look like in a few months and iterate from there.
I have had the pleasure of working with many entrepreneurs over my career and generally my experience is, they are focused more on the technology or solving some problem (hopefully), more than on the design of their business. Typically, the business model is the result of the entrepreneur's most recent experience, as opposed to the result a structured and thorough process that can be used to optimize any new or existing business. The idea being that MY IDEA + MY PERSONAL EXPERIENCE = GOOD BUSINESS DESIGN. In fact this is almost never the case early on. Very, very few businesses have launched and succeeded with exactly the strategies they had when the founder(s) started in their garages. Anyone that tells you otherwise either never did it, or has conveniently forgotten all the major and minor adjustments to the business model they made along the way.
If the entrepreneur's last company used direct sales, and the founder is a technology-focused person, (a very common scenario) then guess what the sales model is likely to be? Yes, direct sales will often be the only one considered until a deeper management team is brought in. Oops! - But who will they hire to run sales with this assumption from the start? A sales VP with mainly direct sales experience of course! And will this person recommend using another type of sales approach? Not very likely is it? Do you see what happens? This is a slippery slope and the business model can actually becomes a self-fulfilling prophecy based on very early bad assumptions. In fact, this seemingly little slip-up very early on often dooms a business before it even leaves the garage!
If the initial business model assumption is wrong, it is certain to cost lots of time and money to figure out. So, it is actually better to assume almost nothing early on in the business. I have seen so many companies that are completely dead, and they just don't know it yet, because they have a simple bad assumption in their business model design, and are totally committed to that incorrect assumption or model. Some actual examples I have seen presented by smart people with the wrong experience for the business to make these decisions include a company trying to sell an enterprise software product at a $5K to $10K price point with a direct sales force. Unfortunately, it is commonly accepted that anything less than $100,000 price point is the "valley of death" for enterprise software direct sales due to the huge sales cost, overhead and long trail cycle of corporations using these products. Yes, there may be exceptions, but I wouldn't want to bet a year of my time or any of my capital on being that rare exception.
Another example was a company that wanted to sell a $10,000 product, where there was already a perfectly good $500 solution available in the marketplace. They basically seemed to believe that rich people were idiots and would pay the extra $9,500 for some extra convenience and an unnecessary feature or two. I am sure they are either gone, or soon will be. What were they thinking? How did this happen? It seems they hired a technical person with exactly the wrong skill-sets, and he came up with a big Unix box solution, basically because that was his technical expertise. It was exactly the case of the carpenter fixing everything with a hammer. The best solution was more likely a $300 piece of hardware with some customer chips in it.
I actually saw both these companies present at different university enterprise forum start-up clinics. All I can do is shake my head, knowing no matter what I say to them, the odds are they already have their minds made up to pursue a futile business model. I have seen this so many times and I know for certain they are DOOMED if they follow this plan. It will just take them about a year and their life's savings to figure that out. This is because by the time they figure this out, they will have burned up six months of their personal funding (which is likely almost all they had), hired the wrong people and not made any real progress figuring out what their real business model should have been to leverage their idea. Another dead start-up! This is so sad, and so totally avoidable if founders are willing to step back, take a month to investigate the market and Design the Business properly for that specific market-need, BEFORE they start investing significant resources. What this means is that they also must be open to listening to others who have been there and done that and/or have different experience sets. That is not to say they should take everything they hear as gospel, many people without the right experience, including most venture capitalists will try to alter a business model to their liking, but the entrepreneur must get many data points and likely move towards the ones offered by the most experienced, successful people.
Consider for a moment all the things we as individuals do not know! It is pretty sure that today no one can even keep one-tenth of one percent of the knowledge available to mankind in their head! Scholars say the last Renaissance Man existed in the early sixteen hundreds some time. This was the last century in which anyone alone could claim to be an authority on everything. Today, four hundred years of collecting knowledge later, we now double human knowledge every few years! How can anyone be silly enough to think they can know enough across a whole industry plus management, sales, finance, marketing, technology and operations to actually design a business alone? Let me tell you I have never met anyone who can, and I do not think they ever have existed, or ever will.
How many elements of the business will be challenging? Today sales and marketing are almost always challenging because people are overwhelmed with options. Are you pushing the limits of logistics, technology or the need for capital? If these disciplines would demand a top person to do when you get there, you will certainly need a top person to contribute during the business design phase. Typically, you will need at least three or more likely five, experienced management level people along the way. This is not to say you need them full-time just contributing as you gather your market research and iterate your business design. You may need many more in a consulting capacity for some quick answers, but often this can be over lunch and by picking peoples brains in exchange for past or future favors. However, this is only if you want to be successful - if you plan to fail one will certainly do just fine.
Consider for a moment what each of us has NOT learned from a mathematical perspective, or as a percentage of all human, or even just business, knowledge? I would never dream of designing a business alone without the expert help of several people who are more experienced than I in other areas. But who? Where do you start? As you have seen who you start with will be a huge factor in where you end up. Yes, it is key to understand this is an iterative process. You have to start somewhere, and without being too committed in time and capital invested. So it is an unavoidable logical conclusion that business design MUST be an iterative process by its nature and this fact that one person cannot do it alone. You need to iterate through several versions of business design over and over again, getting half way closer to your goal each time, but probably never finishing. In fact, this process must be repeated FOREVER, because the market, technology, landscape of competition and other factors, which are totally out of your control, are constantly changing like the weather. So every business must be repeating this process regularly. Today this is one of the chief objectives of the CEO that was not needed 50 years ago. Keeping your business design up-to-date, based on rapidly changing market conditions and circumstances is a never ending process.
If you think about it you will realize, if we only use the things we have learned before, which we just agreed, I hope, is a small fraction of 1% of available information, we are almost certain to NOT have the proper business design. This does not even take into account, the fact that this is a different place and time. The obvious truth is, when you objectively consider it, it is very unlikely that the exact model of sales, marketing, operations and other disciplines at the founder's last company, or even all their previous companies, are anywhere near the optimum ones for this new business. If you accept that, then you must realize that every business is totally unique and needs to have its own custom business design with the input of many experts in appropriate fields.
Since no one can reasonably even claim to consider business options that they have no previous experience with very well, it is not only difficult to design a business without a good team, it is literally impossible, except in the very narrowest of circumstances. And I would argue in such circumstances this would not even be true entrepreneurship, because it must be an exact clone of some other simple business. So, it follows that any founder who says they have designed their business before they have a full team involved and lots of market research completed cannot possibly be on the right track.
Every business could be said to have been designed, but the question is how many options were considered and how many people, with how many sets of professional expertise, were involved? Given any technology, product, challenge, problem or core value that you have to deliver to a market, there are literally thousands of ways to construct a business to extract value from this core value, expertise, product or service (the center core of the vision pie) and I'll show you why shortly.