Small Business by Donald A. Smith: Why business modeling beats writing a business plan

DONALD A. SMITH, SCORE volunteer. Consults internationally in organizational performance, process improvement and business systems.July 9, 2013 

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Donald A. Smith

In the summer of 1997, I started a small information-technology support business. A year later, I signed up for an entrepreneurship course at our local university, hoping it would provide the guidance to help my business take off.

The end product of that course was a fully developed business plan, drafted with the assistance of two students from the business school. And yes, my business took off.

For the next five or six years I revised that business plan every year. About the fifth year, we hit a plateau and couldn't seem to move past it. In an annual meeting with our board of advisers, we discussed our revised business plan. My accountant made a comment that stunned me. He said, "I think you need to stop working on the business plan and start working on your business."

That observation was spot on. In hindsight, I question how much value that business plan truly provided.

A few years ago I was introduced to the concept of business modeling, and it has challenged me to rethink the sacrosanct business plan.

Business modeling provides a concise (single page) depiction of how an organization creates, delivers and exchanges value with a customer. The benefits of business modeling over business plans are abundant. The time invested in business modeling is significantly reduced. Sizing up a business model is also much faster than navigating and digesting a business plan. Business modeling lends itself to a "design approach," where creating, comparing and contrasting various models facilitates the emergence of the best models. Once a model is chosen for implementation, the inevitable problems and potential solutions can be identified far more quickly - nearly in real time. Business models offer a fleet-footed agility the combat-booted business plan cannot.

Formal business modeling has been emerging only in roughly the last 15 years. IBM was a pioneer: Its Component Business Model has been around since shortly after the recent millennial turn. While CBM has had its following, the biggest boost to business modeling as a framework came in 2009, when a self-published work emerged, titled "Business Model Generation." It was written by Alexander Osterwalder, Yves Pigneur and a host of collaborators from all over the globe.

Osterwalder and company developed the Business Model Canvas, which comprises the nine basic building blocks of any organization. In the top center of the canvas is the value proposition block. The right side of the canvas has customer segments, customer relationships, channels and revenue streams. The left side has key activities, key resources, key partners and cost structure. These nine blocks communicate the business architecture quickly and concisely.

Does this mean the traditional business plan is dead? Much of the biz-blow chatter says so, but it depends on to whom you talk.

Many lending institutions and capital investment providers still require a formal business plan if you want serious consideration. Startup wonky Steve Blank's mantra, "Startups Model, Companies Plan," leaves room for both depending on where the organization is in its life cycle.

Yet to remain entrepreneurial, organizations of any age or size can leverage business modeling to uncover potential innovation and opportunities. Even if a business plan is required, there is enormous benefit in working on the business model as a foundational reference and springboard to help write the business plan.

And I must say, business modeling is the most fun I've had at work recently.

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dasmith@latchgroup.com, tvscore@yahoo.com

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