Platt Perspective on Business and Technology

Moving past early stage and the challenge of scalability 2: what needs to scale?

Posted in startups by Timothy Platt on July 20, 2012

This is my second installment in a series on moving past early-stage in developing and building a business (see Part 1.) And I begin this with what should be a fairly simple and straightforward question for any new business founder:

• What in operational and strategic terms is your business model that you have started your new business with?

At the end of Part 1 of this series, I said that this installment would focus on the business model, and I start this by stating that:

• Developing, following, adjusting and refining a business model is an essential part of the process of building a successful startup.
• And building that business model to be scalable is crucial if that new business is to succeed long-term and grow.

And I add here that I have rarely used the term business model in this blog and for a very simple reason – this is one of the most misused terms in business. And I will be discussing that here too. But first I want to make note of what a business model really is, as a foundation point for all that will follow in this posting and series.

• A business model is an operational and strategic outline as to how you will create and distribute a product or service so as to create unique value in your marketplace, and unique value as determined from the perspective of your customers.
• A valid business model should be a relatively comprehensive representation as to how you will do this, touching upon all of the major aspects and components that go into building a working business. That includes operational and strategic details, table of organization, and a lot more.
• I tend to discuss business plans and note here that as business plan is a comprehensive 360 degree view of a business proposal, discussing all of the elements of a proposed business model, as well as pertinent details as to how this new business would fit into and work in a marketplace, and competitively so.

In principle, developing and articulating an explicit, planned out business model should be an automatic step in planning out a new business venture per se. And preparing and drafting a business plan as a formal document should be too (see for example Online Store, Online Market Space – Part 9: business plans and filing in the gaps. In practice, and way too often both are left to some “later on” to think through and write out and everything is done ad hoc – at least for first time entrepreneurs. One of the signal lessons of experience here is that entrepreneurs learn they need to work out these details if they are to succeed with any real likelihood. But I am assuming here that any startups and early stage ventures under consideration are successful enough to be able to develop at least as small early stage-scale ventures. So I assume some planning.

• The question as far as building for scalability is concerned, is what planning is done, and what is explicitly included in a new venture’s business model?

And I return explicitly to business models and that common limiting way the term is too often used – with all emphasis on what should only be considered part of the story.

• One of the most important and in fact defining elements of most business models, is a description as to how their products and/or services will be offered so as to drive sales and bring in profits.
• The problem is that all too often, business models are developed with this their only area of explicitly thought through detail and that can have gaps too – this sales model-centric type of limited business model.
• And that can and does create barriers to scalability that can limit growth potential, at least without what amounts to significant change management.

I want to take this out of the abstract here by citing what is perhaps a best known business model and for a wide range of industries: the so called bait and hook model, in which profit center sales are linked to loss leader sales that are used to initially bring the customer in.

The classic example of this has to be the manufacture and sale of inexpensive loss leader razors, and the more expensive profit center sales of disposable razor blades that would go into them. In fact this type of business model is sometimes even called the razor and blades business model. But this model has also found fertile ground in a wide range of other industries. Computer printers tend to be manufactured and sold as loss leaders; profits come from the sale of ink cartridges, and every new printer model is always built so as to require purchase of new cartridges – the new cartridges you have for your old printer will never fit into or work in the new one and even if the new one is a minor upgrade from the same-manufacturer model that you have been using. Those ink cartridges, after all, are where the manufacturer makes all of its profits from its printer business. Cell phones (serving as bait) are similarly sold at very low cost and even as loss leaders, and air time and service and connectivity contracts (the hook in this) are where profits are made. These are just a few of many possible examples I could cite here.

This model can and does definitely work, but not for all businesses or types of business – and even when this model should work, it can as a business model have real gaps that would limit scalability for the specific application.

• Production and distribution have to be scalable, and for both the bait and hook halves of this model.
• Any scalability issues there or in the in-house operations necessary for maintaining a supply chain for this business would create business growth scalability challenges and barriers too.
• Now consider physical plant and fixed operating costs. A business that starts out small, and that can use an already available space for product assembly might face a large and significant step-up in these set expenses if it is to scale up to a point where new physical plant is going to be needed. Or the founders might have to consider outsourcing production or at least portions of it with all of the new issues and challenges that creates and throughout the full range of a more complete business model.

This is, of course, only one possible type of business model, and even when only looking at the sales model side. I am going to discuss several other business model types in my next installment, and after that I am going to turn to analytical tools that are used in developing and evaluating business models per se. Meanwhile, you can find this and related postings at Startups and Early Stage Businesses. You can also find related material at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.

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