Tuesday, September 22, 2015

Design Your Business End-to-End

The guy who invented the wheel was an idiot. The guy who invented the other three, he was a genius. 
Sid Caesar.

an idea may be worth something, but a working business model around the idea is worth many orders of magnitude more.

How do you get from an idea to a working business model? 

Well, first you need to fully wrap your mind around the idea and think through as many perspectives as possible: who is your customer? what is the problem that you're solving? why you and why now? what's your particular competitive advantage? how is your basic business plan going to look like? what are your particular constraints and how do you plan to overcome them? This is how you design your business model from one end to another and make sure it "holds water".

Second, there's a lot of work involved, but that's for a different story. Let's get back to the end-to-end principle.

During my professional life, I have witnessed some resounding business model failures that can be entirely explained by the dismissal of the end-to-end design principle.

One that comes to mind is a proximity retail start-up in Romania who was built on a quite clever expansion model that would alleviate the investment capital burden and would ensure the P/L is scalable with the network expansion cadence. 

Yet, somewhere along the way, impatience or greed kicked in and the owner decided to start chasing some vanity metric (no. of new stores opened every month!) and of course this required a pivot of the business model into a very risky area, where more investment capital was needed (putting pressure on the working capital and triggering delays in payments to suppliers) and the P/L was immediately thinned by burgeoning network costs (triggering a swift departure from the committed budget). This led to a massive backlash from the suppliers and financiers and the retailer soon collapsed.

Choosing the wrong metric is of course not a capital sin in itself (everybody does it all the time), but the pivoting of the entire business model without a full end-to-end scenario play was what killed this ambitious project. Sadly, I joined too late - the turnaround was no longer possible without a massive capital injection, which turned out not to be realistic.

I have since then experienced several such "gut feel" business investment decisions but I was successful in stopping or blocking them before they could significantly hurt the business. 

While there is nothing wrong with "gut feel" decisions around great ideas, planning your entire business on the back of a napkin is crazy (and I have literally seen that!) - and most successful business models today require a bit more consideration than that.

So - carefully assess your business model and think it through - it will save you a great deal of pain and money later on, even if your business is not successful.

One might argue that "gut feel" is important when exploring completely new markets or business models. Yes, but then it is important to design the execution of your business model so that you start with something and grow as you learn, minimizing waste and risk (of which a new enterprise has plenty).

This is where the lean start-up thinking comes to rescue, with its famous Build-Measure-Learn cycle.

More on that, later.