Business Modeling Quarter

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Business Modeling Quarter (hereinafter, the Quarter) is the first of four lectures of Operations Quadrivium (hereinafter, the Quadrivium):

The Quadrivium is the first of seven modules of Septem Artes Administrativi, which is a course designed to introduce its learners to general concepts in business administration, management, and organizational behavior.


Outline

The predecessor lecture is Feasibility Study Quarter.

Recitals

Strategy design is the enterprise effort undertaken in order to design the strategy out of the concepts analyzed during strategy analysis. The design can be divided in four batches:
  1. To discover most feasible concepts analyzed during strategy analysis;
  2. To analyze which of most feasible concepts and how can be arranged in a new strategy;
  3. To approve the new strategy or, at least, its layout and key points;
  4. To formulate the approved strategy for their further implementation or, in other words, as the input for strategy implementation.

Concepts

  1. Commerce transaction.
  2. Enterprise. (a) An endeavor undertaken in order to create something or develop somebody, or (b) an undertaking that includes several endeavors and may or may not represent an entire business or organization. The enterprise assumes some level of enterprise effort.
    • Business. Either an individual's regular occupation, profession, or trade, or the practice of making one's profit by engaging in commerce.
    • Departmentalization. The basis by which jobs in an enterprise are grouped together.
  3. Segmentation.
  4. Competitive strategy. A formulated strategy for how a strategic business unit is going to compete. This formulation usually states which one of four types of competitive strategies the strategic business unit is going to pursue, what it considers as its competitive advantage or advantages, defines its business model, and may or may not include (a) what products, (c) resulted from what production, (d) at what price, (e) using what presentation and promotion, (f) on what market or markets with regard to the region or regions and/or segment or segments of customers, (g) with what front-end office personnel, (h) with what level of enterprise's support this enterprise is going to offer, as well as (i) what financial results and/or competitors' actions would trigger what changes in those decisions. Rarely, a mature enterprise formulates just one competitive strategy; usually, there are several competitive strategies in the enterprise portfolio since different strategic business units are supposed to have their own competitive strategies.
  5. Value chain. The entire series of organizational work activities that add value to each step from raw materials to finished product.
    • Value. The performance characteristics, features, and attributes, and any other aspects of goods and services for which customers are willing to give up resources.
    • Value. The benefit enjoyed by the stakeholders of the system when the system is in operation.
    • Service profit chain. The service sequence from employees to customers to profit.
    • Technology. The way in which an organization transfers its inputs into outputs.
    • Cloud computing. Refers to storing and accessing data on the Internet rather than a computer's hard drive or a company's network.
    • Internet of things. Allows everyday "things" to generate and store and share data across the Internet.
    • Sharing economy. Business arrangements that are based on people sharing something they own or providing a service for a fee.
  6. Business development model.
    • Product development model.
    • Customer development model. “The ‘traditional’ way to approaching business is the Product Development Model. It starts with a product idea followed by months of building to deliver it to the public.” (Source: Find The Tech Guy) However the Customer Development Model begins by talking to prospective customers and developing something they are interested in purchasing/using. These concepts are promoted strongly by Steve Blank and Eric Ries who encourage startups to get early and frequent customer feedback before developing their products too far (in the wrong direction). The four steps to the model (Source: Find The Tech Guy): 1. Customer Discovery 2. Customer Validation 3. Customer Creation 4. Company Building
  7. Business strategy. A strategy that determines the behavior of the enterprise on a particular segment of its market.
  8. Optimization. The process of choosing the best alternative that will satisfy the needs of the stakeholders under the constraints given (e.g. cost, schedule and available technology).

Roles

Methods

  1. Lean startup. “Lean startup is a term coined and trade marked by Eric Ries. His method advocates the creation of rapid prototypes designed to test market assumptions, and uses customer feedback to evolve them much faster than via more traditional product development practices, such as the Waterfall model. It is not uncommon to see Lean Startups release new code to production multiple times a day, often using a practice known as Continuous Deployment.” (Source: Wikipedia) You should note the slight differences between lean and bootstrapping. “Bootstrapping provides a strategic roadmap for achieving sustainability through customer funding (i.e. charging customers), lean startups provide a more tactical approach to achieving those goals through validated learning.” (Source: Ash Maurya) An Example of 3 Stages of a Lean Startup (Source: Ash Maury): 1. Customer Discover (Problem/Solution Fit) 2. Customer Validation (Product/Market Fit) 3. Customer Creation (Scale) Note that a bootstrap and lean startup have differences and bootstrapping does not mean spending any money.
    • Lean. Also referred to as: lean manufacturing, lean enterprise, lean production. “The core idea is to maximize customer value while minimizing waste. Simply, lean means creating more value for customers with fewer resources.” (Source: Lean Enterprise Institute) The definitions and usage of ‘lean’ vary depending on context and application. The origin of the word in business can be linked back to the 90’s. “Lean manufacturing is a management philosophy derived mostly from the Toyota Production System (TPS)”. (Source: Wikipedia) The key focus is around the reduction of waste whiling focusing on delivering value to the customer.
    • Bootstrap startup. “Bootstrapping involves launching a business on a low budget. Practically this means that you’ll outsource (most likely offshore) your design and development, you‚’ll rent your servers, you won‚’t have an office and you’ll have no salary. Prior to launch, the only expensive professional services which you’ll buy will be your legal advice and accountancy services. Everything else, you’ll have to pick up yourself and learn as you go along.” (Source: RWW) An Example of 3 Stages of a Bootstrap (Source: Ash Maurya): 1. Ideation (Demo) 2. Valley of Death (Sell) 3. Growth (Build) Note that a bootstrap and lean startup have differences and bootstrapping does not mean spending any money. “Bootstrapping and Lean Startups are quite complementary. Both cover techniques for building low-burn startups by eliminating waste through the maximization of existing resources first before expending effort on the acquisition of new or external resources. While bootstrapping provides a strategic roadmap for achieving sustainability through customer funding (i.e. charging customers), lean startups provide a more tactical approach to achieving those goals through validated learning.” (Source: Ash Maurya)
  2. Action design. A change process based on systematic collection of data and then selection of a change action based on what the analyzed data indicate.
  3. AIDA technique.
  4. User feedback loop. Ideas are put in front of users, who provide their feedback, which is used to refine the design, and then the process repeats.

Instruments

  1. Business Model Canvas. “The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It is a visual chart with elements describing a firm’s value proposition, infrastructure, customers, and finances. It assists firms in aligning their activities by illustrating potential trade-offs.” (Source: Wikipedia) A business model is a dynamic document that describes how your company creates, delivers and captures value. The 9 Business Model Canvas Building Blocks (Source: Business Model Generation): 1. Customer Segments 2. Value Propositions 3. Channels 4. Customer Relationships 5. Revenue Streams 6. Key Resources 7. Key Activities 8. Key Partnerships 9. Cost Structure
  2. Orientation mix.
  3. Marketing mix.
  4. Promotional mix.

Results

  1. Business model. The core part of the strategic plan that suggests how an enterprise is going to make money in its business. The business model usually answers two key questions: how the enterprise is going to earn and how it is going to spend in a particular business or a group of them. Its competitive strategy may answer the question about its earning. Its business strategy may answer the question about its spending. Because an enterprise can be involved in several businesses, it can have several business models.
    • Model. An abstraction of reality, a simplified representation of some real-world phenomenon.
      1. Model(s). A representation and simplification of reality developed to convey information to a specific audience to support analysis, communication and understanding.
    • Business domain model. A conceptual view of all or part of an enterprise focusing on products, deliverables and events that are important to the mission of the organization. The domain model is useful to validate the solution scope with the business and technical stakeholders. See also model.
  2. Business architecture. A subset of the enterprise architecture that defines a business' current and future state, including its strategy, its goals and objectives, the internal environment through a process or functional view, the external environment in which the business operates, and the stakeholders affected by the business' activities.

Practices

  • Board of directors. A group of influential individuals, elected by stockholders, chosen to over see the affairs of a company. A board typically includes investors and mentors. Not all startups have a board, but investors typically require a board seat in exchange for an investment in a company.
  • Burn rate. “The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. In other words, it’s a measure of negative cash flow.” (Source: Investopedia) When your burn rate increases or revenue falls it is typically time to make decisions on expenses (eg reduce staff).
  • Business plan. “A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. It has many functions, from securing external funding to measuring success within your business.” (Source: Business Link) A business plan is a static operational document to how your business will run.
  • Buyout. A common exit strategy. The purchase of a company's shares that gives the purchaser controlling interest in the company.
  • Capital. Monetary assets currently available for use. Entrepreneurs raise capital to start a company and continue raising capital to grow the company.
  • Client (or Customer). The person or group of people who are the direct beneficiary of a particular product or service. Idealy, these are the people for whom the product is designed.
  • Concierge Minimum Viable Product (CMVP). A manual service simulating the same exact steps people would go through with a final product.
  • Constraint. Limitations outside the control of a project team. For example, date time-line limits, or finite resources.
  • Convertible debt. This is when a company borrows money with the intent that the debt accrued will later be converted to equity in the company at a later valuation. This allows companies to delay valuation while raising funding in it's early stages. This is typically done in the early stages of a company's life, when a valuation is more difficult to complete and investing carries higher risk.
  • Deliverable. A tangible outcome produced by a project. Internal deliverables are created by a project and are used by the company itself. External deliverables are created for clients, stakeholders, or customers. A single project can create many sets of deliverables.
  • Deployment. Introduction of a new activity, procedure, or program to an organization.
  • Disruption. Also known as disruptive innovation. An innovation or technology is disruptive when it "disrupts" an existing market by doing things such as: challenging the prices in the market, displacing an old technology, or changing the market audience. “An innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology. The term is used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically first by designing for a different set of consumers in the new market and later by lowering prices in the existing market.” (Source: Wikipedia) The term ‘disruptive technologies’ was coined by Clayton M. Christensen and articulated in his book The Innovator’s Dilemma. The term ‘disruption’ is now often used by startups to describe any product or idea that may change existing markets or products (planned or unplanned). However to be used correctly it should link to Christensen’s original theory. The confusion is best explained here. An example is the disruption Wikipedia caused to the Encyclopedia market.
  • Dogfooding. A company showing confidence in their own product by using it themselves. Derived from the expression “eating your own dog food.”
  • Due diligence. An analysis an investor makes of all the facts and figures of a potential investment. Can include an investigation of financial records and a measure of potential ROI.
  • Elevator pitch. “An elevator pitch is a concise, carefully planned, and well-practiced description about your company that your mother should be able to understand in the time it would take to ride up an elevator.” (Source: Business Know How) Being able to pitch your idea is crucial for entrepreneurs and valuable in any formal or informal networking situation. It allows you to quickly describe your concept to anyone in a short period of time, including potential partners or investors.
  • Enterprise. The term enterprise typically refers to a company or business (i.e. an enterprise tech startup is a company that is building technology for businesses).
  • Entrepreneur. “An entrepreneur is an individual who accepts financial risks and undertakes new financial ventures. The word derives from the French “entre” (to enter) and “prendre” (to take), and in a general sense applies to any person starting a new project or trying a new opportunity.” (Source: wiseGEEK)
  • Equity. “In finance, equity is ownership in any asset after all debts associated with that asset are paid off.” (Source: Investopedia) Equity = Assets minus Liabilities. In terms of startup, it is commonly used to describe a business giving up a percentage of ownership in exchange for cash. An equity investor is then entitled to share in any future profits and/or sale of business assets (after debts are paid off).
  • Exit. This is how startup founders get rich. It's the method by which an investor and/or entrepreneur intends to "exit" their investment in a company. Commons options are an IPO or buyout from another company. Entrepreneurs and VCs often develop an "exit strategy" while the company is still growing.
  • Functional requirement. Particular behavior or metric to judge the operation of a system.
  • Ground floor. A reference to the beginning of a venture, or the earliest point of a startup. Generally considered an advantage to invest at this level.
  • Incubator. An organization that helps develop early stage companies, usually in exchange for equity in the company. Companies in incubators get help for things like building their management teams, strategizing their growth, etc.
  • Intraprenuer. “Coined in the 1980s by management consultant Gifford Pinchot, intrapreneurs are used by companies that are in great need of new, innovative ideas. Today, instead of waiting until the company is in a bind, most companies try to create an environment where employees are free to explore ideas. If the idea looks profitable, the person behind it is given an opportunity to become an intrapreneur.” (Source: Investopedia) ‘Intrapreneurs’ hold many similar characteristics to ‘Entrepreneurs’ any may well leave their jobs to pursue a career as an entrepreneur. Companies seek out intrapreneurs to effect change within their organisations.
  • IPO. Initial public offering. The first time shares of stock in a company are offered on a securities exchange or to the general public. At this point, a private company turns into a public company (and is no longer a startup).
  • Iteration. Each phase of agile development is referred to as an iteration. Iterations are short time frames granted to deliver sets of features. Each iteration generally contains activities such as analysis, design, development, and testing.
  • Lead investor. A venture capital firm or individual investor that organizes a specific round of funding for a company. The lead investor usually invests the most capital in that round. Also known as "leading the round."
  • Liquidation. The process of dissolving a company by selling off all of its assets (making them liquid).
  • Milestone. A scheduled event to mark the completion of a major element of a product. Milestones are flags to signify that some amount of work has been completed.
  • Minimum viable product (MVP). A low-cost prototype that measures if an idea attracts interest. (see 6 Steps to Building an MVP to learn more)
  • MVP. Minimum Viable Product. A minimum viable product (MVP) is the "version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort" (similar to a pilot experiment)
  • Non-disclosure agreement (NDA). Non-disclosure agreement. An agreement between two parties to protect sensitive or confidential information, such as trade secrets, from being shared with outside parties.
  • Piecemeal minimum viable product (PMVP). A functioning model of a product that takes advantage of existing tools and services in order to emulate the user experience process.
  • Pivot. The act of a startup quickly changing direction with its business strategy. For example, an enterprise server startup pivoting to become an enterprise cloud company.
  • Portfolio company. A company that a specific Venture Capital firm has invested in is considered a "portfolio company" of that firm.
  • Preferred stock. A stock that carries a fixed dividend that is to be paid out before dividends carried by common stock.
  • Production environment. A term describing the setting where a product is put into use by customers on a regular basis.
  • Proof of concept. A demonstration of the feasibility of a concept or idea that a startup is based on. Many VCs require proof of concept if you wish to pitch to them.
  • Quality assurance (QA). The process of determining whether or not a product meets required specifications and customer expectations.
  • Release. A functional product sent to customers.
  • Requirement. Descriptions of the qualities, traits, abilities and specifications that a product ought to possess.
  • Roadmap. A strategic plan to create a product or complete a project. A roadmap describes the individual steps required to meet a set of goals or objectives. (see Startup Land: A Roadmap for Entrepreneurs for more info)
  • ROI. This is the much-talked-about "return on investment." It's the money an investor gets back as a percentage of the money he or she has invested in a venture. For example, if a VC invests $2 million for a 20 percent share in a company and that company is bought out for $40 million, the VC's return is $8 million.
  • Round. Startups raise capital from VC firms in individual rounds, depending on the stage of the company. The first round is usually a Seed round followed by Series A, B, and C rounds if necessary. In rare cases rounds can go as far as Series F, as was the case with Box.net.
  • SaaS. Software as a service. A software product that is hosted remotely, usually over the internet (a.k.a. "in the cloud").
  • Sandbox. An environment or location where experimentation is acceptable, without consequences for failure.
  • Scrum. An iterative product development method, often introduced to manage software development projects. In scrum-based projects, the team is self-directed with no specified project manager and a high level of communication is maintained between team members. (see 5 Hacks for Non-Technical Founders)
  • Sector. The market that a startup companies product or service fits into. Examples include: consumer technology, cleantech, biotech, and enterprise technology. Venture Capitalists tend to have experience investing in specific related sectors and thus tend not to invest outside of their area of expertise.
  • Seed. The seed round is the first official round of financing for a startup. At this point a company is usually raising funds for proof of concept and/or to build out a prototype and is referred to as a "seed stage" company.
  • Series. Refers to the specific round of financing a company is raising. For example, company X is raising their Series A round.
  • Specification. The exact customer needs that must be satisfied by a product in order for that product to be considered a success.
  • Sprint. A set time period during which milestones must be reached and work must be completed and ready for review.
  • Stage. The stage of development a startup company is in. There is no explicit rule for what defines each stage of a company, but startups tend to be categorized as seed stage, early stage, mid-stage, and late stage. Most VCs firms only invest in companies in one or two stages. Some firms, however, manage multiple funds geared toward different stage companies.
  • Startup. A startup company is a company in the early stages of operations. Startups are usually seeking to solve a problem of fill a need, but there is no hard-and-fast rule for what makes a startup. A company is considered a startup until they stop referring to themselves as a startup.
  • Story point. A measurement used by scrum teams to determine how much effort is required to achieve a goal.
  • Technical requirement. A set of technical properties that a product must fulfill.
  • Term sheet. A non-binding agreement that outlines the major aspects of an investment to be made in a company. A term sheet sets the groundwork for building out detailed legal documents.
  • User experience. The overall experience of an individual using a given product, often discussed in terms of the easiness or difficulties with this experience.
  • Valuation. The process by which a company's worth or value is determined. An analyst will look at capital structure, management team, and revenue or potential revenue, among other things.
  • Venture capital (VC). Money provided by venture capital firms to small, high-risk, startup companies with major growth potential.
  • Venture capitalist. An individual investor, working for a venture capital firm, that chooses to invest in specific companies. Venture capitalists typically have a focused market or sector that they know well and invest in.
  • Version control. The task of organizing a system or product containing many versions.
  • Vesting. When an employee of a company gains rights to stock options and contributions provided by the employer. The rights typically gain value (vest) over time until they reach their full value after a pre-determined amount of time. For example, if an employee was offered 200 stock unites over 10 years, 20 units would vest each year. This gives employees an incentive to perform well and stay with the company for a longer period of time.
  • Waterfall methodology. A product life cycle strategy including Analysis, Design, Development, Testing, and Deployment phases.
  • Wireframe. A representation of the virtual framework of a website. Wireframes allow people to easily arrange elements to optimize ease of use.
  • Wizard of Oz minimum viable product (WoOMVP). A version of a product that looks functional, but it actually operated by a human behind the scenes, granting the appearance of automation.

The successor lecture is Chief Execution Quarter.

Materials

Recorded audio

Recorded video

Live sessions

Texts and graphics

See also

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