MAD MODEL STRATEGY

 MAD MODEL STRATEGY 

A business model is a company's plan for how it will generate revenues and make a profit. It explains what products or services the business plans to manufacture and market, and how it plans to do so, including what expenses it will incur.

A business model lays out a step-by-step plan of action for profitably operating the business in a specific marketplace. The business model for a restaurant is significantly different from the business model for an online business for instance.

To put together a good business model, you need to know the value proposition for the business. A value proposition is a straightforward statement of what a company offers in the form of goods or services that is of value to potential customers or clients, ideally in a way that differentiates the company from its competitors. 

A business model should also include projected startup costs and sources of financing, the target customer base for the business, marketing strategy, competition, and projections of revenues and expenses. One of the most common mistakes leading to the failure of business startups is a failure to project the necessary expenses to fund the business to the point of profitability, i.e., the point in time when revenues exceed expenses.

If possible, a business model should include any possible plans for partnering with other existing businesses. An example of this would be an advertising business that aims to establish an arrangement for referrals to and from a printing company.

There are many different types of business models. Direct sales, franchising, advertising-based and brick-and-mortar are all traditional business models. Brought about by the internet, there is also a click-and-mortar business model, which combines a physical presence with an online presence. 

Even if two businesses operate within the same industry, they likely have different competitive advantages and disadvantages and, therefore, need different business models. 

BAD MODEL STRATEGY

Contrary to what you may think, bad bosses are not the biggest problem facing business today (numerous national surveys show workers are largely satisfied with their supervisor). The more serious threat-- one that can derail your career, as well as the company--is bad strategy.

In the new book, Good Strategy, Bad Strategy: The Difference and Why It Matters, author Richard Rumelt, a professor at UCLA Anderson School of Management and well-known management consultant, says a strong corporate strategy is razor sharp and cuts through corporate doubletalk and jargon. He notes:

"good strategy is coherent action backed up by argument, an effective mixture of thought and action with a basic underlying structure I call the kernel. A good strategy may consist of more than the kernel, but if the kernel is absent or misshapen, then there is a serious problem."

Bad strategy, Rumelt says, arises from emphasizing planning over execution, fuzzy goals over policies and action, and high-sounding words and phrases over concrete directions and tasks. He pinpoints four signs of a flawed strategy:

1.     Fluff: Strategy built on fluff has the quality of a puff pastry--appealing at first bite, but empty within. Rumelt quotes a strategy memo from a major retail bank: "our fundamental strategy is one of customer-centric intermediation." In this bank's case, the only intermediation it provided operationally was taking deposits from one customer and lending to another. "Pull off the fluffy covering and you have the superficial statement 'our fundamental strategy is being a bank,'" Rumelt writes. Academia and info tech are particularly vulnerable to the fluff factor.

2.     Failure to face the problem: Rumelt cites as an example how one company, International Harvester, wrote byzantine strategies for their truck, turbine, and farm equipment business but never addressed their biggest problem--a grossly inefficient work organization governed by union work rules that allowed those with seniority to transfer jobs at will, forcing reorganizations of teams and processes at any time.

3.     Mistaking goals for strategy: Rumelt cites a CEO who defined his company's strategy as "setting your sights high," "reaching for the impossible to do the impossible," and "pushing until we get there." For Rumelt, a leader may justly ask for "one last push," but the leader's job is more than that: "The job of the leader--the strategist--is also to create the conditions that will make the push effective, to have a strategy worthy of the effort called upon."

4.     Fuzzy or overly complex strategic objectives: Objectives should spell out the specific steps necessary to accomplish a strategy. Rumelt says the most common problem he sees is overload, executives who compile a long list of things to do with lofty language. If you've been ever participated in an offsite, where dozens of goals and ideas are cobbled into a document that would take a decade to accomplish, you've seen how bad objectives are born. Rumelt cites the mayor of a city in the Pacific Northwest, whose planning committee's strategic plan contained 47 strategies and 178 action items. Action item number 122 was 'create a strategic plan.' Another weak objective is the "blue sky" goal that rewords a nice thing to do or have (increase market share), and "skips over the annoying fact that no one has a clue as to how to get there."

 

Conclusion

So, how do you know whether a business model is any good? That's a tricky question, but Joan Magretta, former editor of the Harvard Business Review, highlights two critical tests for sizing up business models. When business models don't work, she states, it's because they don't make sense and/or the numbers just don't add up to profits. Because it includes companies that have suffered heavy losses in the past and even bankruptcy, the airline industry is a good place to find a business model that stopped making sense. When evaluating a company as a possible investment, learn exactly how it makes its money. Then think about how attractive and profitable that business model is. Admittedly, the business model doesn't tell you everything about a company's prospects, but investors with a business model frame of mind can make better sense of the financial data and business information.