I’ve worked with a lot of JP startups and smaller companies and have noticed a fairly common misconception. There’s often a belief among entrepreneurs that all you need to be successful in business is a product with a competitive advantage. But in reality, a product does not a company make. Yes, you need at least one great product. But that’s only a start. There’s a vast difference between creating a product and creating a business. They do, however, have one thing in common—they are both design exercises.

Unfortunately, instead of taking the approach of designing the entire business concept at the outset, it’s more likely that a startup will approach issues in an incremental, 3 steps forward—2 steps back fashion. What’s my product? Now that I have a product, how much should I sell it for? Okay I think that price will work so how will I get it manufactured? All right I’ve got a subcontractor and got my first delivery but whoops given what I wants per piece, I can’t sell it and make a profit. Oh well, while I’m looking for a new manufacturer, I need to get some sales reps to get rid of the inventory in my garage. Hmmm, the reps aren’t that interested and want a big commission. Yikes people I’ve shown it to don’t seem to understand the product from the packaging—might need to redo that. Great I’ve got the product in some stores and it seems to be selling but how do I grow the business? And so on and so forth. This approach to creating a business can be very costly and painful and take an unnecessarily long time.

There’s a better, less stressful way. Either before (preferably) or just after you’ve come up with your first product idea, take a step back and design the entire business—or at least what you think the overall business should look like based on what you know at the time. All business designs, a.k.a. business models, are made up of six components—Value Proposition, Culture, Channels, Processes, Resources, and Financial Formula. If you want to see what they are in some detail, take a look at my post from last year “Is Your Business Model Obsolete” (insert link).

Designing a new business is much like sculpting or wood-carving. A business model is something that evolves as you whittle away at it over the life of the company based on ongoing learning. But it’s something you must always work on with “a sense of the whole”—just like a sculpture. That’s because all six business model components need to integrate and support each other or the system just won’t work. Systems thinking Guru Russell Ackoff used to illustrate this point by talking about designing the ultimate automobile. One seemingly logical approach would be to find the best version in the marketplace of each car component and then put them all together. For example use a Ferrari engine, BMW transmission, Mercedes suspension, etc. But the result would be a car that doesn’t work because the components are not designed to work together.   

Another reason it’s important to think about the entire business model and not just your product(s) is that your competitive advantage may come from business model components other than product. Take Dell for example. Their success came from creating a new way to deliver computers to customers rather than the computers themselves. Every business model component is an opportunity for innovation.

Just like product design, it’s a lot easier and cheaper to make business design mistakes on paper at an early stage than trying to correct mistakes after you or others have invested a lot of money. Certainly your business model 1.0 will evolve over time as your company grows and becomes more complex. But even in the very early stages of your company’s life, it pays to be a total business model thinker.

Next Steps

On a white board or piece of paper draw six columns representing each of the business model components. With your other key staff members, brainstorm the design of each component in sequence making sure the components will integrate and support each other. Keep working on this until you’ve created a business model that you think can be successful. Then put the proposed model in front of some outside people you trust for further critique and improvement. Then make it happen.