Business models are thrown around a lot in the business world, but what do they really mean? How can they really impact our lives? Do we really need them?

Whether you’re just starting, or working in a well-established business, a business model can greatly improve your performance.

On one hand, it’s a great tool to use to determine how you will enter a new market or start a new business. It can help ensure that you’ll be successful.

On the other hand, it can diagram all the activities that you currently do so that you can analyze your process and ensure that you have the best use of resources to complete your tasks.

Either way, it’s a great tool to have on hand to help you make sense of your business and how it provides value to your customers.

The most effective way that I’ve found to think about a business model is to think of it like a factory. When you set up your business model, you’re setting up your factory. The sole purpose of a factory is to take inputs and transform them into something that is more valuable.

This is exactly what your business model does as well. It lays out the process that you’re going to use to transform your raw materials into a finished product that you will offer to customers.

A good business model will address all the same activities that a factory uses. So, let’s dive in to see how we can set up a business model that is thorough without being complicated. That covers all areas without creating confusion. That gives you confidence and clarity in your business.

The Factory Business Model

 

From the outside, a factory has four major groups of activities:

• Inputs
• Outputs
• Returns
• Infrastructure.

Inputs are all the material needed to create the product. This can include physical things like steel, copper, or wood and it can also include non-physical things like information that is needed to construct the product.

The outputs of a factory will be the product or products, the value proposition, and the segment channels that you will use to distribute the product.

The returns to a factory include the revenue collected after a sale as well as the relationship with the customer.

The infrastructure is everything that is needed to support the factory to keep it running strong and to keep it producing value for customers.

Looking deeper to the internals of the factory, all the activity of the factory centers around a core process. The core process is what the factory uses to create value for the customer. It defines how the value proposition will be delivered.

This process revolves around creating a transformation. It changes physical goods into a product that provides more value than any individual component. It transforms information from something generalized to something specific that is applicable to customers’ needs. It can also transform people from where they are today to some future version where they are more knowledgeable, more skilled, or in better shape than they were.

This core process will need direct support from people, software, and systems to ensure the process is running smoothly and at a high-quality level. The business model should reflect the same components. It should center around your core process.

This is your value proposition in your business model, it describes how you will create and deliver value. You will also want to include your inputs, your outputs, and how you will collect and manage the returns. Finally, the business model should focus on the infrastructure needed to keep the process strong.

The infrastructure is the section that contains all the support activities needed to run the factory. This will include managing relationships, operating the company, and getting the company the resources it needs to complete its core process. In short, it’s all the activities that are not directly related to the core process.

If you keep this framework in mind, you’ll quickly understand how to add, change, or remove items to your business model as they come up and as you become more sophisticated and successful. First ask, does it relate to the core process or the infrastructure? Then, you can analyze how it should be arranged.

For example, let’s think about a situation where you’re considering buying new equipment that will make it easier to build your product. This relates directly to the core process of adding value.

Then you can ask, is it really adding value to the process? Some examples of adding value are that it enables a better product to be made that increases returns. Or, it enables a new market segment to be added.

If it reduces costs for the business, that’s good, however note that it’s not adding value to the customer unless you pass on those savings or apply them to some other aspect that the customer benefits from such as a new product.

Next, think of the infrastructure needed to acquire and operate the new software. Which areas will it affect? Employees will need to be trained. IT will need to install and manage the software. R&D might need to adjust the build instructions.

What about impacts that only affect infrastructure? For example, upgrading computers for the team. The great thing about this framework is that you can tie this impact directly back to the core process and keep customer value in mind.

For example, new computers will enable people to work more efficiently, which will free up their time. You can then have them spend time working on product improvements or developing new products to enable new customer segments.

I hope you’re starting to see how this framework can be used to develop a strong business model that can adapt and scale over time. Keep your factory and core process in mind and the business model will present itself. This will lead to faster decision making, more confidence in your plans, and more consistent success.

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