4Ms of Business Foundations Series – part 1: Business models

“As a new or potential business owner, you have the advantage of getting it right the first time with the four Ms common to all businesses regardless of size: Model, Management, Marketing, and Money” – Michael Evans

As a Digital Marketer, I have quickly learned that my best clients are those with good businesses. The first key element of this is setting up a business with the right foundations. After all, you would not expect a house built on quicksand without the right foundations to be structurally sound, would you?

I agree with Michael Evans that the 4Ms are the foundations of every successful business. However, entrepreneurs do not often make the right choices in all 4Ms. In this series of posts, I examine the 4Ms to help entrepreneurs to understand their options and make the right choices for their business in this order: Model, Management, Money and last but by no means least, Marketing. By the end of the series, you will see that the choices people make in each of the 4Ms have an impact on all of the other areas of a business.

Let’s jump straight into business models.

 

Why business models matter?

I am privileged to work with a range of different clients within my Digital Marketing role. My clients are typically small businesses and startups who are strong ambitious to succeed in their niche market. They range from the online reseller working from their bedroom to renowned experts in their field. Almost all of these business people have bright business ideas regarding products and services, yet very few become established entrepreneurs.

Research reported in Start-ups backs up the issue start-ups face as despite the UK’s start-up population increasing at record levels, many struggle to survive beyond two years. Approximately 50,000 businesses launch each month, with 587,000 created in the last year. That is over 70,000 more start-ups than in 2013 and quadruple that of 20 years ago (130,000). While start-up numbers are increasing, small businesses in the UK are failing to negotiate a series of potential pitfalls that result in them not making it to their second birthday.

I believe some of the roots of their barriers to their success are inadequately thought-through businesses factors – they either haven’t given sufficient thought to building the business foundations to make their business work or they have not made the right decisions regarding the elements required to make sustainable enterprises.

The worst case I have come across was a company started by two friends (I know they say you should not mix business and friendship!) The business had been struggling along for a couple of years, getting nowhere, in fact. On the face of it, the business looked great – two committed owners,  limited company registration, business mentor, ambitious business plan, excellent products, a live website, business partners and business loans to boot!

It became apparent that things were not as they seemed within a few weeks of working with them. Three business foundation issues primarily got in the way of my online marketing role:

1. No role clarity – neither partner knew who was responsible for what.
2. Unclear business model – they did not know whether their focus was to manufacture products to sell or be third-party resellers of other people’s products
3. The partners had a toxic business relationship – making focusing on priorities and making decisions impossible.

Everything was a massive argument between the partners: negotiating with suppliers, processing orders, updating the website, marketing and promotions, paying creditors, repaying bank loans, etc. We all needed hard-hats whenever someone had to make a decision or take action. It should come as no surprise that with the lack of solid business foundations, this startup has become another statistic in the list of failed startups. Today, these startup owners are former friends, with both laying claims to the sole ownership of what remains of the business (mainly the concept, business name and website) on account of the other person’s failed responsibilities and the supposed lack of commitment. It is a shame!

Putting the right foundations in place, the 4Ms I cover in this series, could have prevented many of the problems that ultimately destroyed this startup and many others like it. I wrote this series to educate this the type of reader.

 

Understanding Business Models

All businesses must choose a way of organising that ensures everyone is working to achieve the same goal. The way a business organises outlines the arrangements for who is responsible for what and relationships between the people, necessary to enable them to work together.

I know there are more than 60 Business models, as outlined in Assen et al.’s book Key Management Models. I do not intend to give a comprehensive analysis of all of them as that would be a book in itself! My focus in this post is primarily on the business designs for today’s startups an small businesses.

It is worth bearing in mind that the organisation’s design of role definition and clarity is usually arbitrary because in most cases there will be informal ways of relating to others that the organisation’s design does not intend or capture. Furthermore, it is rare that any one person can stick to a specified list of task that formal organisation suggests.

 

Evolution of Business models

Arguably, Max Weber’s Bureaucratic model, which has existed since the 1880s until now has endured the longest of all. We all recognise its features:

• Specialists in every role.
• Hierarchy dominated by managers.
• Vertical (top-down) lines of authority.
• Compliance with management decisions.

The Bureaucratic model proved a super-efficient to get things done in businesses and makes a lot of people happy – usually the managers and decision makers at the top of the hierarchy.

Over the years, businesses have gone through the classical school of organisations that characterised the early 1900s. Frederick Taylor’s scientific school advocated this business model that comprised order, control, formality and hierarchy. The major flaws of this type of organisation are that it was highly inflexible and it did not take human factors (for motivation, interpersonal relations, wellbeing or personal interests) into account.

The next major shift to was to more humanistic organisational models in the 1940s, prompted by the Hawthorne Studies. This model focused much more on the importance of people’s informal networks, roles and relationships as the way for businesses to be productive. This evolved into the Behavioural science school of thought in the 1950s that emphasised developing people, giving workers the opportunity to contribute and finding what motivates them as the route to business success.

 

Alternative organisation design

In the middle of all of these have been organisational design fads, which although promoted by management experts and academics, businesses did not adopt on a wide scale.

Learning Organisations

Developed in Peter Senge’s Fifth Discipline. This approach advocated individual and organisational learning and developing mastery on three levels: what you do (Personal Mastery), guiding ideas and insights (Principles), and the state of being of those with high levels of mastery in your discipline (Essences).

The five disciplines necessary to achieve learning organisations are:

1. Systems thinking – taking a whole business view to learning and improving.
2. Personal mastery – individuals are learning by continually clarifying and deepening our personal vision, developing patience and seeing reality objectively.
3. Mental models – understanding through questioning and examining the ingrained assumptions, generalisations and images we have about hos the world works.
4. Building a shared vision – developing a clear picture of how the future will look, which may encourage innovation and experimentation.
5. Team learning – the process of aligning and developing the capacities of teams to achieve the results it’s members want by enabling them to learn together which helps them act together.

A close look at the elements of learning organisations suggests its components would undoubtedly help many businesses. Perhaps this explains the reason behind the fact that while businesses did not adopt the model on a wide scale, many of the elements can be seen in progressive businesses.

Every one of the business models summarised above have a place in companies today. Each added to our understanding of work and how to organise businesses to optimise the performance of people. It is also true that all of the business models we have looked at so far were developed for a completely different age – they served to address the need for large manufacturing-based businesses at a time with a few big players in the market. Today, businesses have to cope with a turbulent high tech and highly competitive global marketplace.

Look around you and count how many businesses are making products? Not many, I expect! That is because most businesses today are service or knowledge-based. Consequently, the models that worked for manufacturing have had to shift radically. Today businesses need to focus on getting the process to meet customers’ needs and much less on rigid business models. At the same time, business must ensure they are responsive to new challenges (including new technologies and competitors)

 

Business models for today

It would be wrong to suggest there is one best way to organise a business today because the best model depends on your unique situation. There is certainly still a place for bureaucratic and mechanistic organisations, especially for big businesses with many specialists and a shed load of money.

However, there is no doubt that a small business that must to be agile and customer-focused in today’s highly competitive global world (pre-requisites for business success today) cannot be mechanistic or bureaucratic. There are three main reasons why the old business models simply will not work for today’s small businesses:

1. There are not enough people to make a have formalised set of jobs, and rigid lines of communication.
2. Jobs in today’s small businesses are viewed more as ‘roles’ with loosely defined job descriptions.
3. The focus is no longer on serving managers, instead we must all serve customers otherwise they will go to a competitor who can better meet their needs.

 

‘Lean and flat’ Businesses

All of these mean that the typical model for today’s small businesses is the process-driven ‘ lean & flat organisation model’ depicted in the diagram above. In today’s business model, every person is rightly expected to be fully committed to the business, have input into everything (including decisions) that they can contribute to, work cohesively with others regardless of specialisation boundaries, and be self-motivated/driven.

You can apply Lean principles in some form to almost all kinds of knowledge work and can generate significant benefits: faster response time, higher quality and creativity, lower costs, reduced drudgery and frustration, and greater job satisfaction (Bradley Staats & David M. Upton).

 

Elements of Lean businesses

These are the elements of ‘lean’ organisations that make it particularly suited to start-ups and small business that must learn quickly and avoid wasting limited resources and time:

• Workers are chosen and assigned on the basis of the skills needed to address the tasks.
• The team consists of people with highly varied experience. Some are quite seasoned, others are just starting out; some have specialised skills, others are generalists. By bouncing ideas off one another and trying things out, they come up with solutions.
• Relentless attention to detail
• Commitment to data-driven experimentation
• Charging workers with the on-going task of increasing efficiency and eliminating waste in their jobs.

The lean and flat business model makes sense because a new business is unlikely to have the numbers of people or the budget to employ specialists in every role. They are unlikely to have the people to make up a management hierarchy, at least in the early months. That may come in the a few years down the line when the business is stable and established.

Until then, it is most likely that the owner will be the manager, with a small team to perform all of the essential roles and tasks. While you may assign each person to their specialist expertise in one or more areas, the reality is that everyone will have to come together to work as a team on more complex projects, tasks or activities.

Effective teamwork, therefore, underpins lean and flat organisations as it facilitates achieving objectives and learning collectively from each other. It also facilitates getting input from others to examine processes to eliminate waste and implement continuous improvement.

 

Plugging the gaps

It is not surprising that there are likely to be essential skills that startups and small businesses simply do not possess in-house. Digital marketing and graphic design are typical two challenging areas for many small businesses and start-ups.

Most businesses resort to do-it-yourself (DIY) approach to such technical areas. I feel this DIY for technical expertise is often a mistake because they usually get hit and miss results that can prove expensive. I recommend Charles Handy’s Shamrock organisation concept (similar to today’s virtual organisations) instead, in which start-ups contract specialists in non-core areas. This ensures  the best results within a limited budget without the overheads associated with employing specialists on an on-going basis.

 

Making lean businesses work

One of the biggest risks in lean and flat organisations is that everyone is so busy trying to keep up with their work that you neglect to train people. This ultimately means that too few members have the expertise to handle a variety of problems.

In response, you could restructured the business along functional lines, assigning individuals to be primary and backup of each function, and make them responsible for training the other team members. Rotating people into a different function periodically would further ensure that everyone acquires broad skills.

Although these measures initially add to the time needed to perform work, soon the business will be able to speed up and it delivers results on schedule and budget.

Making teams work in the digital age

Start-ups and small businesses are unlikely to have the people to fit perfectly into Belbin’s Team Roles. Nonetheless, the team members will have to be sufficiently flexible and motivated to fill as many of the roles as possible to complete tasks effectively.

Annmarie Hanlon ‘s interesting article on structures for digital teams warns against creating major pieces of work in this type of organisation that carries the risk that many will postpone doing them on the basis that there’s so much to do. She advises taking these smaller steps that help to make small teams work well in today’s digital age:

• Break up big tasks into many smaller actions to be shared
• Get all the actions on to a cloud-based system with one overall project manager who assigns tasks and liaises with all stakeholders
• Appoint ‘product owners’ for specific tasks
• Identify the quick wins that can be achieved easily, so the team sees results sooner
• Have faster, shorter meetings – the 20 minute catch up – this can be face to face in person or using online technologies like Skype and Hangout
• Encourage product owners and their supporters to meet to get the work done
• At the meetings, say ‘thank you’ to people who have carried out their tasks – acknowledgement matters!

Without a lean and flat organisation model that considers and addresses the business requirements and risks above, your small business is likely to be doomed before it has even started.

With a lean and flat organisation comes an appropriate style of management, which we will examine in the next article in this series.

Be sure to join us next month for the second instalment of the 4M s of Business Foundation Series: Management!

Recommended reading:

Lean Knowledge Work (Bradley Staats & David M. Upton)

Links in this post

 

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We’d love to have your feedback and suggestions about this post. Have you found a model that works for your small business? Which factors have helped or hindered your business model ? Please leave your comments in the Comments Section below.

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