Activities that create value: A gentle introduction to Business Models

In this post we return to a little bit of theory.

Having understood what a business is trying to sell, and to whom, it is worth understanding how the business intends to accomplish this. At its core, meeting market demand involves the following steps:
  1. Choosing your target customers and identifying the product or service you will provide to them
  2. Selecting and sourcing inputs
  3. Transforming the inputs into outputs
  4. Delivering the outputs to customers
Of course, this is just the beginning. We can now build up a much more detailed list of steps under each of these headings, and as we do we will begin to identify all the activities that are required to meet market demand.

What are the activities that generate value for a company that makes and sells physical things?


Let's go one level down. We can see immediately that different flavours start to emerge. Below is a high-level list of activities associated with a manufacturing company.
  1. Choosing your target customers and identifying the product or service you will provide to them
    1. Conducting market research
    2. Analyzing the competition
    3. Developing the product or service
  2. Selecting and sourcing inputs
    1. Researching suppliers
    2. Negotiating supply contracts
    3. Creating and monitoring supply chains
  3. Transforming the inputs into outputs
    1. Building and maintaining production facilities
    2. Running a production process
    3. Storing finished products
  4. Delivering the outputs to customers
    1. Running a distribution network
    2. Billing customers and collecting payment
    3. Providing after-sales service

What are the activities that generate value for a company that provides a service?


We can contrast the above list with the activities involved in selling a service, for example legal services. At this high level, some of the activities are the same, but some are different:
  1. Choosing your target customers and identifying the product or service you will provide to them
    1. Conducting market research
    2. Analyzing the competition
    3. Developing the product or service
  2. Selecting and sourcing inputs
    1. Researching suppliers Hiring lawyers
    2. Negotiating supply contracts Developing a compensation structure
    3. Creating and monitoring supply chains Running a campus recruitment programme
  3. Transforming the inputs (available time) into outputs (billed hours)
    1. Building and maintaining production facilities Renting office space
    2. Running a production process Staffing lawyers on projects
    3. Storing finished products
  4. Delivering the outputs to customers
    1. Running a distribution network Running administration services for client servicing
    2. Billing customers and collecting payment
    3. Providing after-sales service Investing in client relationship management

From a list of activities to a "business model"


Here's where things start to get really interesting: For each of the activities involved in satisfying a market demand, there are many, many ways to execute those activities. The specific selection of activities, and the thousands of choices around how exactly to carry them out, defines the entrepreneur's business model. We'll talk about this in our next post.