Managing Business Model Risk

The different elements of a business model – revenues, costs, profits, cash flows and investments – should combine to generate a sustainable competitive advantage. As Mullins and Komisar mention (“Getting to Plan B” Hard Business School Press, 2009), a business model must deliver something that is crystal clear and which customers value. A business model must imitate other comparable and well functioning business models but should also be innovative and different where it matters. The starting point is a clear and credible customer promise.
The different business model elements must work seamlessly. Often different parts of the organization focus on different elements revenues, costs, cash flows. As a result, decision making becomes disjointed.
An equally important aspect of managing business model risk is flexibility. When the future is uncertain, planning cannot be perfect. Indeed, too much planning and fine tuning can lead to distraction and loss of focus. Most plans are born out of initial enthusiasm, hope and assumptions rather than hard evidence or data. That is why the initial plan often fails for most entrepreneurs. It is the entrepreneurs who can quickly realize the problems with the current business model and move to Plan B and later on to Plan C that ultimately become successful entrepreneurs.
According to Mullins and Komisar, an effective approach to managing business model risk has four ingredients – Analogs, Antilogs, Leaps of faith and Dashboards. Analogs refer to successful companies which are worth mimicking. Antilogs are companies that serve as reference points for how to be different. Instead of starting from scratch, by studying analogs and antilogs, business risk can be greatly minimized. Unfortunately, all the information needed for a new business/project cannot come from analogs and antilogs. This is where leaps of faith come in. These refer to crucial beliefs and assumptions made while starting the business. These beliefs and assumptions need to be tested by a process called dashboarding. Around the assumptions, hypotheses must be created and tested using metrics. Dashboards help in focusing the company’s attention on critical issues and ensuring that precious resources are focused on removing the critical risks. Dashboards also represent a way of systematically responding to the real life data the company generates.