Modeling a New Small Business

In a previous article we noted that all new businesses start as business ideas and mentioned that the process of translating the idea into an operating business can have a significant impact on the business’ success. In this article we start looking at that process, beginning with business “modeling.” Business modeling checks the viability of the business idea, and is typically done before starting on the detailed work of business plan development.

Writing a business plan is not a “writing” exercise, though good writing can help using it in different contexts. Writing is the final stage of a much longer exercise during which the businessperson will be researching the idea’s feasibility. This research will involve:

• Studying the market to see whether there is a large enough demand for the proposed product or service
• Observing competitors to assess the intensity of competition, competitor strengths and practices, and to get a clear idea of what competitors offer to customers.
• Interacting with the competitors’ customers to identify any dissatisfactions they have with existing offers (any such dissatisfactions can help you develop a competitive strategy)
• Researching technology issues and sources. It is usually possible to create a product or service using different technologies, e.g. manual, machine-supported or automated.
• Learning about distribution options including standard distribution channels used in the industry
• Estimating costs for setting up the business and for regular operations once it has been set up
• Looking at the selling prices for the product or service and comparing it with the costs

A business model can be constructed after a preliminary review of the above issues. The model is an overall view of how the business will create and distribute the product, and make money doing it. It can help confirm that all issues involved in running the business have been considered and that the business has the potential to create surpluses (profits).

Many business ideas will be dropped at this stage as the modeling exercise brings out issues that cannot be tackled with the resources available to the entrepreneur. For example:

• The targeted market might be too small to generate viable business volumes
• The competition might be too intense to allow the business establish itself
• The technology requirements might be beyond the capabilities of the entrepreneur to organize
• Marketing might require resources that the entrepreneur cannot hope to organize
• Financial projections might reveal insurmountable profitability or cash flow issues

If the modeling exercise does indeed confirm the feasibility and viability of the business idea, the entrepreneur proceeds to the next stage of business plan development. Business plans are specific action programs and require detailed investigation to identify prevailing conditions on the ground and develop programs to achieve desired results under these conditions.

The business plan will discuss the markets and marketing strategy, technology and operational issues such as organizing needed human resources, revenue and cost estimates and financing options, as well as the backgrounds of the persons behind the venture. We will look at the contents of a business plan in another article.

 Read more about Develop a Business Plan

 See also Starting a New Small Business