Your business model is a theory, test it often
A changing world demands changing assumptions.
“The model we choose to use to understand something determines
what we find… Our first leap determines where we land.”
—Iain McGilchrist
It’s common to say that you “have” a business model, but it’s more accurate to say that you “hold” one, temporarily. Your business model is your team’s shared theory about how your organization creates, delivers, and captures value (Osterwalder, Pigneur, and Clark 2010). And like any theory, it can be a good fit one day and a failure the next.
Psychologist Donald O. Hebb claimed that “a good theory is one that holds together long enough to get you to a better theory” (Mintzberg 2009). Similarly, your business model is never a destination, but rather a constant journey of curiosity, challenge, and change.
That means you continually have to expose and explore your model’s foundational assumptions (the things you take for granted as useful or true). Management scholar Peter Drucker (1994) focused on three such assumptions, any of which can drift or disconnect from a changing reality:
Assumptions about the organization’s environment: beliefs about society and its structure, the market, the customer, and technology.
Assumptions about the mission of the organization: what you claim and celebrate as success, as the difference you seek to make in the world.
Assumptions about core competencies: beliefs about the skills and capacities essential to advancing your mission in the environment.
As Drucker summarized them:
The assumptions about environment define what an organization is paid for. The assumptions about mission define what an organization considers to be meaningful results…. [T]he assumptions about core competencies define where an organization must excel in order to maintain leadership.
When someone says that their “business model is broken,” they really mean that their assumptions are no longer resonant or useful to their decision-making, action planning, or organizational thriving. Two key indicators that your working with a broken model are:
Surprise: The world seems unfamiliar and unforgiving. What used to work no longer works.
Solvency: You and your team can’t achieve the baseline standard for any business model: “reliable revenue that exceeds expense” (hat tip to Clara Miller).
But don’t feel bad about the drift. “Eventually every theory of the business becomes obsolete and then invalid,” says Drucker. The trick is to respond with inquiry rather than denial.
There are many ways to test and reassess your underlying assumptions. Here are just a few to get you started:
For assumptions about your environment or market, dig into what people actually pay you for (as audience members or donors). Don’t assume you know the answer, as the real answer is emotional and contextual to their lived experiences. For example, try exploring their “jobs to be done.”
For assumptions about your mission or purpose, go beneath and beyond your mission statement (which nobody can remember anyway) to describe the actual difference you make in the world. If you vanished tomorrow, what shape of a hole would you leave? What would you immediately build back? Do this as a team, and with your board, to expose the implicit beliefs you never talk about.
For assumptions about your core competencies, take a look at your answers to the above, as well as your top-three revenue streams. Each of those will require a set of skills or capacities. What’s essential to consistently deliver on your promises and your purposes?
Drucker suggested that any valid theory of the business (aka business model) must meet four criteria:
The assumptions about environment, mission, and core competencies must fit reality.
The assumptions in all three areas have to fit one another – your enterprise needs to be coherent in its construction and direction.
The theory of the business must be known and understood throughout the organization – it cannot be a cryptic secret held by a special few, or a fuzzy cluster of assumptions you never talk about.
The theory of the business has to be tested constantly – using some of the methods above and many others.
Your business model, your theory of the business, is not a rigid, rules-based thing that can be “broken.” It’s a shared way of making sense and taking action. It’s collaborative choreography with a moving world, so stay light on your feet.
From the ArtsManaged Field Guide
Function of the Week: Program & Production
Program & Production involves developing, assembling, presenting, and preserving coherent services or experiences.
Framework of the Week: Value Proposition Canvas
The Value Proposition Canvas encourages you and your team to explore and understand a set of customers, audience members, or constituents from their perspective: What jobs are they trying to do? What pains do they encounter in that effort? And what gains do they experience when they succeed?
Photo by charlesdeluvio on Unsplash
Sources
Drucker, Peter F. “The Theory of the Business.” Harvard Business Review 72, no. 5 (October 9, 1994): 95–104.
Graham, Paul. “How to Be an Expert in a Changing World.” Paul Graham website, December 2014.
Mintzberg, Henry. Managing. 1st ed. A BK Business Book. San Francisco: Berrett-Koehler Publishers, 2009.
Osterwalder, Alexander, Yves Pigneur, and Tim Clark. Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers. Hoboken, NJ: Wiley, 2010.
Thank you for this!
I think sometimes mistaken or at least evolving assumptions about environment and mission are very similar - often we believe that our mission in the arts (and what we think people value) is delivering an artistically excellent product, so we base our business model on delivering that product and then panic when demand for that product goes down. When often the real value is the impact or transformation (the feeling or change) that high quality art creates in people. As long as we consistently deliver that impact, the format and method we do it in can always evolve.