Static Business Plan versus Dynamic Business Model — The Difference and Why It Matters

Andrew
Andrew

Static business plans are based on the assumption that the external environment is relatively stable and predictable. This may have been true in the past, but in today’s rapidly changing business landscape, it is no longer realistic. Dynamic business models, on the other hand, are designed to be flexible and adaptable. They take into account the fact that the business world is constantly evolving and that new opportunities can arise at any time. As a result, dynamic businesses are better able to seize opportunities as they arise, rather than being caught unprepared. In today’s ever-changing business world, flexibility and adaptability are essential for success. Dynamic business models provide the foundation for a successful 21st-century business.

As complexity grows and the world of business becomes more and more volatile and unpredictable businesses are less able to rely on detailed plans. In a fast changing business environment, detailed plans became more like a liability than an asset.

 

As Steve Blank put it:

“There’s only one reason for a business plan: some investor who went to business school doesn’t know any better and wants to see one. But once it has delivered financing, the business plan is fundamentally useless.”

Why is that the case?

In the early days of a startup, it can be easy for founders to get caught up in their own visions of success. They may have a strong idea of what their product will be and who their customers are, but these ideas are often nothing more than unproven hypotheses. Until these assumptions are validated with real customers, it is impossible to know which of them will prove to be true.

Product development plans are important for any business, but they should be treated as dynamic documents that can be changed as new information is learned. All too often, however, the initial business plan of a company is mainly static, it is meant not to change.

This inflexibility for customer feedback can lead to major problems when the product reaches customers and new information is learned. In many cases, after building, perfecting and launcginf their product entrepreneurs realize that customers don’t find it valuable. The result is hundreads or even thousands of wasted engineering hours, wasted capital and broken credibility. The hard truth is that many startups don’t survive this painful lesson.

 

The business plan-based new product introduction model has nine major pitfalls, according to Steve Blank.

  1. Most founders assume they know who their customers are, what their problems or needs are, and how they want to solve them. However, startups have no customers on day one. Therefore, most of these assumptions are mainly based on guesswork. Yet founders and investors take these initial guesses as facts and try to build the entire business around them. This can be a recipe for disaster.
  2. Founders believe that they know what solutions customers will accept to solve their problems. They build a fully-featured product with little or no customer feedback. The result is a wasted effort involving hundreds of engineering hours. Once a product has been built and launched, founders realize that customers don’t care about it anymore.
  3. “Big-bang” launches often lead to failure. Successful startups launch their MVP on day one and gather real customer feedback as early as possible.
  4. Execution-oriented startups often have a “get it done and get it done fast” mindset. They are so busy building their product that they forget to learn from customers. In fact, all startups operate in search mode. It is a non-linear, iterative, messy process. The purpose of a startup’s existence is to search for a scalable, repeatable business model. Nothing more, nothing less.
  5. Traditional metrics used in large companies (such as Return on Investment) will not work. Startups need a different set of metrics to measure progress. Perhaps a good starting point could be the venture’s Cash Burn Rate: “the number of months’ worth of cash left in the bank.”
  6. In case of a startup there are no job titles. Startuppers and business managers need an enturely different skillset.
  7. Measuring progress against product launch is false progress. Building a product nobody wants within budget and on time is nothing but a waste of resources. As Eric Ries pointed out, the real question is not “Can we build it?” but “Should we build it?” “There is nothing quite so useless as doing with great efficiency something that should not be done at all.” —Peter Drucker
  8. The illusion of success often leads to failure. As startups launch their products, they step on the gas and spend large amounts of money on marketing and customer acquisition. After a product has been shipped, they rarely question whether they understood the customer’s problems well enough.
  9. “No plan survives first contact with customers”.—Steve Blank. In many cases, most business plans are built on unverified assumptions. When customers don’t behave the way that is specified in the business plan, entrepreneurs see their venture fall apart.

 

 

Business Plan vs Business Model

 

Business Plan

  • A business plan is static. Changing an idea once it is written down is difficult or impossible.
  • Executives and investors accept the founders’ initial guesses and treat them as proven data.
  • The Business plan serves as an operating plan to guide every decision an organization makes.
  • There is little or no room for learning. Once a business plan is in place, customer feedback can rarely affect the final outcome.
  • In a fast-changing environment, business plans can be guided tours to failure.

 

Business Model

  • A business model is dynamic. Basically, it’s like LEGO bricks, and depending on how they’re modified, they can make a different structure. All the elements of a business model can change over time as new information emerges.
  • Business modelling starts with acknowledging that every part of the business model is a hypothesis that needs to be validated with real customers.
  • Business models are about learning, not execution. It is a tool for conducting guided experiments to gather customer feedback. Teams learn, validate their assumptions, and update each element of the business model as new facts emerge.
  • Business models change continuously as entrepreneurs’ assumptions are validated or rejected by customers. Startups may pivot multiple times throughout the process.

 

According to Eric Ries, the difference between these two approaches is enormous. A static business plan is like a highly planned rocket launch. Every step is carefully mapped out in advance, and if anything goes wrong, the entire endeavor is likely to fail. In contrast, a dynamic business model is more like driving a car. You may have a destination in mind, but you don’t necessarily plan every single step along the way. This approach is more flexible and adaptable, and it allows you to change course if necessary. As Ries points out, “The best business plans are not static documents; they are living, breathing organisms that adapt as our assumptions are proved or disproved.”

Traditional business-plan based thinking is like launching a rocketship, argues Eric Ries in his extraorinary book. It means planning every single detail and move and then carefully executing the plan.

 

The Anatomy of a Business Model

Alex Osterwalder defines business model the following way: “a business model describes the rationale of how an organization creates, delivers, and captures value”.

He developed the Business Model Canvas with nearly 400 contributors to help entrepreneurs and businesses better visualize their business models. The Business Model Canvas forces you to think about your business in a structured way. It helps you visualize all key areas of your business in a straightforward way, without oversimplifying it. It has 9 building blocks, which cover the 4 key areas of a business: customers, value proposition, infrastructure, and finances.

You can download a blank Business Model Canvas template here.

 

The 9 Building Blocks of the Business Model Canvas

 

1. Customer Segments

The Customer Segments Building Block defines the different groups of people or organizations an enterprise aims to reach and serve. Without satisfied customers no business can survive for long. By properly identifying and understanding their customer segments, businesses can ensure that they are providing the products and services that these groups demand.

Questions to ask:

  • For whom are we creating value?
  • Who are our most important customers?
  • What type of market are we addressing?

 

2. Value Proposition

The Value Proposition Building Block describes how you intend to create value for your customers. It can be imagined as a contract between your business and its customers where the customers “hire” your product or service to “get a job done”. Your value proposition can also include your product vision (what you want your successful company to become); product features and benefits; and your initial MVP (Minimum Viable Product).

Questions to ask:

  • What value do we deliver to the customer?
  • Which one of our customer’s problems are we helping to solve?
  • Which customer needs are we satisfying?
  • What bundles of products and services are we offering to each Customer Segment?

 

3. Channels

The Channels Building block describes how the company delivers the value promised to customers (Value Proposition Block). This block also include how the firm communicates with its customers at all phases of the process, from raising awareness, helping customers evaluate out offer, purchase, delivery and after sales support.

Questions to ask:

  • Through which Channels do our Customer Segments want to be reached?
  • How are we reaching them now?
  • How are our Channels integrated?
  • Which ones work best?
  • Which ones are most cost-efficient?
  • How are we integrating them with customer routines?

 

4. Customer Segments

This building block describes what type of relationship the company wants to establish with each customer segment. For example, types of Customer Relationship can include personal assistance, self-service, automated service, dedicated personal assistance, community building, co-creation among others.

Customer Relationships can greatly influence customer experience throughout the customer lifecycle, from acquisition (How do customers find you?); activation (How do customers purchase the product?); retention (the way of retaining customers); referral (How customers recommend you to others); revenue (How you collect revenue?).

Questions to ask:

  • What type of relationship does each of our Customer Segments expect us to establish and maintain with them?
  • Which ones have we established?
  • How costly are they?
  • How are they integrated with the rest of our business model?

 

5. Revenue Streams

The Revenue Streams Building Block might be the toughest of all. The viability of the business as a whole stands or falls on it.

You need to accurately grasp how much each customer segment is truly willing to pay for the product or service you are offering. In other words, the business’ pricing model needs to be inline with every other activity of the firm.

A several popular ways to generate revenues include asset sale, subscription fees, warranties, licensing, leasing, usage fees among others.

Questions to ask:

  • What’s the revenue model?
  • How many products will we sell?
  • How would customers prefer to pay?
  • How much does each Revenue Stream contribute to overall revenues?
  • How much will we charge?
  • Does this add up to a business that’s worth doing?

 

6. Key Resources

The Key Resources Building Block list the most important assets a business needs to operate. These assets fall into four main categories: physical, financial, human and intellectual property.

Questions to ask:

  • What Key Resources do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue Streams?

 

7. Key Activities

This Block describes the most important actions the business needs to take to deliver its promises to customers and operate sustainably.

A software company need to perform different activities than a consulting firm or a manufacturing company.

Key activities might include development, problem solving, network or platform building among many others.

Questions to ask:

  • What Key Activities do our Value Propositions require? Our Distribution Channels? Customer Relationships? Revenue streams?

 

8. Key Partnerships

Key partners provide capabilities, products, services and infrastructure that the business would prefer not to develop itself. Key partners include the network or suppliers and partners that are necessary for the business to operate.

For example, key partners can provide batteries for an electric car manufacturer or LCD screens for a smartphone maker.

The four main types of partnerships include:

  1. Strategic alliances generally happen between non-competitive companies. They usually build or offer a complete product.
  2. Initiating joint ventures to develop new businesses. It generally happen later in a startup’s life.
  3. Developing cooperation between competitors. It means working with a direct competitor to share costs or market together.
  4. Developing buyer-supplier relationships to assure reliable supplies.

Questions to ask:

  • Who are our Key Partners?
  • Who are our key suppliers?
  • Which Key Resources are we acquiring from partners?
  • Which Key Activities do partners perform?

 

9. Cost Structure

This Block describes all the necessary costs to successfully operate the business. Cost can be calculated after we defined Key Resources, Key Activities, and Key Partnerships.

Nearly all business models need to calculate with certain costs. Developing and maintaining customer relationships, delivering value to customers, maintaining partnerships, performing key activities, providing key resources all require capital.

Questions to ask:

  • What are the most important costs inherent in our business model?
  • Which Key Resources are most expensive?
  • Which Key Activities are most expensive?

 

In Summary

In an increasingly complex, volatile and uncertain business environment perhaps the most important capability an organization can develop is the ability to change. Detailed plans can impede this process, as they often require inflexible commitments and can make it difficult to change course in response to new information. Instead of relying on detailed plans, businesses must learn to embrace uncertainty and ambiguity. This means being comfortable with making decisions in the face of incomplete information and being open to course corrections as new information emerges. It also requires a willingness to experiment and try new things, even if there is no guarantee of success. In today’s business environment, flexibility and agility are essential for survival. Those who are able to embrace uncertainty and change will be the ones who thrive in the years to come.

 

 

Takeaways

  • Dynamic business models are more flexible than static business models. Business models are better suited for the fast-changing environment of the 21st century. Business models are composed of nine distinct building blocks.
  • These building blocks are not set in stone; as new facts surface, the business model must be updated to reflect the new information.
  • A dynamic business model helps us view the business as a whole, rather than as a collection of isolated parts.
  • It is a tool for continuous change and adaptation in a fast-paced world. This flexibility allows businesses to respond quickly to changes in the market and adapt their offerings to meet the needs of their customers.