This week we discuss a cool idea about Business Models! Watch now!
VIDEO SUMMARY
We are talking about business models. Very simply, a business model is a description of how you organize a company. What makes business models interesting is that every company is different. Every company has a unique set of Strengths, Weaknesses, Opportunities, and Threats. We talked about this when we discussed SWOT analysis. You take your SWOT analysis, and create a strategy that is unique to your company’s situation. The business model is how you organize your company to implement your strategy. Today I am going to talk about a specific business model that I find to be particularly effective. But do not get upset if your company does not fit this description, because not every company has to be organized the same way.
I am going to focus on the tech industry. The tech industry is going to play a pivotal role in our economy moving forward. The question is, how should we organize these tech companies to achieve the highest level of productivity. The best place to start is to understand how a business makes decisions. The results of any organization are a product of decisions. What is the right product to sell? Who are the right customers to target? Who are the right people to hire? There are a million decisions to make in a business. The way your business is organized affects the way your employees make decisions.
If you look at decisions in a tech company, you can evaluate them from two different perspectives. There is a technical perspective and a business perspective. In every tech company, you have technical staff and business staff. Your technical staff is your computer scientists, engineers, mathematicians, physicists. Your business staff are people who have gone to business school. Both these groups have spent years in school studying their area of expertise. They went through very different programs, so it makes sense that they would approach decisions from different perspectives. Technical staff went to Engineering school, while Business staff went to Business School. They graduated with a different set of tools, techniques, and methodology for making decisions.
Let us look at an example to see how this dynamic plays out. Here is a diagram of a sample decision. You have two perspectives: technical and business. Your technical staff approaches the problem by asking, “What is the right answer?” Your business staff approaches the same problem by asking, “What is the right answer for the right amount of money?” These are two very different perspectives. I would like to suggest that the best solution is somewhere in the middle of these two perspectives. My recommendation for creating a business model is that you get the best results by representing both technical and business perspectives in your decision space. I do not think I am saying anything too controversial here. All I am saying is if you take someone who has spent their whole life studying science, and you take someone else, who has spent their whole life studying money, and you put them together, you will have an effective organization. You can find many examples of this. The most notable example of course is Apple. Steve Jobs and Steve Wozniak started Apple. Steve Wozniak was a great technical person, and Steve Jobs was a great business person. Together they built one of the world’s biggest companies.
The reason this is important to discuss, is if your business model only focuses on one perspective (either technical or business), you can experience serious problems. Companies that only focus on the technical side, tend to have money problems. You see things like company’s running out of money, poor use of capital markets, and a lack of focus. The opposite also creates problems. Companies the only focus on the business side, tend to have quality problems. You see companies cut corners to make money, but then create bad products. You will see things like defective products, bad design, difficulty meeting production schedules, and low quality. You can avoid these things, by organizing your company in a way that applies both perspectives when making decisions.
This begs the question, what is the difference between how a technical person thinks and a business person thinks? Can we put into words what the difference is? I think the best way to do this is through a story. Imagine you live in a primitive village 2,000 years ago. This is a small village where everyone eats their meals together as a group. It is time for the evening meal. The food is passed out to everyone, and everyone eats. Unfortunately, two people arrive to the meal late. One man is a hunter, and the other is a small boy. They find everyone sitting around, having eaten all the food. Everything is gone accept for a small loaf of bread, that is enough to feed one person.
We have a decision to make. We have one loaf of bread, and two hungry people. What do we do? Luckily, the village has two smart people: a technical person and a business person. These two people come up to help us make this decision. The technical person reviews the situation and has a brilliant idea. He is very proud of himself and says, “Let us cut the piece of bread in two. We will give half to the hunter, and half to the boy. That is an equitable distribution of calories.” The business person reviews the same situation, but has a different solution. He takes the loaf of bread, gives it to the hunter, and says, “Let the child starve.” The reason the business person says this, is he knows the hunter is more productive than the boy. The kid is not going to starve to death in 24 hours. But that hunter is going to go out and hunt some food so the entire village can eat tomorrow. The business person knows that every calorie that hunter consumes raises the probability of a successful hunt. That is the difference between how a technical person thinks and a business person thinks. What you study in business school is how to allocate resources in a scarce environment. This is an example of accepting short term discomfort for long term gain. No one likes making these decisions. No one likes causing anyone pain. But a business person has to be a part of the decision making process, distributing the bread in a fiscally responsible way. Because in the end, the entire village will be better off.
Just to clarify, I am not saying that one perspective is better than the other. They are just different. Honestly, technical people usually make more money than accountants, because they create so much value for a company. Whenever I am in a room with a technical person, I listen to every single word they say, because they are usually smarter than me. But one of the keys to being successful in life, is understanding where you bring value to a situation, and where other people can bring value. The area accountants bring value, is they know a lot about money. That is the skill you bring to the decision table.
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Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.