The Building Blocks of Business Success: Business Plan vs Business Model
Hasan K
Product Lead @ Thrivesyte
In the world of entrepreneurship, choosing the right path for your business strategy is a critical decision. One of the key dilemmas faced by entrepreneurs is whether to prioritize a business model or a business plan. These are two different ways to plan for your business, and they can shape how your business grows. Let’s take a deep dive on business model vs business plan and figure out when to use each. Making the right choice can have a big impact on how your business works and makes money.
Business Plans – the vital document without which ideas would not turn into businesses in the past. There are many business owners who swear by them. They would not even think of starting their business, without having a detailed business plan in place. It is a must-have for small businesses, especially if you require a loan from a financial institution, apply for a business grant, or want to pitch your business idea to investors. It is considered a roadmap to success, providing clarity to many aspects of the business, including market analysis and competitive research. A business plan is needed to help articulate a strategy for starting the business, providing insights into the steps that need to be taken, resources that are required for achieving business goals, and a timeline for the anticipated results.
The dynamic business environment in the modern era has raised the importance of a business plan and business model that cannot be emphasized enough. Recent years have seen the emergence of a business model. A business model is primarily used in conjunction with the business plan, describing how and where you will choose to operate your business. It is a short document or outline that presents a mechanism through which the company will generate its profit. It is a framework that is designed to depict how a business will create value. While both have been used in tandem for the past few years, many entrepreneurs feel that the business plan is now outdated. A business model can suffice to help the business forward to success.
While we have two conflicting thoughts, this blog tries to understand the key differences between the two and the importance of each document in an organization. We will look at what a business plan and business model is, how they differ if one can be used in place of another, and if both are used, which one should be made first? This decision can greatly affect your operational strategy and financial strategy.
Understanding Business Plan
What is a Business Plan?
A business plan, in its simplest form, is a guide – a roadmap that outlines business goals and the way to achieve those goals. It is a written document detailing the nature of the business, the sales, marketing, and financial standpoints, and the projected profit and loss statement.
Studies show that entrepreneurs who take the time to write a business plan are 2.5 times more likely to follow through and get their business off the ground. This is because a business plan, in its simplest form, is a roadmap that outlines business goals and the way to achieve those goals.
Key Components of a Business Plan
The Business Plan consists of the following main sections:
Executive Summary: It is the most critical component as it summarizes the vital information from a business plan which includes the unaddressed problem, description of the solution, its value proposition, competitive advantage, market size and demand, milestones achieved, and financial metrics.
Description of Business: It details the information about the company and the customers, essential for defining your organizational structure and understanding your competitive advantage.
Description of Product or Service: It provides insight into the nature of products and services provided, its novelty, development roadmap and intellectual property (IP) strategy.
Problem or Market Opportunity: This section features the description of the problem a business is trying to solve, the scale of the problem along with the pain points of the customer.
Market Analysis: It includes the target market, the trends in the market, opportunities present in the existing market, customer and end-user analysis, helping you shape your go-to-market strategy.
Competitive Analysis: It provides insight into the competing businesses in the industry, contributing to your understanding of market analysis and competitive research.
Marketing & Sales Strategy: This section aims to describe how to target customers, who will be attracted and retained, influencing your market strategies and marketing mix strategy.
Organization & Management: It describes the legal structure of the business, a key element of strategic management.
Teams: Summarizes the key competencies of the team members to develop a product or service and its subsequent commercialization and scale up.
Risk Analysis: service, technology, market, competition, team, commercialization and financial, along with likelihood of occurrence, the expected effects and the mitigation strategy.
Financial Projections: The expected financial profits expected in the next 3 or 5 years, serving as a critical component of your financial objectives.
Why do you need a Business Plan?
Considerable research and studies have been conducted over the years to assess the importance and necessity of a Business Plan. Many businessmen feel that a business may be able to survive without a business plan but having a solid plan that is followed through greatly increases the chances of success. According to Sean Hackney, the founder of Roaring Lion energy drinks, having a business plan is a must.
Research shows that a business plan creates a 30% greater chance of growth and a chance to double the business. This can itself be a motivating factor that would encourage entrepreneurs to write a business plan at the start of their business. A study that was published in Small Business Economics also found that entrepreneurs with business plan are 152% more likely to start their business and are 129% more likely to push forward with their business beyond the initial startup These findings are confirmed by another study that found that entrepreneurs with a plan are 260% more likely to start their business. These findings are bound to give the business plan a place of reverence or great importance when starting a business.
The business plan is not a static document rather it should be reviewed periodically and updated. A well-thought-out and organized business plan can help entrepreneurs determine the viability of their ideas and increase the odds of their success.
• Business plan can help entrepreneurs or companies to determine business profitability.
• Business plans can give entrepreneurs an estimate of their start-up costs and the investment needed.
• A business plan is a formal document used to convince investors and lenders to fund your business.
• It can help you to compete in the marketplace by analyzing the market through a competitive analysis.
• A good Business Plan can anticipate and identify potential risks and ways to mitigate them.
A business plan is like a roadmap for your business. This is not just a document but also a useful tool for making smart decisions and managing your business well. So, whether you are an entrepreneur or an existing business owner, a solid business plan is essential. It helps you make good decisions, stand out from the competition, and reach your financial objectives.
Understanding Business Model
What is a Business Model?
A Business Model is primarily the core strategy of the business to create value. It entails all the activities of the organization and the partners used to create products or services. It generally includes the products or services the business plans to sell, target markets and any other anticipated expenses. It is a skeleton that will explain how the money will be made and how the company will create value in the industry. It defines how the company will interact with the suppliers, clients, and partners to generate profits. It can be based on many different aspects of your company such as production, distribution, pricing, advertising and communication.
What is Business Model Canvas?
Alex Osterwalder, co-founder of Strategyzer, along with Yves Pigneur, are the pioneers of the Business Model Canvas. They created the Business Canvas Model as an innovative strategy management and entrepreneurial tool that allows users to visualize all the building blocks of starting a business and can be used to design, challenge, and pivot a business model.
The Business Model Canvas, often referred to as the “business canvas” or “business canvas model”, is an essential tool for any organization. The Business Model Canvas is a strategic tool that allows businesses to map out their essential components for success.
Key Components of Business Model Canvas
The main components of the Business Model Canvas are:
Customer segments: This includes information on who your target customers are.
Customer Relationships: These are activities to maintain customer relationships for financial success.
Channels: This section covers the most efficient ways to distribute your products or services to your target audience
Value Propositions: This highlights the unique benefits your product or service offers to your valuable customers.
Key Resources: This encompass the human, financial, intellectual & physical resources that generates customer value.
Key activities: All the relevant activities needed to maintain profitability are included here.
Key Partnerships: Identify any strategic alliances or partnerships that contribute to business model’s success.
Revenue Streams: Identify all the sources of revenue for your business, including pricing models and income streams.
Cost Structure: Recognize all the expenses and cost drivers associated with running your business.
Why do you need a Business Model?
The need for a business model cannot be undermined, when studies are conducted on businesses that do not have one. According to a study conducted by Investopedia on why small businesses fail, it was found that 17% of businesses failed because they lacked a business model. It is no surprise that most businesses do not make it past the initial few years. According to the U.S Bureau of Labor Statistics, 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new business make it 15 years or more.
This could be attributed to the fact that many businesses are not able to pivot away quickly enough from a bad product or decision. Continuously trying to salvage a bad idea can lead to a loss of resources and money. What businesses need at this point is to be able to identify their mistakes and rectify them to capitalize on the opportunities present. A business model can help businesses change strategies by testing out different ways to run the business. A good business model can:
• Organize ideas for the business and create value out of ideas.
• Explore communities and discover how the business can be successful.
• It helps to maintain a close relationship with the customers.
• It gives a summary of your business focus which can be shared with employees and customers.
• It helps to keep from losing sight of the company’s direction while managing daily tasks.
Key Differences between Business Model and Business Plan
A business plan and business model may have similar components, but they differ in their inherent purpose. The main difference between a business model and a business plan is that a business model is the means through which a company generates profits, whereas a business plan is a document showcasing the company’s strategy and its expected financial performance for the coming years. In other words,
“A Business Model shows how the organization or business will generate value and revenues and the Business Plan shows an estimate of how much profit the business will make in a specified time.”
Think of the business model at the center of the business plan. The business model will show how the company is positioned in the industry and how it creates relationships with its suppliers, clients, and partners to make profits. On the other hand, the business plan outlines all the strategic actions required for this positioning and quantifies the financial impact of these actions.
Business Plan vs Business Model: Which is more important?
A business plan and a business model are both parts of the strategic planning process. They both work in tandem to help a business grow. One cannot function without the other. Some entrepreneurs think of the business model as a destination and the plan as the way to reach the destination. Since the model describes how to create value for the customer, this is our end goal. In this context, the business model comes first, and then the plan is created. The plan describes the strategies involved to build the business in line with the business model. Other entrepreneurs describe the business model as the foundation of the company and the business plan as the structure. Even in this context, the business model as the foundation should be developed first on the basis of which the business plan can be made.
To conclude, it is safe to say that having an effective strategic plan that has the business model incorporated within it is integral in steering the organization towards success. Businesses should make use of both the business model as well as the business plan to develop a competitive edge in the industry and increase the odds of their success.
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