When it comes to Playing to Win, where is the business model?

Where is the business model in the Playing to Win Strategy Choice Cascade, I am frequently asked? Isn't there supposed to be a sixth box for business model? I've had this question so many times that I decided to write my 25th Playing to Win/Practitioner Insights (PTW/PI) on Where's the Business Model in Playing to Win? (You can find links to the rest of the PTW/PI series hеre.)
The Business Stratеgy

For many, the business model takes on a mystical quality. When entrepreneurs are questioned about their company strategy, they want to give a response that demonstrates that it is destined for greatness. It will be the Warby Parker of x or the Airbnb of y. Our 'business model' is to charge $1.50 per order to the shoe company to which we refer a shoe-buyer who visits our shoe-buying aggregation site. And even if we just sell 700,000 pairs, we'll make over $1 million. There's no limit to what you can achieve!

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The business model is quite significant. Someone must give you a sum sufficient to cover your expenses while also allowing you to make a profit. As a result, you'll need a revenue model and a cost model, preferably ones that are compatible. In a world where numbers are often held sacred, the above business strategy would suffice for the majority

A Strategy-Oriented Model

However, in my opinion, you can make up any number you want, and all revenue estimates are exercises in fiction. Is $1.50 per pair a reasonable price? Is it true that there are 700,000 users? Simply stating the numbers does not make them real, especially when the decision to spend/pay is made by someone else. As a result, I want the business model to be grounded in and emerge from the strategy's essential elements

Because the Where-to-Play/How-to-Win (WTP/HTW) choice pair lies at the heart of strategy, the business model must be ingrained in and emerge from it. Customers from whom you will get revenue must be specified in the WTP. That is fundamental to your business strategy. And in today's economy, things aren't always simple. Many two-sided markets exist, with a'money side' (for example, advertising who pay for Google phrases) and a'subsidy side' (for example, searchers who do not pay). Because Congress doesn't comprehend two-sided market economic structures, congressional committees may believe Google and Facebook are "free services."

The HTW option must explain how you will make a higher profit margin providing the WTP customers than your competitors. This can be accomplished by selling at a lower price with lower costs or a higher price with average costs. Your HTW must explain why, with the WTP you've chosen, you'll be able to either earn greater prices or offer clients at a cheaper cost structure. Both how you will arrive to that position and how you will retain it must be specified in that theory. You don't have a business model worth having if you don't have one. You can absolutely do so in a spreadsheet, but it won't last long and won't look anything like your spreadsheet. That is because someone else will have an advantage over you and will gradually but steadily demolish your company

As a result of your WTP/HTW decision, your company model emerges. The WTP tells you which customers will generate income, whereas the HTW tells you how much money you can expect and how much it will cost you to generate that revenue

The Capabilities and Management Systems (MS) decisions are the reality check for strategy, as they determine if you can establish and sustain the Capabilities required to win where you have decided to play. The expenses of developing and maintaining these Capabilities must be factored into the business model. If your HTW demands you to improve your branding in order to maintain premium pricing, how much money do you need to spend on advertising on a regular basis? Will you be able to maintain overall cost proximity with those advertising costs? Is your scale giving you the cost efficiencies you need if your HTW requires you to have an advantaged cost position based on scale? Is your recruitment system too expensive if your system requires higher-quality human resources? These are the kinds of reality checks that your business model must pass, otherwise it will be a fiction, like most business ideas

In today's economy, your Winning Aspiration (WA) plays a critical role in evaluating the viability of your business concept. Fixed expenses have taken over the majority of the overall cost structure in most sectors today. Most organisations' cost structures were weighted towards the variable expenses associated with producing another unit of the product a century ago (or service). Building an automobile, for example, necessitated a large number of raw materials/parts and significant variable labour costs, with only a small amount of fixed expenses. Most modern organisations' fixed costs, such as R&D, advertising, engineering, management overhead, distribution system, and IT, now account for the majority of their costs. The variable costs of additional unit are frequently insignificant. How much does it cost to serve another Facebook user? It's almost zero. What does it cost to provide a second copy of Office 365? It's almost zero. Even a well-known consumer goods company like P&G now has higher fixed expenses than variable costs
With such a cost structure, relative size is critical to the strategy's and business model's viability. The player with the biggest size will have the most appealing economics in any defined WTP because it can spread its fixed costs more widely than its smaller competitors. As a result, it will be able to either spend more to differentiate itself or reach parity with a reduced total cost structure. For example, if it has a higher relative market share than its competitors, every dollar spent on advertising will cost it less per unit sold. If, on the other hand, a competitor is larger in a given WTP, its economics will be superior, resulting in it becoming relatively stronger over time while you become relatively weaker

Each box in the Strategy Choice Cascade establishes and verifies your business model in this manner. A winning aspiration that motivates you to reach the largest position in the chosen Where-to-Play must be paired with a How-to-Win that creates the advantage that enables you to achieve the dominant share in order to have a business model that works. And that WTP/HTW decision must be backed up by Capabilities and Management Systems that can be established and maintained to regularly produce the type of winning that the WTP/HTW decision assumes. If these decisions are well-considered and mutually reinforcing, a business model that is a reality rather than a fiction will emerge

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Perspectives from a Practitioner

Don't think of your business model as something apart from your strategy when you're questioned about it. Begin with your plan, which includes your Winning Aspiration, Where to Play, How to Win, Capabilities, and Management System. That will provide a stronger justification for why revenues will flow to you and profits will accrue over costs. You're wasting your time with them if they're impatient and only want the stats. Without a strategy, there is no business model. And all great strategies result in an appealing and long-lasting business model