The right business model and business development – key components to SME success
The first five years in the life cycle of a startup are its most crucial. It is during this time that start-ups attract their first customer base and begin nurturing relationships with early adopters – these are the people who inadvertently become the start-up’s first brand ambassadors and word-of-mouth marketers.
The formative years are for trial and error, this is when you get to experiment with marketing channels, cement your value proposition and finally, establish whether your predictions on market appetite for your product or service were accurate.
Unfortunately, as part one in this series explained, the majority of start-ups in South Africa fail within the first year. Most SMEs never really get off the ground, and it’s important to delve deeper into why this is the case for so many South African business.
In the first part of this series, we found that there was a correlation between the failure of businesses and the failure of familial and personal relationships. Below we unpack two more central reasons for why start-ups fail.
- Working off an inaccurate or lacking business model
A business model is different from a business plan, in that the business model is the mechanism through which the company generates its profit while the business plan drives the business strategy and outlines its financial forecast. The business model is essentially the foundation of a company, while the business plan is the structure – the plan is built around the model which is at the core of the business.
The key components of a business model include knowing who the target market is, the business’s core proposition (what problem is it solving for who) and unique selling point, the potential benefits and pitfalls of the proposition, and how the product or service will be sold and remain competitive (this could include a subscription, freemium, crowdsourcing or product-to-service model, for example). During a start-up’s initial growth phase, its business model undergoes a trial by fire.
Essentially, entrepreneurship is about solving problems, and the first few years of a start-up will reveal how efficiently the business solves a problem and for whom. SMEs who invest in extensive market research (rather than basing their decisions on educated guesswork), and who prioritise elements like feasibility studies stand to gain the most.
A business model fails or falls short when the product or service does not provide a solution to a viable problem or the target market simply has no interest in it. This is a classic pitfall that’s referred to as a ‘failure to achieve product-market fit’. A business model can also fail if the business’s competition has a model that works more efficiently – this can relate to the size of their market share or something as granular as their pricing structure.
When it comes to getting your business model right, there are also macroeconomic realities to consider. A poorly performing economy and currency can lead to higher production costs and/lower demand, which can have a ripple effect on profitability. In many cases, the key for building a start-up in a volatile economic environment can be to iterate – to make small but significant changes to your business model within its formative months and years, to meet the demands of the economic climate. It may seem easy, but too often entrepreneurs grow attached to their original ideas and fail to see the value in seeing things from a different perspective. Flexibility and agility are essential for SME owners to succeed in today’s market, which is in a constant state of flux.
- Lack of business development
The business development function within a business refers to the processes that help cultivate and implement growth opportunities for the company. One of the most crucial factors for SME founders to consider in their first five years of operation, is what their long-term goals are for the business. This is easier said than done, simply because there are so many extenuating circumstances to consider. So much can change in five years, but planning ahead and developing a business in alignment with those long-term goals could be the very cornerstone of its success.
It’s not uncommon for start-ups to become stagnant before failing completely. Some begin with executing a great idea, but that initial idea may not have longevity, and in those cases, start-ups who don’t ask the pivotal question, “what’s next?” may be in danger of losing momentum or coming to a complete standstill. This is why business development practices should be prioritised – and should include mechanisms to grow sales, a view on potential strategic partnerships, and how to reduce costs to promote a healthier bottom line.
However, business development goes beyond increasing sales and considering next steps for a product or service, it extends to developing human resources. Eagerness to learn on the job and develop skills is a vital quality of a good first-hire. An effective strategy to ensure that the people involved in a start-up are always growing and developing to meet the needs of the business, is to make skills development a part of their job description and the company’s philosophy.
This article is the second in a series of three articles that will unpack why SMEs fail and how to circumvent some of the most common issues.