High hopes: Small business is becoming optimistic

Small business owners are joining consumers and investors in showing some cautious optimism about the economy.

An index that measures owners' optimism rose last month, boosted by expectations that business conditions will improve in the future. And there's anecdotal evidence from owners in a variety of industries who say they have reasons to feel a little more upbeat.

The National Federation of Independent Business, which surveys its members each month, said its index of business owner optimism rose 2.1 points to 88.6 in August, an increase that NFIB chief economist William Dunkelberg called "a big gain." The optimism, though, is about the future, as owners still have a dim view of current economic conditions. Dunkelberg noted that small businesses generally aren't planning big capital expenditures or to start hiring again.

"First you have to feel better before you'll spend your money," Dunkelberg said.

Dunkelberg makes the same caveats that other economists do: If consumer spending doesn't pick up, the budding optimism is likely to wither. But, he said, having watched decades of economic cycles, "every recovery begins with an improvement in the feel good stuff, and that's followed by an improvement in the hard spending numbers."

Several small business owners interviewed by The Associated Press reported that their own optimism, as well as that of their clients and customers, has started to improve recently.

"It's still tough, but people are at least starting to speak in normal terms again," said Michael Frenkel, president of New York-based M Frenkel Communications Inc.

Like many other public relations firms, Frenkel's business was hurt when clients slashed their marketing budgets, often the first casualties when companies cut costs. Now, he said, with his hotel and real estate clients putting their budgets together, "things are looking a bit looser for the fourth quarter and they're looking even looser for the beginning of 2010."

But Frenkel said business owners have been forced to adapt to a new reality: The booming economy of two and three years ago, when a company like his could find business almost anywhere, isn't likely to return soon. So, he said, "you just try to go out there and make it happen."

Ian Ford, whose company sells discount tickets to Orlando, Fla., tourist attractions, has become more optimistic as his sales, which dropped off last September and fell as much as 20 percent, started to rebound this summer. Part of the improvement followed Walt Disney World's discontinuing some of its deep discounts, which in turn lifted demand for the tickets sold by Ford's company, Undercover Tourist. Also, more people are willing to travel now.

10 Tips on Business Model Innovation

How can we start innovating on our business model?

Business Model Innovations have redesigned entire industries and there are many stories on how companies by providing something different, in a different way or to a different customer segment completely change the rules of the game.

There are many ways to explore and analyze markets and the different components of the business model to identify opportunities for innovation. Here are 10 tips on how you can approach business model innovation:

1. Create a common understanding of the existing business model

This might seem obvious but in many organizations the knowledge about how the company operates is widely distributed in the organization. A good idea is to bring together key people from different parts of the organization who understands different parts of the existing business model and the underlying reasons for why things are the way they are. Is it because it always has been in that way? Is it because it was the easiest way to do it at the time the decision was made? A great way to create a common understanding is to visualize the business model by drawing boxes on a whiteboard, using the business model canvas, or as I sometimes do; list business model components in Excel using a projector to facilitate collaboration.

2. Create a common understanding of what is core in the business model

Focusing on what a business does best is often argued the easiest and most efficient way for companies to grow and be profitable. Understanding customers' perspectives and their perception of value is fundamental to identify what is core. Perhaps it’s not what you deliver but how you deliver it, that makes people buy? - Perhaps you should deliver something else as well given your good way of delivering things? - Perhaps it’s not the gadget you sell as such, but the software interface that people like? - Could other gadget manufacturers need your better software interfaces? - Perhaps the reason someone wants to collaborate with you is because your customer relationship and contracts with a certain organization? - Could other companies be interested to get access to the same organization? Read more about identifying the core in a business model here.

3. Identify interrelationship between the different business model components

Discovering real and perceived relationships and interdependencies between different components is important to understand underlying reasons for why things are the way they are. Identifying perceived relationships is also a good way to find underlying assumptions that might be wrong. What are the underlying assets enabling key activities? For what parts of the value proposition are partners and external actors necessary? How do the customer segments affect the choice of customer relationships and delivery methods?

4. Identify drivers of change and trends affecting existing business model

Why do you need to reinvent your business model? Is it because of low cost competition? Niche actors? New actors? New technology? Changing customer behavior? Changing partner behavior? Identifying the drivers of change and trends affecting the existing business model will turn your focus to the most crucial components of your business model.

5. Analyze strengths, weaknesses, opportunities and threats

The SWOT analysis is simple yet a powerful tool to create a common understanding of the current situation and to summarize the findings from the steps above. It is often illuminating to point out what needs to be done and to put weaknesses and threats into perspective. Use precise and verifiable statements rather than lose assumptions or opinions, and prioritize to spend your time on the most significant factors. The SWOT analysis can also be used on the business models of competitors or other external actors to find new ways to compete or collaborate.

6. Analyze theoretical ideal situation and contradictions for each business model component

By exploring what would be the theoretical ideal situation for each business model component you can create out-of-the-box-ideas without being locked into existing solutions. In doing so you can also find the constraints of a business model: why can't we provide this for free? Why not instantly? Why not exactly the way the customer wants it? With the ideal situation identified, the next step is to work backwards to something that is achievable by decreasing benefits and/or increasing costs and harms.

7. Analyze external alternatives that could take each business model component closer to the ideal situation

With a rigorous SWOT analysis and Ideality analysis you are well equipped to analyze how external actors could fill in the gaps you have identified. What if X delivered this instead? What if we replaced some of our existing assets or activities with external ones at lower cost or better performance? What if we created a low cost version? A digital version?

8. Analyze what would happen if applying principles for innovation

You can use the 40 principles for innovation, based on TRIZ adjusted for business problems, to explore "what if" questions for each business component (see example in the business model innovation matrix). What if we took away something? (principle 2), turned something the other way around? (13), did something slightly less or slightly more? (16) etc. Exploring 40 principles on several different business model components is an extensive work and I find two approaches helpful; either have a session on one business model component and apply the different principles, or take a few principles and apply them on all business model components.

9. Decide on ways to explore alternative business models with limited risk

The development of a successful business model is often the result of lots of learning from lots of failures, so it is important to find ways to fail fast and cheap without destroying existing business models. To avoid failing in front of your existing customers and partners, common methods are to set up separate working groups within or outside the company and use closed focus groups, advisory boards, release limited beta versions or try out new business models in limited geographic areas.

10. Track progress and unexpected customer or partner behavior

When tracking the progress of a new business model it is important to not focus blindly on parameters such as costs and revenues, but to identify existing, expected or unexpected customer or partner behavior and iterate the business model.

In retrospect most business models seem obvious but at the time it's not always that clear. To quote an article in Business Week from 2000 "But how will Google ever make money? There's the rub. The company's adamant refusal to use banner or other graphical ads eliminates what is the most lucrative income stream for rival search engines."

Further reading:

Table of contents

Tools for Business Model Innovation:

Business Model Innovation Matrix

The Business Model Canvas

What elements are core?

The Value Proposition Explorer

Ideality as an innovation tool