Introduction to Key Terms: Business Model, Business Ecosystem, and Transactions

During the course of the two grants mentioned in my introductory post, our project team convened numerous “stakeholder sessions” across Northeast Ohio in an effort to encourage participants to generate business ideas and use the tools we offered to build them into business cases. In a pattern that repeated itself several times, attendees would have exciting ideas for businesses that played into their skills and captivated their interest in the session, but died along with the conversations after the meetings were over.

A likely reason for the high drop-off is the result of having given thoughtful consideration to the question, “How can I make a profit with my idea?” Or another way to ask the question is “How can I sell the value I deliver for a price that covers the expense I incur for delivering that value and have extra left over as a reward for me taking the risk and succeeding? The answer to that question is a business model. And if I can’t come up with a business model that fits with my idea, then I can’t make a case for it. Simple.

How could so many innovative and compelling ideas raised during the stakeholder sessions not find compatible business models to see them through to start-up? No doubt, there are several contributing factors to this outcome, not the least, of which, is that many of the ideas, which sounded good when first given voice, just didn’t pass muster under closer scrutiny. But what we also found is that how wide the net a person casts to vet an idea with others defines in large degree whether the idea continues toward fruition or dies on the vine.

In effect, almost any idea has the potential to connect with a social network of the countless, nameless many who represent all walks of life and all manner of means, and garner sufficient support to forge the idea into a full-fledged business. It is an application of Barry Commoner’s First Law of Ecology— “Everything is connected to everything else”— to commerce. The result is a business ecosystem.

From this perspective, a business ecosystem encompasses and interconnects all resources and assets as well as all participants be they customers, owners, employees, investors, suppliers, advocates, etc. Given this, how one draws the boundaries for a business ecosystem, defines who participates, and then positions an idea into it, influences the development of viable business models. The more expansive and inclusive the business ecosystem, the more options there are for a serviceable business model to ensue.

This raises the question, “Why do the qualities of expansiveness and inclusiveness contribute to more clarity rather than more chaos?” We found that, as in a natural ecosystem, the business counterpart thrives on an abundance of flows. Only instead of water, air, nutrients, etc., the flows in commerce consist of inputs, outputs, information, and know-how. And when these flows converge at specific points in time and space, an exchange of value, or transaction, occurs using an agreed to medium of exchange.

A business model organizes transactions so that “I sell the value I deliver for a price that covers the expense I incur for delivering that value and have extra left over as a reward for me taking the risk and succeeding.” More participants, more flows, more mediums of exchange, more value generated in a business ecosystem drive more transactions and, with them, greater odds that a business model will surface that develops a worthy idea into a successful business.

With these three terms as tags, look for future postings related to them that appeal to our grant experiences…

Originally posted to Sustainable Local Economic Development by Steve Bosserman on Monday, August 6, 2012

Rules and Choices for a Sustainable Local Economy

Economies are social systems within which we make choices based on needs, wants, and means. People regulate economies through rules that set taxes, tariffs, fees, standards, licensure, certification, patents, etc. These rules reflect the priorities of the people who enact them through their governance structures be they for small local groups or large global agencies.

The intent of rules is to limit choices in favor of those that produce the desired behavioral outcomes on a consistent basis. Such rules make the economic system more effective (do the right thing) and efficient (do it the right way).

Oftentimes, rules from multiple levels of jurisdiction apply to the same set of choices. For example, cooperatives, municipalities, county, state, and federal offices and agencies, the European Union, the United Nations, professional societies, industry-wide private sector groups all have a hand in defining various regulations to monitor and manage the supply of basic needs such as food, water, energy, fuel, manufactured goods, etc.

Unfortunately, competing or unclear interests behind the rules or insufficient diplomatic moxie to enforce them results in a complex legal and financial landscape in which to make choices. From a business perspective, this dense web of rules becomes a barrier to entry for all but those that have a global market, deep pockets, and easy access to resources to sort through the alternatives, invest in the opportunities, and pay the consequences for any misstep. It also fosters a dependency by people and their communities, neighborhoods, and rural areas on global players to supply them with basic needs. This places communities at risk for survival if supply chains are disrupted whether by natural disasters, climate change, pandemics, fossil fuel shortages, political turmoil, even a down Internet, to mention some of the more obvious.

As explored in the posting, “Business Models for a Local Economy,” the primary purpose of a local economy is to meet the needs of its participants whereas the purpose of the global economy is to satisfy their wants. Such distinctly different purposes result in different rule sets. Governance structures proliferate at all levels to administer rules of the global economy. Far fewer are in place for local economies. However, several types are available. Among these are policy councils, buying clubs, and co-ops for food, family, education, housing, etc.

Governance structures for local economies establish the rules by which members of communities, neighborhoods, and rural areas have more options available so they can choose to meet their needs through local sources. In effect, such “rules management” facilitates “Business Model Development within a Local Economy”, which drives two fundamental “localization” processes:

  • Integration across all value-added steps from the point of consumption back to the points of production
  • Utilization of community assets and resources without reliance on outside funding

The combination of these two processes, under the auspices of a local governance structure, gives interdependent local businesses and support organizations the competitive edge to prevail over their global counterparts when meeting needs of community members. Furthermore, members have opportunities to minimize economic leakage, reinvest their assets, and retain vital resources in the community through an effective portfolio management effort. This collective effort, then, is the foundation for sustainable local economic development.

The diagram below offers another way to view these critical interrelationships.

The integration of value-add steps–a function of rules management–flows from the point of consumption to the points of production, whereas the utilization of community assets and resources–a function of asset management–flows from identification and location to inclusion in an infrastructure project and business case portfolio.

The center of the diagram lists a wide range of professional services required to accomplish the tasks and complete the activities associated with rules management, business ecosystem functionality, and asset management. Social networking and innovation, which characterize asset management, and entrepreneurship and commercialization, which result from rules management, form the backdrop to conduct these transactions.

As the graphic suggests, services are transactions–the lifeblood in social system behavior. Nothing gets done between and among people without transactions. However, some methods and processes require fewer transactions than others. Furthermore, a healthy local economy incurs fewer transaction costs, either internal or external, to meet the needs of its members than a global economy. This is simply because the sustainability of the community is in the hands of those who live there. It’s in their vested interest to manage it. And given the choice to do so, which a vibrant local economy does, members will act on behalf of their collective sustainability.

Community members, represented by the orange-colored background, have the rules in hand to manage the context and the choices available by which they can:

  • Meet their needs
  • Sustain their community for generations to come
  • Assure themselves of a reasonable quality of life
  • Build on a firm foundation to participate, successfully, in the global economy

These outcomes of constitute the primary purpose for a sustainable local economy and the healthy development it catalyzes and encourages.

Originally posted to Sustainable Local Economic Development on Tumblr by Steve Bosserman on Wednesday, September 8, 2010

Integrated Agricultural Economies

Title Slide
Title Slide
Slide 1, Build 1
Slide 1, Build 1
Slide 1, Build 2
Slide 1, Build 2
Slide 1, Build 3
Slide 1, Build 3
Slide 1, Build 4
Slide 1, Build 4
Slide 1, Build 5
Slide 1, Build 5
Slide 1 Build 6
Slide 1 Build 6
Slide 1, Build 7
Slide 1, Build 7
Slide 1, Build 8
Slide 1, Build 8
Slide 1, Build 9
Slide 1, Build 9
Slide 1, Build 10
Slide 1, Build 10
Slide 1, Build 11
Slide 1, Build 11
Slide 2, Build 1
Slide 2, Build 1
Slide 2, Build 2
Slide 2, Build 2
Slide 3, Build 1
Slide 3, Build 1
Slide 3, Build 2
Slide 3, Build 2
Slide 4
Slide 4
Slide 5
Slide 5
Slide 6
Slide 6