andrei charnysh
There is no universal working theory of business at the moment. Different actors use very different approaches – in real business life and theoretical researches, in developed and emerging markets, in mature businesses and fast-growing «tech» teams.
I offer my vision of the basic business scheme applicable to any environment.
Shortly, business is a regular organized activity of people that simultaneously creates value for someone and increases fortune for others. Business arises when market opportunities, technologies and people meet. These three entities live according to absolutely different laws, that's why it is so difficult to "connect" them in real practice. An implemented market opportunity (technologized and used by people) is a business model (M). A technology put at the service of business and mastered by people is a business system (S). People actively involved in business are business persons (P). Three things to define and connect (MSP) provide a great variety of combinations – that’s why the real business landscape is so complicated. The efficiency of any decision depends on the degree it links together the model, the system and the person. An efficient business-decision not only improves the economy, increases resilience, or engages the team, but does it all at the same time. Such a decision is referred to as a key decision
A significant portion of the world's population currently works for commercial organizations. Even a bigger portion deals with various businesses — buying goods at stores, paying mobile operators, using Internet apps, etc. — on a daily basis. Most of them have absolutely no idea about where business comes from, what a business organization is, how it is structured, how it operates.

But of course there are those who are interested. I often hear partners, clients and employees say that it is important for them to understand what business is “in general”. But this plain practical curiosity often goes unsatisfied. Then most people abandon these attempts and, instead of understanding what business is “in general,” prefers to proceed to direct actions and make decisions on specific situation.

But I've always wanted to find a general working theory that could be used as a method or tool when embarking on every new business project. This article is my humble way to figure out how to systematically understand business and how to put this understanding into practice.
Those who want to get acquainted with the approach immediately, please refer to section 2.
Those who are completely impatient, please read the 10 key findings of the article at the very end of it.

Those who wonder why I needed to come up with some special approach at all (“hasn't anyone figured it out before?”), please start with the first section of the article.
I. What do we know about the nature of business and are we satisfied with the answers?
First of all, we must understand to whom, in principle, this subject is important, and who has already dealt with it. Perhaps we will find that there is some common basic business theory that is understandable to all interested parties. Maybe, we can move on with it and not reinvent the wheel.

So who needs to figure out business anyway? I have identified six potential interest groups and now I would venture to suggest what specifically they are interested in.

First, entrepreneurs themselves. They take personal risks and play an active role in their business. Most of all, they are concerned about the answer to the question "What do I need to do right now for my business to develop?" These are people with a vested interest in understanding business, but there is one significant limitation to their interest. They are, as a rule, preoccupied only with their specific case and very rarely care about the fate of other businesses and general approaches. For them, these kinds of questions often seem too theoretical. This means that they will hardly be able to define the "common" mechanism.

These questions do not look so theoretical for another group of people. I mean those who earn on the performance of a business without playing such an active role in it: investors, passive co-owners, bankers, funds, etc. It is important for them to understand how to effectively choose an object for investment and how to protect their risks. All of them are interested in having a kind of "matrix" for them to compare the efficiency and sustainability of businesses without getting into too much detail, and participate in top-level management.

The third group (they are also interested in studying various businesses and general principles) are managers. Managers are interested in their own value in the labor market in terms of the level of salaries and bonuses. And this value strongly depends on both the experience and the level of education of a manager, the breadth of their horizons, understanding of a business landscape, ability to apply various business tools in a specific situation.

The fourth group is a whole class of contractors whose business is to understand properly and improve the efficiency of their clients' businesses. Business consultants are a classic example, but we also have to remember about system integrators, law firms, full-cycle advertising agencies, training centers, and so on. They are interested in increasing their income, which is directly dependent on a better understanding of their clients’ businesses.

The fifth group, which is interested in having a holistic view of business, is often overlooked. These are government officials, regulators, and politicians — so called policy-makers. They form the institutional framework for entrepreneurship. For them, business is important as a source of power (voters, lobbyists) and as a tool for the implementation of political tasks (business as a taxpayer, employment generator, etc.)

Sixth, scientists and researchers. Driven by a thirst for truth, they study economic processes and try to comprehend the deep meaning of business as an institution, its mechanisms and influence on social processes. Most of all, they would like to work out some kind of the "Periodic Table" or "Newton's Three Laws", which could explain the evolution of business in society and predict its development.

So what are we dealing with at this moment? Do all these groups share some common point? Are they all on a single platform for us to understand business?

The short answer is NO! This article will not suffice to provide a complete overview of all existing concepts as evidence. But this point can be fully illustrated by showing the best (best of the best) examples from each group.

To begin with, let's try to proceed from the solid foundation of science. What will scientists and researchers say about the nature of business? The pinnacles of scientific thought in this area of economics are:

• The theory of entrepreneurship advanced by Schumpeter, who substantiated the hypothesis that business is an activity aimed at constantly “destroying” existing economic cycles, generating new cycles and, accordingly, creating new profit in them.
• The Chamberlin-Robinson theory of monopolistic competition, which explains that a business can make a profit even without Schumpeter's "destruction", by having products that differ from those offered by competitors, forming its own limited "quasi-monopoly" and therefore regularly deriving income from it
• Finally, Coase's "theory of the firm", which explains why business is profitable for organizations, and not everyone in the world needs to be individual entrepreneurs. This is explained by the presence of transaction costs in our imperfect world. Roughly speaking, instead of going around every day looking for new orders and incurring time costs caused by their search, it is easier for, say, designers, to unite into an organization, form a sales department and enjoy a stable flow of orders and fees. Incidentally, the same theory explains why the development of technology makes the opposite thing happen — freelance work platforms, “uber” companies, etc. emerge as transaction costs drop.

Apart from economics, helpful information about how businesses operate can be obtained from the disciplines of organizational sociology, but their subject is too broad for us — in addition to business, they study any organization — hospitals, government agencies, and even communities of volunteers and families.

Is the scientific platform right for us to understand business? Unfortunately, no, and this is easy to prove. Most entrepreneurs don't even know the theories I mentioned above (you can ask your fellow business people yourself), while they are the best thing that has happened to economic science in the past 250 years! Still, any engineer remembers the laws of Newton and Ohm, any doctor understands and relies on the understanding of the cell theory, but this is not the case for businessmen. Something did not seem to work out in this area of ​​knowledge. Why?

First, business is a social discipline, not a natural science, and we have not developed strong scientific solutions on most social issues, not only business. Second, science is generally disinclined to give advice to entrepreneurs on a specific business, it is rather interested in general principles — this automatically reduces the usefulness of this research for practitioners to almost a zero.

If the answer of "pure science" does not satisfy us, we should turn to those who are professionally engaged in this topic — consultants and business research practitioners. This group has developed a huge array of methods and created an incredible number of books, so again we do not have a chance to see them all in one glance — let's turn only to those most advanced. What's the best of the best here? Of course, consulting leader McKinsey and their forward-minded "think-tank" -—McKinsey Global Institute. Anyone can delve into the key points of their articles ... and realize that there is no answer. The MGI authors (as a rule, the managing partners-practitioners and the best analysts of the company), recognizing the immensity of the issue, turned to an absolutely empirical approach. They analyze cases, conduct surveys and then form concepts for clients on specific issues — strategy, group business, digital transformation, etc., without trying to work out a general scheme. The strongest consultants, working with large companies and large industries, generate a body of knowledge for their clients that are large stable businesses. Even medium-sized businesses find it difficult to rely on them. A simple yet revealing case: McKinsey suggests measuring the key effect of working on a strategy by the increase in the client's share in a respective industry's profit. For many non-developed markets this would be impossible. In general, since consultants have not worked out a common approach, but offer specific solutions, it means that each individual business needs to give up on a single scheme idea, and look for relevant research out of thousands of studies...
Let's move on to the third group — managers. What basis do they rely on? Everything is clear here — MBA, "mainstream", which has been criticized for many years (remember that G. Mintzberg "buried" MBA already ... 15 years ago). But the cost of MBA programs keeps increasing, and demand is growing. Instead of being recognized as obsolete, such programs absorb separate courses, such as corporate innovation and so on. To find the “business theory”, let’s analyze the structure of the best training programs in the world. For example, have a look at the programs at Stanford , the London School of Economics, or the Harvard Business School OPM, and you will see that they are all about management. This is absolutely logical — after all, they train masters of BUSINESS ADMINISTRATION (less often they indicate that the focus is on owners, while the program itself does not change significantly). The demand for training is generated by stable companies and professionals making a career. This training is not so much for “understanding” the nature of business, but for taking the next step in the ability to MANAGE (for career development), rather than entrepreneurship. So what's the problem? The fact that business is not really tantamount to management. The design of, say, a car is not identical to the design of a steering wheel and gearbox (the control system). Therefore, unfortunately, the entire logic of such programs leads us away from the question we need to answer, while doing its job of educating managers.

We still have three groups left. Let's not waste any time looking into where policy-makers get their understanding of business. Obviously, for them, businesses are “black boxes” in the economic and social system — it is necessary to feed them regulation and economic incentives, and as a result receive taxes, economic growth and jobs. Their insufficient interest in what is going on "inside" suggests that we can hardly find anything impressive in these sources.

How do bankers and investors “understand” business? Who will share with us the “best practice” to learn from? Perhaps the greatest living investor, Warren Buffett, or the largest bank in the world, China's ICBC? Even perfunctory consideration of their habitual work with businesses is enough to understand that it is almost always based on three pillars — corporate finance analysis, industry analytics and corporate governance. This is a strong and understandable methodology and we should pay attention to it. Any business is presented as a machine with money going in and out (finance), which rushes along market waves (industry dynamics), and requires the right mechanism for decision-making and asset control (corporate governance). Let's remember this. It looks almost like a working framework that could be used as the basis for understanding business, but ... its disadvantage is that it is formed by outside observers. It can take long to explain why this scheme cannot be taken for an all-encompassing method, but we can make a more simple demonstration. Here are some interesting thoughts of Henry Ford from his book "My Life and Work". Ford believed that a financial view of an enterprise was completely meaningless, and that the income statement was simply a scoreboard showing the performance of an enterprise. But it is in the operation that the essence of the business lies, which is usually inaccessible for "brokers from Wall Street". We often hear from businessmen that finance is like body temperature. It is useful to monitor it from time to time in order to understand whether your business is healthy. But in general it is not worth fixating on this temperature. Overall, it is known that the corporate finance approach almost never makes it possible to reveal the internal mechanisms that give rise to entrepreneurship and innovation.

Since we recalled Henry Ford, now is the time to move on to entrepreneurs themselves. It must be from them we can finally learn about a real and understandable toolkit which we can use to approach any business. Let's ask the Great Ones what they think ... But what do we hear?
Jeff Bezos (the world’s richest entrepreneur in 2021): "All of my best decisions in business and in life have been made with heart and intuition – not analysis." Steve Jobs (a present-day icon of entrepreneurship) thought that to start a company, you have to really want it and if you don’t have real passion, you will give up... The same Henry Ford that we above, wrote: “If a man did his work well, the price … the profits and all financial matters would care for themselves. Do a good work and get paid for it. "
There are many more passages to quote, and all of them are equally disappointing. The fastest bird in the world will never teach you how to fly, and the most powerful entrepreneur cannot explain in simple words what business is. Honestly, this is not the strength of entrepreneurs.

A recap. Many approaches to the nature of business have been accumulated, and all these are views from different sides based on various theoretical and practical considerations. However, they cannot be combined to form a general picture. A word of good advice for everyone is to decide which group they belong to and try to understand the logic behind that group's approaches. Anyone who wants to become an investor — it would be nice to go deep into approaches to business evaluation; consultants should study the latest findings of ​​leading consulting firms, entrepreneurs should look for inspiration in biographies of entrepreneurs (not so much for their business to benefit, but for motivation and proper energy), and so on.

Such a variety of approaches empowers everyone to form their own working scheme, which is something I will do in the second section.

II. A new approach and why we need it

As a rule, the need to create any new approach is subjective and a little selfish. In the first section, I tried to show that many approaches to the phenomenon of business were already developed earlier, each of them served perfectly a certain groups, but none of them fully satisfied me. First, the gap between the attempts of desk researchers and real practice (in which each entrepreneur worked at their own risk) is striking. I would like to develop an approach that would be suitable for practitioners without contradicting the results of in-depth studies.

Second, there was another abyss that I was lucky to sense. I have always worked with lots of medium and large (by local standards) businesses operating in the local markets of the post-USSR and Eastern Europe, but over the past few years I also had to immerse in the problems of startups operating in the global venture capital industry. In addition, I have always satisfied my curiosity by analyzing the world of global companies not so much from books as from the detailed stories of friends who — to my benefit — left to work for large corporations around the world (from Amazon and Facebook to Credit Suisse and Adidas). Those were different worlds that did not intersect at all. What worked for a large German or American corporation never took root in a business conducted in Belarus. Furthermore, for example, the terminology used by startup teams is infinitely far from the parlance of stable business managers in all countries. I have always felt that the nature of business is the same in the entire human community and can be described in the same categories, even for different cases.

I just need to make a reservation that by the word “business” I will mean a specific individual enterprise, rather than the social phenomenon (such as American business). I do not refer to anyone’s individual activity, either (such as in “it’s my business”).

First, let's try to define what a business is. In philosophy there is a so-called phenomenological method — this is when we try to “forget” everything that we knew before and just look at the surrounding reality with fresh eyes. What do I see when I look at any business? I see that these are groups of people who regularly perform some kind of useful activity for other people. In general, many different useful activities are carried out in the world, but this particular one differs in that as a result of it, the fortune of some people grows. In general, this is the only institution in society for which the generation of a surplus is socially acceptable. For example, the state should not generate a surplus — the entire amount of taxes collected must be spent (or put into reserves, which will be spent later). The same is true for public organizations. An individual or a household also makes money and enjoys a surplus not to devour it with their eyes and keep it untouched, but expects to spend (or save up for inheritance) throughout their lifetime. Only a business is supposed to have more money at the exit than at the entrance. So, I see business as a regular group activity of some that benefits some and makes money for others. This definition is completely primitive and unscientific, but it makes you think about three things at once. First, regularity is an important factor — if something is non-recurrent and happens sporadically, it cannot be analyzed as a business. Second, if the one who works and the one who earns are the same entity, then this is no longer a business, but handicraft trade. In business, it is important to organize other people. Third, this "simultaneity" looks like some magic — it has created a benefit and immediately increased its fortune. Let's keep this in mind.
Let's check this "fresh" definition of business against conventional wisdom. The classic definition goes as follows: a business is an organization whose goal is to make a profit. I have long had two objections to this standard definition, but only recently I have received strong arguments to support these objections.

The first objection is that I did not like the presence of a certain goal in this definition. People have goals, and any goal can only be set or assigned to an organization by fixing it somewhere in its charter. Indeed, all legal charters state that the goal of commercial organizations is to make profits. There is a but though! More recently, a meeting of nearly two hundred directors of the largest American corporations announced in a communiqué that profit cannot be considered the main goal of a business. Of course, the communiqué serves purely declarative purposes, but the fact itself is undeniable — you can write down any goal on paper, this does not bring us closer to understanding the essence of the phenomenon.

My second objection — the mention in the classical definition of the concept of "profit" is strange. Profit is the financial result of an activity, namely income minus costs. The effectiveness of such a ephemeral thing as an accounting entry seemed to me unsuitable as a key factor. On the other hand, the growth of the fortune of specific people — the owners — already looks like a serious factor. This reasoning used to look quite theoretical and useless — after all, profit is the source of the growth of wealth. The company earns, the owner withdraws dividends and increases their fortune — why do we need to overcomplicate these things?

The evolution of a developed stock market (which is more than a hundred years old), the rapid growth of the venture capital industry (the last fifteen years) perfectly demonstrate that it is not only about profit. Everyone knows that the growth of stock value is associated, but not straightly correlates with profit. Many shareholders rely on the growth in the value of their shares. Can we imagine a situation when the enterprise does not earn any profit at all, but the owner's fortune is growing? Of course! Over the past few years, several projects in my native Belarus brought their founders a lot of money without making a penny of profit — the Viber messenger was sold to the Japanese corporation Rakuten, the MSQRD and Aimmater applications were sold to Facebook and Google, respectively. And there are plenty of such projects in the world! Is it a business? For sure, because these projects created value for consumers and brought money to their owners, while the profit of the organization itself is not a priority.

But situations may not be as simple as that. Unprofitable Uber went public, its shares markedly dropped and disappointed investors. But Uber made its founders rick — Travis Kalanick, for example, made more than $ 5 billion on the IPO. There are obviously bad cases as well, such as the story with WeWork, another unprofitable company. In that case, the investor (SoftBank), sought to save the company from the negative influence of its owner, Adam Newman, and bought out his share for almost $ 2 billion. WeWork is an organization that created value (numerous comfortable and trendy office spaces around the world) and brought fortune to its founder, therefore, it’s a business, despite all of its distortions and controversies.
A situation can be even more complicated. Can an organization be a business that has no profit and even ... does not increase the wealth of the owners? Yes! All incomes can be spent on salaries and bonuses paid to top managers and, for example, squandered due to corruption. It means that the stakeholders are not the owners, but someone else who is making a fortune due to this activity (in this case, its managers).

Why am I citing all these examples? I just want to prove that the most accurate definition is as follows: a business is organization that increases its stakeholders’ wealth by creating value. I suggest we use this definition in the future. Please note that we are not talking about someone setting themselves some goals. We are not talking about profit. We simply record the real observable fact that there are organizations that simultaneously create value for society and wealth for their beneficiaries. These organizations can do anything else (set whatever goals you want, can be legally incorporated or not, etc.)

Note that this definition imposes serious restrictions.
● If we have not an organization, but two friends who make their own living, then this cannot be analyzed as a business. The various activities “buy on e-bay and sell on amazon” are entrepreneurship, and it’s a great thing, but it remains beyond the scope of analysis. But if you organize a certain number of people so that they are engaged in these re-sales for a salary or for a percentage and give the revenue back to you, then you have a reason to call it a business.
● If an organization does not increase someone's fortune (potentially or actually), then even if it creates value, it is not a business. It's a charity or a church, a municipality, whatever. The generation of value in a business should be accompanied by the emergence of a cash surplus for the owners (and not vice versa).
● If this organization increases the wealth of its owners, but does not create value, then again it is not a business. It is a racketeering organization, a criminal group, a financial pyramid, etc. Value creation is a rather subjective concept, so let's use the legal approach — there should be no misleading of the buyer or investor. If a service or fundraising is done with transparency and disclosure of information, then this activity can be considered a business.
We have received an important definition that helps us understand what can be called a business and what cannot. But we have not yet figured out the mechanisms of its operation.

III. Key elements of any business

The definition of business we provided in the previous section is simple. An organization of some people that creates value for a second group of people while making a third group rich —- how can this even work? How can you organize the creation of something and spend less money on it than you get for it? Anyone who has dealt with value creation understands how difficult this is. You are constantly “pushed” — by costs from below, by buyers who do not want to pay more from above, , and by competitors from your sides, . And even if the owner manages to earn the difference between income and costs, they look with suspicion at this difference and think “is this really profit? Judging by the size, it looks more like my salary as a manager. And, frankly, I would have earned more as a manager." To enjoy a significant difference between expenses and gains, certain conditions must develop, unfolding around the entrepreneur and independently of them. We usually call this the market. No entrepreneur or any starting business can change the existing system of cash flows, but they can only participate in it to the best of their ability.

Such conditions are called market opportunities (business opportunities). Sometimes we talk about a market gap. This is the first and very powerful factor — the fundamental existence of market opportunities that have already been discovered or have yet been unnoticed by others. Is it possible to somehow “measure” these possibilities? Yes, more often than not, a market opportunity is the existence of actual or potential effective demand for something that can be created for less than the size of the demand. In Europe, a thousand years ago, people were ready to pay for spices a thousandfold premium to the price of the same spices in the market of Malaya. This opportunity was used by merchants. The ability to use cheap labor to create a product that sells at a high price in other markets is currently being exploited by industrialists. The unlimited online access to the global payable market for the implementation of relatively less costly coding efforts are used by developers of IT solutions, etc. An important point is that this opportunity is almost always external and uncontrollable. A business should have enough luck to catch it, ability to hold on and willpower to endure.

But is it possible not just to react to an opportunity, but to create it? Yes. It will be riskier, much more expensive, but your gains will be greater (remember Chan Kim and his “blue ocean” instead of that “scarlet”). Incidentally, despite the literary beauty of the “blue ocean” image, the overwhelming majority of real investors always look first at the potential of existing markets, and then at the prospect of new ones.

We are moving on. Opportunity is good, but an entrepreneur needs to have something to use and regularly exploit this opportunity. This is where you have to turn to the existing range of technologies. I will understand the word TECHNOLOGY as broadly as possible. Using technology isn't just about buying a machine or a manufacturing line. A technology is any algorithm that, with a certain degree of probability, leads to a result (even a manufacturing line, frankly speaking, is not a technology, but a ready-to-use and “packaged” way to implement it). Technology is vital for business, because, as we have already agreed, a business must act REGULARLY, and for regularity it is necessary to work according to at least some, even the most unstable, algorithm. To catch a market opportunity in the car wash segment, you can turn to the well-known procedure of manual wash (you do not need to reinvent innovations). You can even buy a gantry car wash (also a technology). Moreover, you don't have to think about the procedure to hire people, keep records and protect yourself from unscrupulous buyers — you have access to the legal technology of creating a legal entity and a public offer template. There are also management technologies, such as- the creation of organizational structures, methods of staff motivation, etc. Many of those who open a business do not even think about what algorithms they use — the volume of technologies is not infinite, but huge — the entire civilization has already selected and accumulated a huge amount of technologies for us.
Is it possible not to employ existing technologies, but create some on your own? It is, but again, it is very risky and difficult. Most often, in this case, a “wheel is reinvented” (this is clearly seen in the post-Soviet space, where many businessmen had to reinvent approaches that have long been known in the West). Companies that try to seize market opportunities by creating new technologies are called technology companies. They are funded by venture capital funds and are considered high-risk investments.

One more important thing. We keep talking about SOMEONE reacting to a market opportunity, SOMEONE mastering technology. It is clear that SOMEONE is people. An entrepreneur is a person and in order to seize a market opportunity using some technology they address people — relatives, friends, someone recommended to them, strangers, job seekers, and so on. As a business grows, the importance of specific people may decrease (and we will soon understand why), but there is always a specific CEO, a specific board of directors, and specific decision-makers. For some reason, the most high-tech companies in Silicon Valley do not run exclusively on machines, but have thousands, hundreds of thousands of people working for them. Any experienced business person, regardless of their moral qualities, will agree that business critically depends on people, at least on the management team.
So, we have market opportunities, technologies, and people. An important point: each specific business is always a unique combination of certain market opportunities, technologies and people. A successful business (let's conventionally consider any business that creates value and fortune for its owner at least for a couple of years and more) is a certain temporary situation when all these components work for each other, and not separated. Because of the uniqueness of the combinations, all businesses are so different from each other. But does this mean that it is impossible to work with them according to some fundamental algorithm? You can, if you remember how we look at an organization. Market opportunities, technology and people are just sources for building a business. In reality, when we deal with a specific business, there are already rigidly intertwined elements in it. And in a real company, the most difficult thing is to separate these three things from each other.

In fact, this is the most important thing, let's look at it a bit closer.

An implemented market opportunity is a business MODEL (hereinafter simply M). When an abstract market opportunity is technologized, found and implemented by people in the real world, we welcome the birth of a business model. The term “business model” is not new — you can read about it in the books by Osterwalder, Slywotzky, Christensen and others. They all described the business-model as the principle underlying profitability — how and by what means this business creates value. An important difference in my understanding is that I think not only about profit, but also about the mechanism of generation of the owner's fortune. The business model is a sustainable principle of increasing the wealth of the owner through the creation of value. Models are a truly inexhaustible topic, well covered in the literature — there is a huge number of different classifications. For example, A. Slywotzky identified eight basic models, Gassmann, Frankenberg and Schick described already 50 business models, etc. It is impossible to repeat all of their findings here; a careful study of options for business models may be presented in the following articles. Here I will just note that all businesses belong in one way or another to one of 4 basic business models — product, service, distribution or infrastructure. The latter in our time can often take the form of a platform. These models differ based on the cost of each additional transaction and the ability to differentiate (make unique) the offer.

1. Service — strong ability to differentiate the offer and high cost of additional (marginal) transactions. The model lies in the creation of value specifically for specific customers that pay in excess of cost. This is how very different companies work — hair salons, law firms and contract manufacturing in Southeast Asia

2. Product — strong ability to differentiate the offer and low cost of additional (marginal) transactions. The model consists in creating rights to fairly unique values ​​for an indefinite range of consumers and then earning on the demand for such rights (if the product is good). This is how an FMCG manufacturer works, which creates its own food brand, or a real estate developer, which comes up with a concept, builds and sells, and even a film studio, which shoots films.

3. Distribution — low differentiation and high cost of additional transactions. The model envisages a transfer of values ​​created by others to the next participant in the chain or buyer and earning money on creating value for these participants (discounts, markups, margins, etc.). These are grocery stores, wholesalers and even bank branches offering you loans from depositors' money.

4. Infrastructure — low differentiation and low cost of additional transactions. The model includes the creation of ownership of assets that are hardly unique, but whose cost and scale are beyond the reach of individual users. You can then sell access to those assets, such as telecom operators, landlords, and even cloud servers that offer disk space subscriptions. If users can engage with each other without the participation of the main player, this becomes a platform solution such as Facebook, Uber and Alibaba.

In real life, companies mix business models, but usually 80-90% of profits are earned on a single base. For example, Apple actively employs the distribution model in its app store (in fact, selling other people's applications), but the basis of income is the product. We recommend you to clearly identify your core business model and invest in it.

A certain business model is usually REPEATED (looking at competitors and peers in other markets) or RANDOMLY FOUND, much less often deliberately built. Can a company build its own business model rather than copy it? Yes, and if this is a successful model, then this is what is called disruption according to Christensen, or what is referred to as “creative destruction” according to Schumpeter. A large and successful company is transforming the industry by creating new business models for other players as well.

An implemented business technology is a business SYSTEM (hereinafter simply S). An algorithm that no longer rests simply on paper, but is implemented by people and regularly generates value, takes form of a working system. A plant with a rhythmic production planning system, an IT service company with its own time tracking applications, etc. are all examples of operating systems. It is important that the system becomes fully functional when not only technologies for creating a useful product from raw materials are put in place, but also social technologies. And, as a rule, for medium and large organizations the matter of changing the behavior of people is more important than processing raw stuff — and this is what is called management! When we look at a business and see an organization in it, we think about a system.

People involved in a business are business PERSONS (hereinafter simply P). A team of entrepreneurs creating a start-up, board of directors and top management of a large corporation are all examples of those business persons who determine the dynamics of each particular business. No business model or business system in itself exists in reality — it is just an accumulated, "capitalized" set of activities of some people in the past with all their achievements and mistakes. That is why all these models and systems are so difficult to turn into catalogues and stereotypes. Can here be a guarantee that a particular decision (for example, hiring an advertising specialist) was made for the sake of efficiency, rather than the task of finding a position for the owner’s family member? As an organization grows and develops, such things are "purged" and they are through with natural selection. But all the same, companies usually are the reflections of the personalities of those who created and governed them. The life of the market (economic cycles, consumer tastes) and the life of technologies (inventions, developments, social innovations) take such different lines that there must necessarily be someone at risk of connecting them — an entrepreneur. In historical science, the discussion is still on about the role of the individual in history — whether a particular individual influences historical processes or masses of people lead to inevitabilities, which a personality only captures. Even if the influence of an individual is assumed to be possible in such global processes, then in smaller matters (the life of one particular company) the importance of leadership is enormous.

These three designations denote our new method — MSP. Model. System. Person. These are not just three letters, this is a certain view of an organization, which helps correctly classify events that go on in it, determine the "diseases" and opportunities of the company, and make proper conversations about it.

You may ask how this might help. After all, as we said above, the three things outlined here — model, system and person, as well as “blue oceans”, “missions”, “organizational structures” and so on, do not exist in the real world — these are just three different views of one and the same organization.

First, despite the actual "mixture" of these three things in a real organization, they have three different sources, very loosely connected with each other. Market opportunities, accumulated technologies and available human capital are three different "containers" from which resources can be drawn to build a business. How can I improve my business model? See what market opportunities are available, list those that are farther / nearer to your business. The vast majority of companies have been developed by trying and gradually mastering opportunities lying nearby, for example, Microsoft first made software for personal computers, then mastered corporate solutions, stumbled onto Internet solutions, took a grip on itself and took its place in the online market.

How to improve business consistency? See which technologies are not yet in place in your industry, in similar areas, etc. Which technologies are developed in your organization, but do not benefit the business, which are "dead weight", and which can be used. Many successful companies, while developing their business, borrowed technologies from other areas and actively transformed their technology stack. For example, McDonald’s had their suppliers change the entire technology of growing and procesing potatoes. The franchise technology, which became a "gold mine" for McDonalds, was borrowed from commodity businesses — it had been created a hundred years before at Singer.

How to expand your business and make it more efficient? Be able to quickly hire the right people, move people in the company and motivate them. Steve Jobs recruited John Scully, President of Pepsi-Cola, to develop Apple as a consumer brand, and lured future CEO Tim Cook from Compaq. Neither of these steps is caused directly by market opportunities and technologies; such decisions require personal involvement of managers in the recruitment process, their range of acquaintances and accurate understanding of the applicability of certain persons.

These three elements (model, system, person) live according to completely different logical patterns, although they constitute the same organization. A business model is built on market opportunities and driven by market elements. The market is extremely situational and volatile. If you could change the company every time in order to please some of the most optimal and profitable model, it would be great, but this is impossible. A business system is built on repeatability and predictability, even on rigidity. It functions for the sake of itself and requires more and more resources to maintain itself (according to the laws of system dynamics). An ideal system is an absolutely predictable and orderly mechanism, but it is impossible to build it in the same way in business. A business person is, in literary terms, "the fire of human passions". A business person is a unique individual with their own set of qualities, inspirations and psychoses, as well as personal traits. They do not adapt well to systems, their life cycle (love, divorce and having children) does not coincide with the market cycle in any way.

This view enables you to understand why it makes no sense to look for a "magic pill" for solving all business problems. There is no "holy grail" in management technology (where management consultants often look for it), nor is there in personal time management (where coaches look for it), or in market figures (where investors look for it while investing in "growing" industries, but losing money, because they support wrong teams). A successful business is actually a shaky balance between these three points. Business development envisages the creation of tensions in this balance (imbalance) and "pulling" the rest of the components so that the company does not collapse. Companies die because the tension “tears” them apart: the business model “has died”, but the system has failed to react, the system has grown, but the model has not fed it, the founder wished to earn more and work less, but the system has been undeveloped — and the model serves as a barrier, etc.

IV. Ok, now what can I do with all these things?

So, I’ve tried to convince you that every business is a successful, but temporary combination, the "moment of meeting" of an external business opportunity, a functioning social organization and the internal energy of people-entrepreneurs, etc. Why are these definitions and methodology needed at all? How to use them?

The MSP view enables every business practitioner to target integrating solutions. Opening a new business? First of all, try to understand which market niche and which technology you are trying to capture — and when building a model and system, determine who will be your team (P) and how it will be involved in the project. Implementing a new CRM system? Don't just think about S (which is a well-proven technology). Describe how it fits into the business model (is there a reserve for growth in the segment?), as well as who exactly will put it in place and master it. Are you recruiting the best foreign HR specialist (expatriate) as your HR director? A good P-solution, but think about whether a strong HR is of great importance to your business at all and whether it will turn out that a new specialist will disrupt the people management culture you have built. And so on…

The MSP perspective empowers you to better understand commonly used terms and take a fresh look at their practical meanings. A few examples:

• What is entrepreneurship and why is it not always possible for a strong entrepreneur to create a successful business? Entrepreneurship is M + P — people who know how to find business models. It is precisely the lack of S (efforts to implement systems) that they lack for a happy business to exist.

• What is a business process? It is mandatorily M + S, i.e. a clear algorithm, as a result of which a business model is implemented. The description of business processes often fails because it describes the “correct” order of actions (S), which does not take into account M (the specifics of the business model). If your business model is built on a fast and creative solution to the client's problems, then a “correctly” scheduled process may lengthen and destroy communication with the client. And such a process cannot be called a business process per se, it is just a “lifeless” and not very useful procedure.

• What are competencies? Why is a perfectly trained and talented team not producing the desired result? Just because a competence is S + P — people trained in system technologies, but far from the fact that they are relevant to the market and business requirements.
You can look at your company and see opportunities for quick balancing decisions. Any company has non-integrated elements — for example, M + P, but without S — these are the so-called "entrepreneurial fields", where strong proactive partners operate, making money for the company — but their activities are not at all systematized, which means they are fraught with business risks. Or, vice versa, S + P, without M — these are regular operating procedures, which "lag behind" or fail to correspond to the value of business. Any solution aimed at integration (to describe a business process instead of an "entrepreneurial field" or to curtail established procedures that are of little use to a business) will bring a relatively quick effect.
In addition, this MSP view allows everyone to build new management tools — in the future we are planning to develop and use such tools. I will give just one example. Anyone can run the simplest diagnostics of their company (where you are the owner, manager or employee) by using this approach,

To do this, you need to follow four steps.

Step 1. Look at your company's business model — your way of making money. Mark it with the letter M, S or P
● M — the business model is built on the use of a market opportunity, it does not depend much on what you do or do not do. For example, you have a good lease space in an area with and make money on good traffic.
● S — Your business model is built on the use of your competitive advantages, regardless of external circumstances or people who work for you. For example, you use a patent that you developed earlier, which will not expire soon, or you use supplier bases that have been versified for years and that your competitors cannot have.
● P — Your business model is built on the unique characteristics of the people in your organization. For example, most of the sales are made by the founder who has been in the market for a long time. Or clients visit your service knowing that you have a specific professional, etc.
Attention! In a real situation, everything can be very complicated — you will have a combination of several factors. Then indicate to which your company is closer — I believe everyone can honestly say to which you gravitate.

Step 2. Look at the business system of your company — its organizational structure, daily and monthly cycles, implemented technologies. Designate it with the letters M, S, or P.
M — your system is "copied" from the systems of similar successful businesses in your market or abroad.
S — your system is quite unique and lives by its own internal, "hardcoded" rules, which have long been established and are difficult to change
P — your system is more customized for the convenience of key people.

Step 3. Look at the business people of your company — 5-7 key decision-makers or major income earners.
M — they are mostly entrepreneurs (they are passionate about making money, they easily switch from one activity to another, provided there is a result, they quickly grasp new opportunities)
S — they are mostly managers (they love order, they can launch and arrange any business correctly, they care about efficiency)
P — they are mostly leaders or specialists (they think about specific people, about professionalism, about a common cause, sincerely appreciate the chosen trade)

Step 4. Now look where you put which letter and get a short diagnosis of your company and best possible actions
- M S P "Diagnosis"
1 M M M Open up new lines of business more actively — right now.
2 M M S Challenge yourself to protect your business — you need a new strong secure competitive advantage
3 M M P Find a strong development partner for your team — a manager or an entrepreneur
4 M S M Before considering new priorities, first get things sorted out in the control system — is it really optimal for you?
5 M S S Your company needs new energy — new people for the team and for the management.
6 M S P The more business develops, the faster the system can become “stronger” than leaders and your risk factor. See how the best practices in your industry work.
7 M P M You will not be able to launch new directions if you do not rebuild the management system — delegate and build processes
8 M P S You can easily reorganize the system so that it does not depend on you. Try this.
9 M P P You are too dependent on the state of your market. If the market is stable and growing, everything is fine, but if not, you should think about alterative areas
10 S M M Create a group of companies or a holding — work on unlocking new business areas
11 S M S Consider raising external investment for a large-scale expansion of your business (or its sale)
12 S M P You can easily transfer control to managers and do what you love.
13 S S M Shouldn't you be more active in management?
14 S S S You should pay more attention to the market and changes — try to innovate in your company, even if there is no current need for it
15 S S P You have already “moved away” from the current life of your company — shouldn't you hire an external leader (with experience in the industry)?
16 S P M If the leadership team is young and full of energy, then just keep going, if not, it's time to start delegating.
17 S P S Use your management skills to build a system independent of yourself
18 S P P If you don’t need company growth, you don’t need to make sudden moves — your business works for your convenience. If you need growth, you should attract new partners or raise external investments.
19 P M M With your team and management system you should try building a new business with lower dependence on human factors.
20 P M S Your managerial talents are being misused — if you re-energize the company through partnerships or pursue a managerial career, you will earn more.
21 P M P The established system hinders the development of your business — “reset” and experiment with approaches — the more the better.
22 P S M Line management has put red tape in your company, focus on finding a sustainable business model that does not require your constant involvement
23 P S S The company has a danger of "freezing" in its development — you need external managers and new partners
24 P S P In the current business model, you do not need such an “expensive” system — either simplify or open up new directions
25 P P M Focus on finding new niches beyond your control - otherwise, the manager's stress will build up.
26 P P S Try applying the talents of the management team to a new business, perhaps you
27 P P P Just keep enjoying your business if you don't need business growth.

Naturally, no one can be satisfied with such primitive answers — with this tool we just wanted to show that basic business needs can be easily diagnosed with this exercise and search for contradictions between the three elements. In addition, it is not always possible to diagnose yourself (in terms of objectivity and honesty in your answers) — try this exercise with someone who knows your business well. Perhaps answers will surprise you. Further analysis using the MSP method will help draw up a more detailed business development plan, and details will follow in new articles.

V. Conclusions

In conclusion, I would like to return to the beginning. Why couldn't we find a general working theory of business in previously written books and applied practices? Does the MSP method supercede all the constructs developed by scientists and consultants?
Of course, it doesn’t.

In fact, the scientific understanding of the nature of business (Schumpeter, Chamberlin, etc.) is quite reasonable — it just covers the M-nature of business. The limitations of the scientific approach reside not in its desk nature (as practitioners often suggest), but in its disregard for the S- and even more so the P-factors. Likewise, for example, Hammer and Champy’s excellent “Reengineering the Corporation”, which set trends for business processes, perfectly describes the mechanisms of business. However, this is exclusively a story about the system (S). Importantly, this book shares the success story of reengineering at Kodak, which was later challenged by a dramatic decline in film photography business in competition with digital rivals. The concepts of Napoleon Hill ("Think and Grow Rich") or Covey ("Habits of Highly Effective People"), which focus on the P factor (person), cannot fully capture the dynamic of business systems, etc.

However, the MSP approach is intended not only to complicate the view of business, but also to simplify. Despite its title that looks like an ad, the wonderful book "The personal MBA", , is recommended due to its focus on the three issues — systems, people, and elements of business. However, in addition to them, a dozen others are revealed, compromising the simplicity and elegance of the concept. The McKinsey 7S Framework is beautiful, but aren’t seven elements too many? The strategy is about M, the structure and system are about S, and the rest is about P. We would like to offer a convenient guidebook to navigate them, rather than cancel or amend the methods and tools we respect.

This guide will be useful not only for sorting out your personal business knowledge, but also for teamwork. If all participants are familiar with the MSP approach, then it becomes much easier to find a common language in understanding further steps, assessing the situation (“we are now discussing only S, let's analyze P”, for example). However, I would like to warn readers against oversimplifying this approach. We must never forget that an MSP is just an instant “photograph” of a rapidly developing and complex business entity. High-quality decision-making requires you to be deeply immersed in the market context, dive into details and have the willpower and energy to implement them. But with the three simple symbols M, S, and P in my head, I can approach any business, comprehend it, see the problem and resolve it.
For the last bit, I present a brief summary of the ten key messages of the article:

Ten messages.
1. There is no universal working theory of business at the moment. Depending on what you specifically do, you can rely on the appropriate models. This means that everyone is entitled to develop their own basic scheme and their own definition. I will try to describe my understanding of the basic business scheme applicable to any environment.
2. We offer the following definition: business is a regular organized activity of people that simultaneously creates value for someone and increases fortune for others. All other elements — profit, legal entities, owners, etc. — are all either implications of the definition or, in general, unrelated issues.
3. Business (as described in clause 2.) arises when market opportunities, technologies and people meet. These three entities live according to absolutely different laws, which is why it is so difficult to "connect" them in real practice.
4. Market opportunities arise from the dynamics and “gaps” of the economic system, cultural and political cycles, and are rarely (almost never) dependent on a given business. An implemented market opportunity (technologized and used by people) is a business model (M).
5. Technology is the accumulated potential of existing algorithms and procedures. It can be used to “seize” a market opportunity. A technology put at the service of business and mastered by people is a business system (S).
6. People live for their personal goals and objectives, participate in business to make money, personal self-realization, power, or simply because of momentum (you have to be employed somewhere). People actively involved in business are business persons (P).
7. To create a new business, there are at least three things to define and connect (MSP). Most likely, you will be unable to obtain three new elements from scratch at once. Therefore, when creating a business, take advantage of an opportunity that you understand well (if you have been in this industry for a long time), a familiar technology (if you are a specialist) and a trusted partner, etc.
8. To improve an existing business, you need to look into imbalances amongst the business model, business system and business persons and bring them into balance. It won't give you big breakthroughs and won’t open new horizons, but it will definitely give you a little more money, control, and satisfaction.
9. In order to dramatically change an existing business, it is necessary to STRONGLY change one of the elements and make sure that the remaining ones catch up with it, without destroying the entire organization along the way. The further the model / system / person you choose from your current state, the greater the risk of breaking the company, but the bigger the possible gain from changes.
10. The efficiency of any individual decision at the level of business management depends on the degree it links together the model, the system and the person. An efficient decision not only improves the economy, increases resilience, or engages the team, but does it all at the same time. Such a decision is referred to as a key decision
Follow Andrei Charnysh on LinkedIn
This site was made on Tilda — a website builder that helps to create a website without any code
Create a website