I read an article by Steve Blank in which he suggested that start-up businesses build business models as opposed to the typical business plans. Steve argues that no business plan (in a start-up scenario) survives first contact with customers. He added that a plan is static whereas a business model is dynamic.
A business plan is an execution document which originated from large companies. They are usually written when planning a new product line. In these cases, the customers, market and product features are known to a large extent.
A business model, however, comes in more valuable when there are many unknowns as in the case of a start-up venture. A business model describes how a company creates, delivers and captures value. It is, in most cases, a diagram that shows the different flows between different parts of the company including how products get distributed to the customers and how money flows back into the company. It also shows the company’s cost structure, how each department or unit interacts with each other and links to other companies or partners necessary to implement the business. A business model is designed to be rapidly changing to reflect what the company discovers in interacting with its customers. Thus, its dynamic nature.
Steve suggests that the start-up stage of a business should be spent in an iterative process focused on refining the business model. This approach, I would believe, applies more to start-ups looking to offer innovative products to its market.
More details on Steve Blank’s article can be found here.