The Importance of Frameworks In Real-World Scenarios
The very first time that I encountered a framework I felt my soul rebel. It seemed such an artificial construct designed to contain and constrain my creativity. But as time progressed, I learnt more and had to write more and more project reports, I realised I had been unfair. Frameworks are invaluable tools of trade for anyone looking to establish, evaluate or run a business.
Real world scenarios are amorphous and there are divergent dimensions to any problem. In such a case, it becomes very easy to miss some of these dimensions. The solutions offered could themselves can become very piecemeal and disconnected. In such a case, frameworks function as scaffolding where questions and their answers have a rightful place, thus allowing the bigger picture to emerge. And maybe one can engineer a solution that is bigger and better than the sum of its parts (or synergy in business speak).
I found that frameworks gave structure to my thoughts, brought to fore issues that may have been otherwise overlooked because I was busy being swept away by the beauty of an idea. In fact, if I was to choose the single most important thing that professionals running or working in a business without an MBA miss out on, it would be this: the knowledge (and dare I say wisdom) about which frameworks would prove to be most useful for modelling a given business scenario.
Among the most useful tools were two that I would like to mention here – the porter’s five forces framework and the business model canvas. They both belong to opposite ends of the spectrum in many ways: one is a timeless classic the other relatively new upstart; one provides the macro-picture of the industry, the other dives into details about how the business unit will function. Although at this point, a disclaimer is in order, the business model canvas (affectionately called the BMC) is a template rather than a framework. But I have found that it fulfils a similar function by providing clarity and crystallinity to my ideas.
- Porter’s Five Forces: Porter’s five forces framework is used to evaluate the attractiveness of an industry and the titular five forces are competitive rivalry, supplier power, buyer power, threat of substitution and threat of new entrants. Strong competitive rivalry can sometimes be limited to zealous product differentiation but often leads to aggressive price cuts, resulting in something that is the stuff of nightmares for all businesses alike – perfect competition. So, strong competitive rivalry renders an industry unattractive. Powerful buyers and suppliers means a business has less to leverage and a weaker position in negotiations, which translates to smaller profits. Similarly, threat of substitutions or new entrants reduce the attractiveness of an industry. Switching costs play a crucial role in case of buyers, suppliers and substitutes. There are nuances to each forces which can be best explained by Porter’s original paper, which is an interesting read and will be a part of a B-school curriculum anyway.
- Business model canvas: This one is newer and is wonderfully explained here. BMC is often framed as a tool for entrepreneurs but it can actually be used for an established business, planning to diversify its markets or products. The BMC is also very visual, lends itself well to an iterative process and consists of nine building blocks – customer segments, value proposition, channels, customer relationship, revenue streams, key resources, key activities, key partners and cost structure. It is especially well-suited for a business model that serves several customer segments, for example a multi-sided platform. In such a case, it allows one to separately define the value proposition for each segment.
Similarly, other components like channels, customer relationship, revenue generation etcetera may also differ for different customer segments. Mapping out the revenue streams is crucial otherwise there is a clear and present danger of turning into gnomes who do not know how to turn their purloined loot into profits (a shout-out to everyone who got the obscure pop-culture reference). Of course, in case of most multisided businesses today, identifying/generating revenue streams is a problem especially since consumers are becoming more protective of their data and increasingly inured to online advertisements vying for their attention.
To summarize, eat your veggies.
Life as an MBA student is like being in the foyer – you can adjust your bowtie, comb through your hair and practice your best foot forward, before your name is announced and you finally get to join the party. Frameworks may at times seem like a futile academic exercise, far removed from the complexities and dynamism of the world out there. But that is exactly why they are useful, they remove you from the middle of the chaos, give you a much needed distance and a tool to evaluate your solutions.