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The Business Engineer

the transitional business model!

Published about 1 month ago • 6 min read

Entrepreneurs must balance out the short and long term. At times, short and long-term do converge. At other times, they seem to diverge.

How do you make sure that the short-term positively converges with the long-term vision of your business? A concept I came up with as I dived into various business models is "transitional business models."

You will also find a short video lecture at the end of this newsletter issue!


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This concept changed my view of the business world. How?

When companies like
Tesla start to roll out their business models, they go through a phase of what I like to call the "transitional business model."

That model works in the short term to validate the market and enable the technology and its ecosystem to mature while still having a reality check.

Therefore, launching products will allow the company to test larger and larger segments of that same market. You might want to keep an ambitious, long-term vision, but you have built-in reality checks in the short term.

As I always say, strategies take years to roll out, and they seem obvious, but only in hindsight.

Therefore, the transitional business model is a
"market hook" that creates enough traction to keep financing your ambitious long-term goal.

I used to explain this a few years back
through Tesla's case, and now that Tesla's strategy is fully rolling out, you can grasp that!

Tesla: from electric sports car to everyone's electric car

It was 2006 when Tesla, with his co-founder Martin Eberhard, launched a sports car that broke down the trade-off between high performance and fuel efficiency.

Tesla, which for a few years had been building up an electric sports car ready to be marketed, finally pulled it off.

As Elon Musk explained Back in 2012:

“In 2006, our plan was to build an electric sports car followed by an affordable electric sedan, and reduce our dependence on oil…delivering Model S is a key part of that plan and represents Tesla’s transition to a mass-production automaker and the most compelling car company of the 21st century.”

Tesla had to find an effective market entry strategy that would enable it to validate the market.

The transitional business model in a nutshell

When companies like Tesla start to roll out their business models, they go through a phase of what I like to call the "transitional business model."

A transitional business model is used for traction in a market that doesn't have to be big or initially scalable.

If we break down business strategy into three core parts:

A transitional business model is a model that will serve the purpose of gaining initial traction and market validation.

Therefore, it will help for the sake of the market entry, and it will help also shape the long-term vision as it gets rolled out.

A transitional business model might seem obsolete in hindsight, yet that is the same model which proves the viability of the idea while keeping it alive.

A transitional business model might not be scalable. Yet, that is the model that will help create an initial positioning and get the funding (revenues or capital) needed to roll out the scalable business model.

A transitional business model might not have a long-term vision, yet it will help shape it.

Thus, a transitional business model works in the short term to validate the market to enable the technology and its ecosystem to mature while still having a reality check.

This is the core premise of a renewed business playbook that doesn't just rely on growth capital. It moves by (also) securing growth capital, but then it validates the market step by step.

There are plenty of examples of transitional business models:

  • Facebook, a former college social network, would open up to anyone just later on, as it gained substantial traction.
  • Netflix moved from a DVD rental company to a streaming platform only much later.
  • Google, before building the most powerful advertising machine ever built, sold advertising through its salespeople.

Real World Case Studies For Transitional Business Modeling

Facebook

  • Transitional Model: Initially, Facebook was exclusively for college students, limiting its user base.
  • Purpose: Facebook aimed to validate its concept and gain initial traction within the college market.
  • Evolution: It later expanded its user base to include everyone, becoming the social media giant we know today.

Netflix

  • Transitional Model: Netflix began as a DVD rental service by mail, a model that wasn't initially scalable.
  • Purpose: Netflix used this model to validate its rental concept and build a customer base.
  • Evolution: It later transitioned to a streaming platform, revolutionizing the way people consume content.

Google

  • Transitional Model: Before becoming an advertising powerhouse, Google sold advertising through its salespeople.
  • Purpose: Google used this model to validate its advertising approach and generate revenue.
  • Evolution: It evolved into the dominant online advertising platform, fueling its growth.

Amazon

  • Transitional Model: Amazon initially started as an online bookstore.
  • Purpose: Amazon began with books to validate the concept of online retail.
  • Evolution: It expanded into a vast online marketplace offering various products and services.

Airbnb

  • Transitional Model: Airbnb started by renting out air mattresses in a small apartment.
  • Purpose: Airbnb used this model to validate the idea of short-term rentals in a sharing economy.
  • Evolution: It evolved into a global platform for booking accommodations of all types.

Twitter

  • Transitional Model: Twitter was initially an SMS-based service with a 140-character limit.
  • Purpose: Twitter used this model to validate the concept of microblogging and real-time updates.
  • Evolution: It expanded into a social media platform with millions of users worldwide.

Uber

  • Transitional Model: Uber began as a black car service for luxury transportation.
  • Purpose: Uber used this model to validate the idea of on-demand ride-sharing.
  • Evolution: It expanded to include various ride options and delivery services.

Apple

  • Transitional Model: Apple initially focused on personal computers, such as the Apple I and II.
  • Purpose: Apple used this model to validate its innovative approach to computing.
  • Evolution: It expanded into a wide range of consumer electronics and services.

Microsoft

  • Transitional Model: Microsoft initially developed and sold programming languages.
  • Purpose: Microsoft used this model to validate its software development capabilities.
  • Evolution: It evolved into a dominant software company, with products like Windows and Office.

SpaceX

  • Transitional Model: SpaceX started with the Falcon 1, a small rocket.
  • Purpose: SpaceX used this model to validate its rocket technology and approach to space exploration.
  • Evolution: It expanded its capabilities and became a leading player in the space industry.

Recap: In This Issue!

  • Transitional business models serve as a market hook: They create enough traction and validation in the short term to secure financing for ambitious long-term goals.
  • Strategies take time to roll out: Transitional business models provide reality checks and allow companies to test market segments while maintaining a long-term vision.
  • Tesla's transitional business model case study: Tesla initially launched an electric sports car in 2006, breaking the trade-off between performance and fuel efficiency. This served as a market entry strategy to validate the market before transitioning to mass production and becoming a compelling car company.
  • Purpose of transitional business models: They help gain initial traction, validate the market, and shape the long-term vision as they get rolled out.
  • Not initially scalable but crucial for positioning: Transitional business models may not be scalable, but they establish an initial positioning and secure the funding needed to develop a scalable business model.
  • Examples of transitional business models: Facebook started as a college social network and later expanded to the general public. Netflix transitioned from a DVD rental company to a streaming platform. Google initially sold advertising through its salespeople before building its powerful advertising machine.

Ciao!

With ♥️ Gennaro, FourWeekMBA


Business Engineering Printed



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The Business Engineer

The Only Official Newsletter of FourWeekMBA - By Gennaro Cuofano

At the intersection of business model strategy, technology, and business development, The Business Engineer is the only official newsletter of FourWeekMBA.com, the leading blog about business model strategy and business engineering. The blog reaches millions of business people each year.

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