The Diamond-and-Square Framework
Identifying whether a startup has what it takes to become a sustainable business
I’m currently reading Why Startups Fail by Tom Eisenmann. I think it’s a great book, and as soon as I finish it, I plan on writing a review here to explain all the reasons why.
If you’ve followed my writing, you know I have a strong affinity for tools and frameworks that can help leaders make strategic decisions. This book has a couple of particularly powerful tools and I didn’t want to wait for the full review before sharing them with you. Today I’ll cover the first one, and in a few days I hope to get to the second.
Eisenmann introduces the first tool this way: “how can an aspiring entrepreneur know whether she has actually identified an attractive opportunity and determine what types of resources are required to successfully capitalize on it? The diamond-and-square framework provides the answers.”
As shown above, this framework literally is a diamond inside of a square. The diamond represents the opportunity, and the square represents the resources.
Since you’ve gotten this far in the article, you probably care about startups and you (like me) appreciate tools and frameworks, so I’m guessing you’re familiar with other helpful constructs like the Business Model Canvas (or any of its variants) and the Value Proposition Canvas.
It’s not hard to see the linkage between the Diamond-and-Square (DaS) and the Business Model Canvas (BMC). At the center of the BMC (see below) is the Value Proposition. The two boxes to the right of the Value Proposition represent acquisition and retention (Marketing) activities. The two boxes to the left of the Value Proposition represent resources (Technology) and activities (Operations). Directly below these are revenues and costs (the Profit Formula). To the far left are Partners. (Founders, the Team, and Investors are the primary users of the BMC.)
The Diamond-and-Square differs from the BMC in that it emphasizes development over time, and it provides a test for the overall viability of the startup concept.
Let me explain what I mean.
Lean startups recognize that, at any point in time, the hypotheses that make up their business model are in flux, being tested and refined through the Build-Measure-Learn loop. The Business Model Canvas reflects the current hypotheses at a given moment. The Diamond-and-Square recognizes that, over time, these hypotheses need to become beliefs that are implemented, with the right resources, as the foundation of a profitable business.
It’s not just a matter of learning and improving the hypotheses, but resource constraints require that maturation to happen at a certain pace for the business to be successful. At any point in that maturation, founders and investors need to consider how sound the strategic foundation is, what is lacking, and whether there’s enough runway left to reach sustainability.
Finally, the Diamond-and-Square clarifies the linked chain of essential truths necessary for startup success that is only implied or hinted at by the Business Model Canvas.
The arrows in the DaS makes clear this logical linkage and flow. A winning value proposition must be successfully implemented in technology and operations and must be clearly communicated and made available through successful marketing in order to result in long term revenues that are greater than the cost of acquisition and the cost of providing the value proposition.
And all of that has to happen within the constrained resources and capabilities of the founders, team, partners, and investors.
The critical question is: Does the business model in the diamond define an economically sustainable business, and has the startup acquired the resources necessary to reach that sustainable state?
One of the things that I really appreciate about the book is that the author calls out specific strategic decisions that startups face along the path to reaching sustainability. He does a good job of not only identifying the decisions, but calling out the factors that founders must consider in making those decisions. (More about that when I get to the full review of the book 😀.)
Throughout this article, I’ve compared the Diamond-and-Square to the Business Model Canvas. Let me emphasize that my goal isn’t to say that the DaS is better than the BMC, but simply to show how they are different. They have different uses that are complementary. The DaS provides context that makes the BMC more valuable, and the BMC (and Value Proposition Canvas) provides structure that helps clarify the elements of the DaS. I recommend both/and, not either/or.
Please let me know if I can help you and your startup with the strategic decisions you face in building a sustainable business!
