A business model is nothing else than a representation of how an organization makes (or intends to make) money i..e., it should provide a simplified description of how a company does business and makes money without having to go into the complex details of all its strategy, processes, units, rules, hierarchies, workflows, and systems.
Innovation has always been an instrumental factor in driving growth and competitiveness in business. In the past, an outstanding technological solution or the introduction of an exceptional product was sufficient for success. New technologies, blurred industry boundaries, changing markets, new competitive players and changing regulations all combine to make products and processes obsolete. Whether we like it or not, the rules of the game are changing in most of our industries.
A Boston Consulting Group study has shown that over a five-year period business model innovators are six per cent more profitable than their contemporaries who were innovating products and processes. Similarly, 14 of the 25 most innovative companies in the world are business model innovators. These findings correlate with a study conducted by IBM in 2012 showing that industry outperformers innovate their business model twice as frequently as underperformers.
Of course quality products and processes remain as ever of great importance, but they will not decide a company’s success or failure in the future. e.g., 1.) Amazon has become the biggest bookseller in the world even though it doesn’t own a single brick-and-mortar store. 2.) Apple is the largest music retailer even though it doesn’t sell CDs. 3.) Netflix reinvented video rental despite not owning a single physical shop. 4.) Skype is the largest telecommunications provider worldwide even though it does not own any network infrastructure. 5.) Starbucks is the world’s largest coffeehouse chain to sell standardised coffee products at premium prices; and a host of other super-successful firms; and very recently, 6.) the gaining of foothold in the car-rental industry by Uber and Grab Cars/ Taxi.
ELEMENTS OF A BUSINESS MODEL
At the very minimum, a business-model should include the following elements:
- The customer – who are our target customers? It is important that you understand precisely which customer segments are relevant for you and which ones you will and won’t address with your business model. Customers are at the very heart of every business model – always! There are no exceptions.
- The value proposition – what do we offer to customers? This second dimension defines your company’s offerings (products and services) and describes how you cater for your target customers’ needs.
- The value chain – how do we produce our offerings? In order to put your value proposition into effect you need to carry through various processes and activities. These processes and activities in conjunction with related resources and capabilities and their coordination along the company’s value chain make up the third dimension of business model design.
- The profit mechanism – why does it generate profit? This fourth dimension, which includes aspects such as cost structures and revenue-generating mechanisms, clarifies what it is that makes a business model financially viable. It provides an answer to the central question that every company needs to ask: how do we produce value for our shareholders and stakeholders? Or simpler: why does the business model work commercially?
It can be expanded to include: 1.) The segment(s) of clients that are addressed by the value proposition; 2.) The communication and distribution channels to reach clients and offer them the value proposition; 3.) The relationships established with clients; 4.) The key resources needed to make the business model possible; 5.) The key activities necessary to implement the business model; 6.) The key partners and their motivations to participate in the business model; 7.) The revenue streams generated by the business model (constituting the revenue model); 8.) The cost structure resulting from the business model. It can be visually represented by the figure below:
The references below provide more details for those who are interested in digging deeper into the concepts and practices of business models and modelling.
Gassmann, Oliver; Frankenberger, Karolin; Csik, Michaela. The Business Model Navigator: 55 Models That Will Revolutionise Your Business. Pearson Education Limited.