What is a business model?
Discussions About Business Model
References to “business models” are frequent whenever aspiring entrepreneurs pitch their business plans to potential investors. We feel that there has been a misguided approach of talking too much about business models, perhaps because the definition of business model is not clear.
While the popular media and business literature use the term loosely and vaguely, we attempt to present a more precise definition. We prefer to lean more toward helping you create and develop your business strategy, competitive advantage, and unique business value proposition, that when assembled and functioning successfully together, become your business model.
A business model is a consistent, economically sound configuration of the elements comprising your venture’s goals, strategies, processes, technologies and organizational structure, conceived to create and consistently add value for the customers you have identified and thus are able to successfully compete in a specifically segmented market. In other words, it is the entire system that allows your venture to capture and deliver value to targeted customers in a profitable business activity.
Elements of a Successful Business Model
Your business model may be the single most important element of your new venture, and getting any one of these following elements wrong can mean doom for your venture.
You need to determine the following for your business:
– How will your venture make money?
– Who is the target customer and how much money does that customer have to spend on your product?
– What is the fragmentation or concentration of competitors in the industry?
– Has any company been previously successful doing what you plan to do, and if not, why not?
– What are the pricing dynamics of the industry, the distribution channel and its economics, and the dependencies of your venture, such as other goods needed to make your solution useful or necessary?
Faced with the pressure of getting it all right the first time, some entrepreneurs choose to copy many elements of their strategy from other companies. As Bhide noted, “They creatively select and integrate ideas from several sources.” Based on our experience helping entrepreneurs create their business models, we have found that the most important concept is understanding that their business model is predicated on the assumption that greater value can be developed through the careful arrangement, implementation, and management of these unique elements discovered in other existing ventures.
What we mean is to look for ideas not only within your industry sector, but also look at other industries, paying particular importance to fast-growing companies that are capitalizing on new trends and technological changes.
Communicating Your Business Model
Jose Ortega y Gasset, a Spanish philosopher, once said, “Metaphor is probably the most fertile power possessed by man.” And using a simple business model as a metaphor to help in communicating your strategic intent is one of the most valuable skills an entrepreneur can learn. According to Regis McKenna, what makes a business model successful is that it has the capability to help the executives following in the steps of entrepreneurs to quickly grasp the strategic vision, and to think and plan ahead.20
As a case in point, consider the early days of the hardware industry. Retail hardware stores were few and far between. The depth and width of inventory on hand was limited; a typical store may have carried three kitchen sinks in its inventory. The knowledge and expertise was usually limited to the sole proprietor running the shop. In 1978, when Bernie Marcus and Arthur Blank were out raising money for their start-up, they called their concept “The Sears & Roebuck’s of the home-improvement industry.” Who today cannot see The Home Depot as the company that grew out of that concept they pitched?
Using a “Direct-from-Dell” business model, the airlines have slowly been cutting into the travel agency business by simply selling direct to their passengers. According to Scott Hayden, managing director for American Airlines Interactive Marketing, in 2002 American’s site averaged 750,000 visitors that made some 15,000 to 20,000 reservations a day. About 67 percent of all the airline’s tickets were sold through online or e-ticketing kiosks, totaling some $2 billion, and growing at about 90 percent year over year.
Be Sure to Click Refresh
Your business model can only be successful if it was created by intensely focusing on a particular problem in a particular space, tinkering and tweaking through experimentation, and then sticking with what works. This “refreshing” of a business model is part of the evolutionary process of new business venturing today. Developing a modern business model is like a basketball game. You know what it takes to get down the court to the basket, and your job is to keep the ball moving forward by regrouping quickly and moving in response to events and circumstances.
According to Leonard Riggio, the entrepreneur behind the Barnes & Noble bookstore chain, “Today’s competitive advantage lasts about two hours.” But the concept of responding to fast-changing environments actually goes back to Charles Darwin, who stated in 1859, “It is not the smartest, nor strongest that survive, but the most responsive.”
So transforming your business model to keep pace is par for the course. McKenna pointed out that Intel, with whom he was a marketing consultant, was in the memory business until 1985 and was actually licensing their processor technology to a Japanese firm that was going under. Recall from our previous discussions that they refreshed their business model to manufacturing microprocessors. Qualcomm changed their business from making cell phones to licensing their technology. In essence, once they saw how cutthroat the mobile phone marketplace was becoming they moved their competitive advantage from a commodity, selling phones to phone service providers, to code. These companies saw that they could move ahead with their next-generation technologies only if they cut away from their existing business model and competitive advantage and began profiting from their intellectual property.