Thursday, May 15, 2014

Business Model

 A business model is "why this business works"

A business model is a multi-level, zoom-able schema of how a business or an organization creates, delivers, and captures value for stakeholders: customers, businesses, investors, or society. Here is more insight upon the business model:

A business model is the set of features of a business that keep it in business. If you have a strong business model you have a set of value-generating skills that match customer need and are difficult to copy, at least in the short term. Often this is a strong relationship between differentiation and cost. A strong business model is difficult to copy; it is differentiated in the marketplace. However, market forces render any given business model unsustainable. Customers change competitors change, politics, economics, society, and technology change. 

A business model is "why this business works": If you can't answer that in a few words, you probably don't have a viable business! The business model defines customers, needs, and solutions as well as a competitive advantage. Ideally, a business balances its activities and resources in such a way, that it can be successful at both creating new forms of value and delivering and capturing from its existing forms. In this way, a strong business is wired to purposefully and strategically change its business model.

A business model is how a business is configured to create, deliver, and capture value: The trick to survival, the process to align with how the business evolves to create new value, and, ultimately, success over the long-term. This is where innovation comes into play. Delivering and capturing value is about making money now. Creating new value, or, innovating is about making money in the future. With the hyper-competition we live in, no competitive advantage is set forever. So any operational advantage in creating value is likely to be copied fast. To avoid this fast obsolescence, besides its focus on execution, the business model needs to allow space for innovation.

A common definition of the business model is that it is a description of the particular way how a business operates: It includes the components and functions of the business which generate revenues and expenses of the business. A business model is a way or ways that a company generates revenues and profits. A particular business model can be thought of as the prototypical operational framework repeated in the business plans of several companies of the same type.

A business model is simply a plan of action that will achieve a certain desired end-state: Profitability is a sign and possibly a gauge of mission success. A business model should facilitate simulation as well as inexpensive testing of a business's technical, financial, and social feasibility. A business model should not only be used for describing, analyzing, and predicting the evolution of a business system, but also provide a framework for managing the performance of the business throughout its life cycle. 

The common perception about business models is how the company makes money: Most successful business models are usually based on low cost, high differentiation or a combination of these factors. Maintaining these features is often the basis of sustaining the model. Thus, if you are a low-cost business, then the primary basis of the business model is the maintenance of low cost through operations management. In differentiation, it is probably more to do with the maintenance of brand, features, and quality. Brands and reputation are harder to copy so investing in creating enduring relationships, building strong brands and attracting and retaining superior talent is also the key.

“A business model describes the rationale of how an organization creates, delivers, and captures value": Alexander Osterwalder & Yves Pigneur, "Business Model Generation". This rationale can then be identified and explained through nine basic building blocks that show the logic of how a company does or intends to make money. Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Key Partnerships, and Cost Structure.


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