Business Model

What is it?

A company’s business model describes how the company is organized to deliver the value proposition to customers and make money doing it.

It differs from strategy because it is a static snapshot. Thus, “Our old business model was not sustainable, so our strategy is to build the competitive advantage of our new online business model”.

It covers all the activities that the company does – the assets, Core Competences, processes and culture, as well as how it organises its external partners.

When is it useful?

For most companies, changes to the business model are incremental and . However there are situations where business models are critically important:

  • Start-up strategy could be described as “the search for a business model”. Start-ups have the germ of an idea or technology and need to find a business model that commercialse this. Because they start with a blank sheet of paper, any combination of offer, revenue streams and target customer are possible.
  • Industries undergoing an “inflection point”. Inflections make old business models redundant, and create the opportunity for completely new business models. Sometimes, incumbents manage to make the jump to the new model, more commonly, new entrants jump to the new business model first.
  • Competitive analysis – understanding your competitors business model is essential to predicting their moves.

An Example?

 

Newspapers have a business model based on the economics of distribution. They provided content that had some appeal to everyone in a local city and funded the creation of content through selling advertising. Some papers had a business model more weighted to circulation revenues (e.g. The Economist); others were more dependent on advertising (free papers).

This model is now dying around the world – fastest in the US, slowest in emerging markets like India, but the writing is on the wall for the old-fashioned newspaper.

Papers are trying to find new online business models, and have found that the web is a totally new media. You can’t just post your old offline content online and hope to succeed. Some papers, e.g. the FT,  have found a defensible niche (financial news and analysis) and have switched to an online  subscription model. Most are struggling, trying to hang on to their more attractive paper business as long as possible. New entrants (e.g. Huffington Post) have proven more nimble than incumbents, finding an online advertising supported business model.

How do you do the analysis?

Think through for your business – what are all the current business models? Which of these have the trends in their favour? What new business models might be possible?