The Struggle for the Right “Business Model”: Distraction or Imperative for Creating and Sustaining the Business?

In Uncategorized on April 28, 2011 at 3:56 pm

“Past success stories are generally not applicable to new situations. We must continually reinvent ourselves, responding to changing times with innovative new business models.” ~Akira Mori

A business model describes the rationale of how an organization creates, delivers, and captures value; economic, social, or other forms of value. Whenever a business is established, it either explicitly or implicitly employs a particular business model that describes the design or architecture of the value creation, delivery, and capture mechanisms employed by the business enterprise. The essence of a business model is that it defines the manner by which the business enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit. This reflects management’s hypothesis about what customers want and how they want it, and how the enterprise is organized and how it makes a profit.

The popularity of the term “business model” is a relatively new phenomenon and it rose to prominence only towards the end of the 1990s. This surge coincidences with the advent of the Internet in the business world and the steep rise of the NASDAQ stock market for technology-heavy companies. Oddly, the number of times the term “business model” appeared in business journals follows a pattern that resembles the shape of the NASDAQ market index. It is not quite clear what to conclude from this observation besides the fact that the topic of business models probably has a relationship with technology.

In the article “Business Models on the Web” by Michael Rappa writes: Business models are perhaps the most discussed and least understood aspect of the web. There is so much talk about how the web changes traditional business models. But there is little clear-cut evidence of exactly what this means. In the most basic sense, a business model is the method of doing business by which a company can sustain itself — that is, generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain…

“… all too often, a successful new business model becomes the business model for companies who are not creative enough to invent their own. ~ Gary Hamel

In the article “Focus on Business Model Innovation and Increase Growth” by Gunjan Bhardwaj writes: Business model innovations come from new entrants, but incumbent firms can also reinvent their business model to stay competitive and to outperform competitors. What is a business model? A business model can be defined as the combination of “who”, “what”, “when”, “where”, “why”, and “how” a company provides its customers with its products. Business model innovation is the discovery of a new way to do business in an already existing business, or in a new start-up business.  Creating a new business model means to discover new sources of revenues; thanks to new technology, changing demographics or consumer behaviours…

According to the observations of ‘Mitchell & Coles’, who have studied several successful public companies, the most effective firms were making important business model shifts every 2 to 4 years. Continuing business model innovation is essential because it can help companies to prosper… Firms should learn to cannibalize their own businesses before the competitors do. In addition, when a firm changes several aspects of its business model, it makes its business model innovation very hard to duplicate by competitors and benefits from significant growth and increasing profitability.

In the article “Free: a Tactic, not a Business Model” by Anne Zelenka writes: Every time an economic bubble develops, many will tell you how “this time it’s different,” how “this time the rules have changed.” The lie of the Web 2.0 bubble is that ‘free is the way to succeed in the new economy’: That’s not true. The rules of economics have not changed. The best way to make money in the new economy, in the Web 2.0 economy, comes down to the same fundamental business model that has always existed: create something of value for people who will pay for it.

Fred Wilson, venture capitalist(VC), wrote in defense of free: “free is a great way to make money. You just have to know how you are going to get paid for being free”. To be fair to VCs, they’re not advocating doing everything without pay. They’re suggesting ‘free as a tactic’ towards getting paid in other ways; through advertising, or by premium services (as in a freemium model), or maybe even through being acquired by another  company. “Free is only a tactic, not a business model”.

In the article “5 Business Models for Social Media Startups” by Jun Loayza writes: During the first Internet boom, the most common business model was probably, “get a ton of traffic, then figure out how to make money”. Today’s social media startups are finding unique ways of generating revenue from the very beginning. Here are a few of the revenue models:

  • Freemium Model: Offer a basic service for free, while charging for a premium service with advanced features to paying members.
  • Affiliate Model: Drive traffic, leads, or sales to another affiliated company’s website.
  • Subscription Model: User pays a fee, generally, monthly or yearly to access a product or service.
  • Virtual Goods Model: User pays for virtual goods, such as upgrades, points, gifts, on a website or in a game.
  • Advertising Model: Sell advertisements against their traffic; the more traffic and the more you can charge for ads.

In the article “Business Models” by Dick writes: Focusing on business model too early can hurt a company’s prospects. When asked about Google’s lack of a clear business model, when he  originally backed the company, John Doerr is said to have responded “With this kind of traffic, we’ll figure it out”… Be laser focused on having your company be passionate about product and passionate about customers, you don’t need to be passionate about revenue until the business model reveals itself. You try different things…. So, we come to this curious world in which some people say “sure that’s great, but what’s the business model” while other people are saying “don’t worry about the business model right now, grow, grow, grow”…

In the article “What is a Business Model?” by Audience Dialogue writes: When designing a new business, the model it uses is likely to be a crucial factor in its success. The other type of business that needs to worry about a business model is a business in a steadily declining market. ‘Chesbrough & Rosenbloom’ point out that “while the term ‘business model’ is often used these days, it is seldom defined explicitly“… Roger Clarke created a framework for e-business models with four questions, and answers to these questions would form a business model:

  • Who pays? (e.g. consumer, producer, or third parties?)
  • What for? (e.g goods, services, expertise, assurances of quality or security.)
  • How much? (e.g. currency)
  • Why? (e.g. perceived value)

In the article “What is Business Model?” by Umair Haque writes: Business model converts innovation to economic value for the business. The business model spells-out how a company makes money by specifying where it is positioned in the value chain. Simply put, a business model describes how a business positions itself within the value chain of its industry and how it intends to sustain itself; that is, generate revenue. “The classic business model that has dictated the structure of traditional companies is so at odds with contemporary economic currents that is must and will disappear”…

In the article “The Best Business Model in the World” by Robert Pozen writes: The best business model is also the simplest: make stuff that’s insanely great: That is, it amazes, enriches, and inspires. That kind of stuff doesn’t need a hard sell, a new market, or a convoluted product range. It just needs — to be. Business model innovation is often self-defeating and self-destructive. The real problem with business model innovation is that it dilutes the incentives to make good stuff in the first place…

In the article “Reinventing Your Business Model” by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann writes:  One secret to maintaining a thriving business is recognizing when it needs a fundamental change. Apple introduced the iPod with the iTunes store, revolutionizing portable entertainment, creating a new market, and transforming the company. Apple did something far smarter than take a good technology and wrap it in a snazzy design. It took a good technology and wrapped it in a great business model. This model defined value in a new way and provided game-changing convenience to the consumer.

Business model innovations have reshaped entire industries and redistributed billions of dollars of value. Retail discounters such as Wal-Mart and Target, which entered the market with pioneering business models, now account for 75% of the total valuation of the retail sector. Low-cost  airlines grew from a blip on the radar screen to 55% of the market value of all carriers. Fully 11 of the 27 companies born in the last quarter century that grew their way into the Fortune 500 in the past 10 years did so through business model innovation…

“In all enterprises, it’s the business model that deserves detailed attention and understanding”. ~ Mitch Thrower

In the article “5 Influential Business Models” by Jane McGrath writes:  A business model can make or break a company, no matter whether its product is fantastic or just mediocre.  Henry Ford, famous for using the assembly line in his car factories, neither founded the world’s first car company nor invented the assembly line. Borrowing the idea originally used in the meat-pa­cking industries, Ford was able to go after a new market in his industry to great success. It goes to show that in the dog-eat-dog world of business, it’s often not as much about the product as it is about the process.

Bu­siness strategy may not be a science, but using the right method with the right materials in the right place at the right time can create explosive results. What’s particularly fascinating is how companies ride to success largely on the strength of their business models. Some of the most interesting business models are: Dell [‘just-in-time’ manufacturing]; [direct-to-consumer service];  McDonald’s Corporation [ real estate, fast-food assembly-line, franchising];  Microsoft [operating system, personal computer, non-techie-community, Office suite]; Wal-Mart [retailer, no-frills-low prices, rural areas]…

Getting the business model right is often the difference between surviving or not, between being truly transformational or simply incremental. Many business models in the private sector must demonstrate simplicity, precision, and focus that can be communicated in just a few words… Business models are as relevant to the public sector as they are to the private sector…

“This leads to the question of whether business model innovation and strategy is really just the same thing. Certainly successful business models should also have sound strategic principles behind them and one of these is the central concept of ‘fit’. This is an old idea made popular by Michael Porter in the 1980s and it is really about lining up all of your business operations behind a central logic of value creation” ~Tim Kastelle and John Steen

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