The term ‘business models' is commonly used today but it did not exist twenty-five years when I started out in the strategy consulting world. What’s the difference between a business model and business strategy?
Business strategies are constantly challenged by discontinuity disruptive business models and often used interchangeably with business strategy, but are they the same?
What about hierarchy? Does ‘business strategy’ comes before ‘business model’ or vice versa? Business models are perhaps the most discussed and least understood aspect of business. The term started in the early days of the Internet when there were many discussion of how the web empowers new business models. Internet and now Web 2.0 are drivers of change, value chains were broken up and reconfigured; Innovative information-rich or -enriched products and services appeared and new distribution channels emerged. Ultimately this lead to intense competition, but as described above it also led to more ways of doing business. In other words, there is a larger variety of action a company can take that shape their business models.
In the most basic sense, a ‘business model’ is the creation and distribution of economic value within a business system and it also involves what capital investment is needed and how a business sustains itself. The business model should also spells-out how a company makes money by specifying its role within the value chain. It is also a simplified representation of business is being conducted and what economic rent it can collect. It involves:
- The value proposition of what is offered to the market (customer unmet needs);
- The profitable target customer segments addressed by the value proposition;
- The communication and distribution channels to reach customers and offer the value proposition;
- The access to and/or relationships with customers;
- The core capabilities needed to make the business model possible;
- The configuration of activities to implement the business model;
- The partners and their motivations of coming together to make a business model happen;
- The revenue streams generated by the business model constituting the revenue model;
- The cost structure resulting of the business model.
For executives this means that they have a whole new creative ways to design their businesses so they can compete differently rather than directly, which results in innovative and competing business models in the same industries. Industry structures play a role deciding on profitability of businesses, but today it is simply not sufficient to choose a lucrative industry, you must have a good business design.
What are characteristics of a good business model? I was asked this questions probably a couple hundreds times. First, they must answer to a customer unmet needs and deliver value against those needs. So it is not just another company delivery similar product at similar prices. Second, it simply cannot not be easily copied. By having some competitive advantages such as protectable knowledge or special access are two examples. Finally, great business mode must be sustainable from only from a financial or operational perspectives, it needs to be able to attract strong talents. These attractions must be built-into the business design.
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