The question of what a business model is often remains relatively vague. The main reason for this is because business people have an intuitive understanding of business models. This is normal, since the business model is about how an organization makes money, which is a manager’s job after all. However, there is often a lack of a more precise and shared understanding of what a business model is. Yet, such a common understanding is required if we want to have high quality discussions of one’s business model and make important business model decisions.
Alexander Osterwalder has come up with the 9 building blocks approach to describe business models. This approach has the characteristics of any other type of model (e.g. in architecture or engineering). It is a simplified description and representation of a complex real world object. It describes the original in a way that we understand its essence without having to deal with all its characteristics and complexities. A business model reflects how a company does business and makes money without detailing its strategy, processes, units, rules, hierarchies, workflows, and systems.
So, Osterwalder defines a business model as consisting of 9 building blocks that constitute the business model canvas:
- The value proposition of what is offered to the market;
- The segment(s) of clients that are addressed by the value proposition;
- The communication and distribution channels to reach clients and offer them the value proposition;
- The relationships established with clients;
- The key resources needed to make the business model possible;
- The key activities necessary to implement the business model;
- The key partners and their motivations to participate in the business model;
- The revenue streams generated by the business model (constituting the revenue model);
- The cost structure resulting from the business model.
According to Osterwalder, the popularity of the business model concept increased in the late 90s as a relation to the rapid decrease of prices in the IT and telecom industry. It became very cheap to process, store and share information across businesses and other companies and all the way to the customer, which is why many new ways of doing business became possible: value chains were reconfigured, innovative products and services appeared, new distribution channels emerged and more customers could be reached.
Ultimately this lead to globalization and high competition, but, as described above, it also led to new ways of doing business. Therefore, nowadays there are various ways on how companies can make money: this means new in terms of what they do, how they do it and for whom they do it.
Managers and executives have a whole new range of possibilities to design and redesign their businesses. This results in innovative and competing business models in the same industries. Before, it used to be sufficient to say in what industry you where, for somebody to understand what your company was doing. All players had more or less the same business model. Today it is not sufficient to choose a lucrative industry, but you must also design a competitive business model. In addition, increased competition and rapid copying of successful business models forces all players to continuously innovate and adapt their business model to gain and sustain a competitive edge.
Companies that thoroughly understand their business model and know how the building blocks relate to each other will be able to constantly rethink and redesign these blocks and their relationship to innovate before their business model is copied or becomes outdated.
Business Models and Innovation
The technical product supremacy in the business world of nowadays is no longer enough. Customer experience became the most critical differentiator in the highly competitive business world. This incident made the business competition transforming rapidly from competition of various products to competition of business models. Innovation is playing an important role in business competition. It is not necessarily must be derived through an invention. The technological changes in the production of existing goods, the discovering of the new markets and supply sources, work tailorization and new organizational structure are various innovations that contribute technological advancement. Most of the efforts to replace the technologies will fail in innovation. Value is shifting from products to solutions to experiences nowadays. The products nowadays must meet an expectation or need in order to create great customer experiences. There is no any individual idea or factor that can ensure the winning in the competition, it requires various elements such as enabling and supporting elements that combined together to create the winning edge. Business model is important because it decides how a company going to approach customers. Adjusting the approach based on the market conditions is not enough because the competitors can do the same thing too. A company needs a wider mindset to make itself extraordinary. A series of continual discussions need to be held between the business and technological experts to come out with a strategic plan which will then be further involves in the planning at tactical level and operational level. The key factor of tactical level is fast decision making in the forever changing business environment. A flexible business model is always better than those rigid funneling and long-span models.
In order to enable the success of an innovation for the products, the company needs to ensure people to trust that it is not about something temporary only and the company will make a long term commitment to provide services or helps that might needed for those new products. Many companies would like to rely on their current products in the market rather than continue to make more innovations due to reluctance which is caused by mindset, misleading signals and the illusion of progress. Mindset is the biggest barrier among these three factors, it is often caused by the preoccupied thoughts or offensive satisfaction of a company’s leader about the company itself, behavior of avoiding losses and sunk cost dilemma where people tends to do something which is wrong or not worth it after spent so much on it. Besides that, all the company managers or leaders need to know clearly and accept that no matter how brilliant they had done in their plans and implementations of the business models they might still have high possibility to fail at the end. They need to follow all the disciplines required but at the same time still remain agile and flexible to lower the possibility of failure. As long as they had done all the essential early preparations, failure would not become a disaster for their company. Strategic resilience is what a company needs in order to be successful where company will change according to the conditions of business ecosystem and competitions before it is too late. In order to be resilient, the company needs to get ready for cognitive, strategic, political and ideological challenges. The company leaders should also be aware that workers are still the crucial assets since the system do not do thinking.
The term business model is also closely related to innovation. The business model concept is related to a whole new range of business design opportunities. There are examples of business model innovations in each of the 9 building blocks described. The most obvious is innovating in the value proposition. When mobile phones appeared in the market they offered a different value proposition than fixed line phones. In the early days of the Internet popular indexes like Yahoo! helped people find information on the Web. Regarding target customer segments, low-cost airlines like EasyJet have brought flying to the masses. Dell became really successful by exploring the web as a distribution channel. Gillette has made a fortune by establishing a continuous relationship with customers based on its disposable razors. Apple resurged based on its core capacity of bringing design to computers and electronic gadgets. Cisco became famous for its capacity of configuring activities in new and innovative supply chains. Intel thrived for its capacity to get partners to build on its processing platform. Google tapped in an innovative revenue streams by linking highly specific search results and content with text ads. Wal-Mart became dominant by its ability to slash cost throughout its business model.