What is a business model? (Part 1)

Business models are among the hottest topics in business these days. Everyone is disrupting everyone else with a great business model! Business model advantages are claimed, by some, to be a more sustainable advantage than other advantages. But what is a business model?

You can find about as many definitions for “business model” as you can for “strategy” they both sound like really cool things, yet, almost everywhere you look, there is a different definition. The simplest, yet most cliche, definition of business model, is how a company creates, delivers, and captures value. This definition is simple to remember, encapsulates some of the key elements of a value chain (which is important in strategy work), and provides a sense of how many different ways one company can differentiate from another.

One company may create value by designing ASICs, another company may focus its attention on other ways to create value. Each approach is going to have pros and cons for any given market opportunity / customer problem. One company may go to market with a primarily direct sales force, another may optimize for partnerships, OEM relationships, and/or channels. Each way of going to market may have pros and cons relative to any target customer segment. One company may capture value with a product model, another with a service model, and yet another with an innovative payment model. Each approach has pros and cons relative to the phase a market is in, economic preferences of target customers, the pain point of target customers, the ecosystem of solutions, etc.

For any given company, it may be simple to encapsulate the essence of a company’s value proposition: what product/service creation activities it focuses on, the central things a sales force does to win, the types of commercial models that are dominant, etc. The tricky thing about a business model is what underpins it: all the things that are built into systems, processes, culture, supply chains, partnerships, channel programs, etc. For many companies, all these activities/variables naturally arise as they enter a market with a particular approach to winning and/or disrupting, so it could be argued, though I would not, that such things will naturally evolve without much conscious design and planning. But describing all those connections, all those assumptions, all those values, how everything hangs together as a “system”, well that is quite a job.

The essence of modern strategy literature is the idea that if you have a strong focal point as a company, the company will self-organize around that focal point, and create all those underpinnings of a business model that are so hard to describe in detail. In this sense, modern strategy thinking and modern business model thinking have a great deal of overlap [and this point is probably as true for non-profits as it is for-profit enterprises].

But perhaps the most significant reason that business models are of such strategic interest today is because there have been so many industries disrupted by the XaaS players, and that has been a sea shift, as big as anything in recent memory.

Business models – on one hand, a pretty simple focus on the main preoccupations and competencies of a company, and on the other hand, a complex study of everything a company does to create, deliver, and capture that value – and if you really want to understand the latter, try changing a business model, as many companies, across many industries, are currently trying to do.