The construction of a business model is intricately linked to the creation of a business strategy. A successful model determines the way a company sells its products and elucidates how it creates and delivers value to its customers. This makes it an indispensable key which determines how long a company will survive in a competitive market.
Peter Drucker described it as an answer to the following questions: Who is your customer, what does he value, and how do you deliver that value at an appropriate cost?
To know more about various types of business models, you can read here.
Executives must understand how a business model works for their organization to survive. The economic slowdown in the developed world is forcing companies to modify their business models to a large extent. Moreover, innovation in technology is reshaping industries and transforming the way companies create and capture value through business models. For instance, Kodak had to change its business model from film sales and printing to digital printing centers.
Why do you need a business model?
When managers set up and follow a business model, every initiative or decision is taken keeping a close eye on profits. If it fails, you need to re-examine your model. For instance, when Euro Disney opened its theme park in Paris in 1992, it borrowed from the model that worked perfectly for the US. They assumed that Europeans, like Americans, would spend the same amount of time and money per visit on food, rides and shopping for souvenirs. However, this proved wrong and finally the key elements of the original business model were tweaked to suit the European set up. Gradually, things started looking up.
Therefore, it is highly imperative to have a model as a starting point– a spreadsheet with detailed analysis of every major item that you can pull apart, every sub-component that you can test and try. In brief, a business model is absolutely mandatory.
What does a successful model do?
A successful model:
- Allows companies to tie their marketplace insights to economics. In short you can assume people’s reaction/response to your business. It can be tested like any scientific theory and revised when necessary.
- Offers a unique value promise that is hard to replicate.
- Is capable of generating huge profits. Competitors cannot easily copy the models due to their low cost structure and meaningful benefits.
- Sets up new platforms of growth. Gradually the stocks of the company’s key assets grow and over time expands its value creation.
- Can weaken or destroy new entrants. At times even rivals with different models can partner with each other for value creation.
Business model is not synonymous with strategy, though both are often used interchangeably. To explain it in simple terms, if business model is the car, strategy is how to design and build it—both inter-related but completely different.
A good business model allows all employees to align themselves around the value of the company and work towards the larger goal. In this sense, it is a powerful tool steering the company towards success.