business models summary

With all this recent talk of business models, it is probably useful to clarify what I mean by it – business model is yet another phrase that ends up meaning different things to everyone. I use the Henry Chesbrough definition, which splits the business model into six key issues (the summary is from

  1. Value proposition – a description the customer problem, the product that addresses the problem, and the value of the product from the customer’s perspective.
  2. Market segment – the group of customers to target, recognizing that different market segments have different needs. Sometimes the potential of an innovation is unlocked only when a different market segment is targeted.
  3. Value chain structure – the firm’s position and activities in the value chain and how the firm will capture part of the value that it creates in the chain.
  4. Revenue generation and margins – how revenue is generated (sales, leasing, subscription, support, etc.), the cost structure, and target profit margins.
  5. Position in value network – identification of competitors, complementors, and any network effects that can be utilized to deliver more value to the customer.
  6. Competitive strategy – how the company will attempt to develop a sustainable competitive advantage, for example, by means of a cost, differentiation, or niche strategy.

The ideas are explained well by Chesbrough himself in this presentation:

As with all of these things, the six parts of the business model interact, and the answers you come up with for one part of the model enable (and constrain) choices in other parts. How can we use this to integrate discussions about how to build effective business models in disrupted industries like journalism, music and (potentially) higher education?

The hardest part of this model for people to understand is the idea of the value network. Basically, it is looking at how your offering fits in with all of the complementary products & services it needs to work correctly. Another way of thinking about his is to ask how your product or service fits within the ecosystem that surrounds it. For journalism, this means thinking about all of the functions in Steven Johnson’s news ecosystem model. You can create an innovative business model by linking these functions together in a unique way. Kevin Anderson has written an excellent post discussing how news organisations might encourage innovative thinking along these lines. He references a blog post discussing how innovators think, and says:

They call it associating; I call it lateral thinking. I see it in innovative journalists who find tools or technologies created for another purpose but who immediately see the editorial possibilities. They are journalists constantly striving to wrench out efficiencies in how they work and perfect the process. They are constantly looking for new tools and services that can either solve existing problems they have or allow them to do things they hadn’t thought of before. They experiment, and if something doesn’t work, they move on. It’s not something they were trained to do, it’s something they instinctively do.

That’s a great description of the innovation system works in general. It links to my ideas about how the three key functions in digital business systems are aggregating, filtering and connecting, which address the issue of the value proposition. My contention here is that mis-specifying what problem you are solving for customers is one of the fundamental mistakes that organisations make when building their business models. If you get this wrong, as the music industry did, then you end up making poor choices about the other five parts of the business model. Paul Graham has an outstanding post discussing how we’ve never really paid for content, which clearly shows some of the mistakes made in this respect.

One of the key parts of the model that is very closely related to your value proposition is the revenue generating mechanism. Jeff Jarvis and the CUNY Graduate School of Journalism have put together an outstanding resource called New Business Models for News. One of their pages lists twenty three ways that news organisations can generate revenue. I can’t emphasise enough the imprtance of creative thinking in this area. I’ve seen numerous comments recently that run along the lines of ‘well, there’s only two ways for news organisations to make money – advertisements or donations, so what else can newspapers do?’ Well, about 21 other things (at least!). Thinking creatively about how to combine these revenue mechanisms is another potential source of business model innovation. The CUNY site also includes a number of spreadsheets that allow you to play with revenue models for several different forms of news organisation. It is a tremendous resource. You might argue with the assumptions built in to their models, but doing so is an essential part of figuring out how to build a business model that works.

I guess the point that I’m trying to make is that if you are in an industry that is under threat of disruption, then you have to be thinking about these issues seriously. I find Chesbrough’s business model framework to be one of the most useful tools for doing so. It can be nerve-wracking, but disruption also creates great opportunity. As Scott Anthony says, some people actually court disruption in their industries. The point of his post today is that looking for disruption can actually be exciting, and he closes with some ideas that quite useful:

I suggest those of you contemplating your own career in the face of the challenges and opportunities presented by today’s economy consider three questions:

1. What are you doing to expose yourself to new challenges?
2. How can you get closer to the “action” in your field or organization?
3. What can you do to get closer to transformational efforts in your company?

I’m greatly looking forward to taking the next step in my disruptive journey — and in sharing the learning with you.

I’m looking forward to sharing ideas about these issues as well.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

Please note: I reserve the right to delete comments that are offensive or off-topic.

8 thoughts on “business models summary

  1. I thank you for saving me the $$ on my MBA. 😀 I’m beginning to think the time requirement is all about absorbing all of the above.

    One thing that chills me about the list of 23 is that two of them are things that turn customers right off if they hear about them – selling the database information, and premium content. The former is a stab in the back for customers who trusted the organization, and the latter can feel elitist and unnerving.

    The Cafe idea, however, is extraordinary. I love it – not in the least because I’ve come up with similar ideas for people who usually meet online to salon (is that a verb?) in a creative space.

    Sorry I haven’t had time to comment lately, Tim. I keep pushing myself further in just how many credits I can stack up during a term. :)

  2. No worries Amber – working on your own stuff is definitely more important than reading my blog!

    If only 2 of the 23 options are chilling, then that’s not too bad, really. And I think that part of their objective is to list all of the possible sources of revenue generation – and those two have certainly both been tried. I fully agree with you on the evils of selling your database. I’m not as convinced that premium content is of necessity bad – I actually think that if it is handled correctly that model may have some promise…

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