The term Business Model is one that gets thrown around a lot these days. Even though it might sound like a buzzword to you, it’s important to understand what a business model is, and how they are useful.
One of the confusing things about the business model concept is that there are a wide variety of models of business models, and it seems as though everyone that talks about them makes up a new one. This can be frustrating if you are trying to figure out how to use the concept.
At their core, all business models address this questions: how do we sustainably deliver value to our customers? In this instance, the sustainable part refers to your organisation – how can you deliver value so that you’re still around in the future?
In a special issue of the journal Long Range Planning, Charles Baden-Fuller and Mary Morgan say that business models can serve three different purposes. They can describe different kinds and types of businesses. This is critical if we are trying to study them analytically. They can be short-hand descriptions of how firms operate – the primary value here is that you can use the business model to ensure that you have strategic fit across activities. Or they can be role models – you can use them to describe how you want your organisation to function.
More recently, Steve Blank has added another use – he says that business models are hypotheses about how your organisation might be able to create value for customers (see my discussion of this here).
To help illustrate some of the important points about business models, here are some of the models of business models that I’ve run across. The list isn’t comprehensive, so I apologise to anyone that I’ve forgotten – it’s simply due to my ignorance.
- Value Networks from Verna Allee: Verna was working with some of the basic concepts of business models in the 90s. One of the tools that she developed is Value Network Mapping:
Key points: value creation and exchange is at the core of understanding business models. You need to clearly articulate how you create value, and for whom. The other key point here is that value isn’t just about money. You can also create and exchange intangible value. You can see her latest work here in her book Value Networks and the True Nature of Collaboration.
- Henry Chesbrough: described business models in an article with Richard Rosenbloom and in his book Open Innovation. Here is what his business model looks like:
Key points: new innovations often require new business models. This is where the idea of business model innovation really started to gain traction. Chesbrough didn’t just describe business models, he also discussed how changing a business model can be an innovation just by itself. I’m beginning to suspect that all new innovations require new business models…
- Strategy Diamond: this is a strategy tool developed by Hambrick & Fredrickson. They talk about the importance of having an integrated strategy, which looks like this:
Key points: the first key point here is that a good business model is integrated. All of the elements need to be consistent with and support the others. If you change one element, it’s likely that you’ll need to change all of them. Second, this model illustrates how closely linked strategy and business models are. When you design a business model, you can’t do it without clearly articulating a strategy.
- Patrick Staehler: wrote a PhD called Business Models in the Digital Economy that was published in 2001. His business model looks like this:
Key points: the thing I like best about Staehler’s model are the three bottom boxes: Leadership Style, Relationship Style and Values. Think about that in relation to the point above about integration. If you change the relationship style within your organisation, you’ll likely need to change the rest of your business model as well. Furthermore, this business model innovation could be a source of competitive advantage. This is a very powerful point.
- Business Model Canvas: around the same time that Staehler was writing his PhD on business models, Alex Osterwalder as also writing a PhD on business model innovation. He developed a tool called the Business Model Canvas. He has subsequently published a book called Business Model Generation, which is all over the place now, along with a number of other analytical tools. Here is his version, as modified by Steve Blank:
Key points: this is where the business model concept has started to go mainstream – it’s astonishing how well this version of business models is doing right now. Osterwalder has done a great job of promoting the idea, and making it genuinely useful. This version of business models proves that it is a practical tool that you can use to figure out where your organisation should be heading.
- Long Range Planning: the special issue mentioned above makes a couple of important contributions. There is a new model of business models in the paper by David Teece, but it is more of a model to use in description if you are trying to study these academically. It’s not really one that you could use very easily within a firm for analysis.
Key points: the issue with the Teece model illustrates the point that Baden-Fuller and Morgan make about the different uses of the business model concept. Teece’s model is designed solely for description/classification. So you can run into approaches for business models that aren’t as practical. The second point in the special issue is this: about 2/3 of businesses surveyed in one of the papers can’t articulate what their business model really is. This is alarming. It also raises the point that every organisation has a business model, whether you have consciously thought about it or not. If you’re trying to develop business strategy, it is essential to actually give this some thought.
- Seizing the White Space: Mark Johnson works with Clayton Christensen, and Johnson’s book from last year has another model of business models. The website has a bunch of useful resources, and the book has some great stories about business model innovation. His model looks like this:
Key points: so now we have models of business models with 4,5,6,9 and 12 components. The same core elements keep turning up. For me, I don’t care which business model version you use, and picking the right one depends on what you’re trying to accomplish. Personally, I like the Chesbrough version because of the emphasis on networks, which I think is critical. On the other hand, the Business Model Canvas is getting easier to use now because of the substantial amount of resources that are building up around it.
People build their own model for different reasons, but it’s important to understand that they are all trying to find ways to get at essentially the same issues. There isn’t one that is absolutely correct. So pick whichever one resonates the most with you to use.
- Escape Velocity: the latest book by Geoffrey Moore is fantastic. In it he includes a 9-point Market Strategy Framework, which includes elements like Target Customer, Compelling Reason to Buy, Partners and Allies, etc. If you look at it, it’s outlining a business model.
Key points: like I said earlier, any time you start thinking about strategy, you’re thinking about business models. So even frameworks that aren’t being put forward as business models really are business models.
Business models are important. They are an important tool that can be used to augment product and service innovations, to link innovation to strategy, to co-ordinate activities within an organisation, and they can be a source of innovation as well.
There are many models of business models out there. You can use whichever makes the most sense to you. But it’s important to use one.
Follow up post: Three Things You Can Do With a Business Model.