Business Models

What is it?

A business model is a strategic framework that outlines how a company plans to create, deliver, and capture value in the market. It defines the fundamental aspects of how a business operates and generates revenue. A well-defined business model helps answer key questions about how a company will:

1. Create Value: This involves identifying the products or services a company will offer and how they address the needs or problems of its target customers.
2. Deliver Value: It outlines the methods and channels through which the company will deliver its products or services to customers. This could include physical stores, online platforms, or a combination of both.
3. Capture Value: This part of the model describes how the company plans to generate revenue and profit. It may include pricing strategies, sales channels, and revenue streams.
4. Sustain and Grow: Business models also consider how a company plans to sustain its operations and potentially expand its market presence over time.

Business models are used to describe and classify businesses, especially in an entrepreneurial setting, but they are also used by managers inside companies to explore possibilities for future development. Well-known business models can operate as “recipes” for creative managers.

History

The concept of a “business model” has evolved over time, and its history can be traced back to various periods and economic developments. Here’s a brief overview of the historical evolution of the business model concept:

1. Early Trade and Barter (Pre-Industrial Revolution): Before the Industrial Revolution, business activities were often centered around trade and barter. People exchanged goods and services based on immediate needs, without the formalized business models we think of today. The concept of a business model, as we understand it, didn’t exist in this era.
2. Industrial Revolution (Late 18th to Early 19th Century): With the Industrial Revolution came significant changes in manufacturing and distribution. Businesses began to scale their operations, and the concept of a business model started to emerge. Companies like the textile mills of the 18th century and the factories of the 19th century developed production-oriented models based on economies of scale.
3. Railroads and Utilities (Mid-19th Century): The rise of railroads and utilities marked another milestone in the development of business models. Companies in these industries often relied on infrastructure and network effects. Railroads, for example, created a transportation network that opened up new possibilities for commerce and trade.
4. Mass Production and Mass Marketing (Early 20th Century): The early 20th century saw the advent of mass production and mass marketing. Companies like Ford revolutionized manufacturing with assembly lines, while others like Procter & Gamble pioneered modern marketing techniques. This era gave birth to business models based on efficient production and broad consumer markets.
5. Post-World War II (Mid-20th Century): The mid-20th century witnessed the rise of multinational corporations, which introduced more complex business models. These companies often had diversified portfolios and operated in multiple countries, requiring new approaches to management and strategy.
6. Digital Revolution (Late 20th Century): The digital revolution of the late 20th century brought about transformative changes. Businesses began to leverage technology to create new products, services, and distribution channels. Companies like Microsoft and IBM adopted licensing and software business models, while others like Amazon pioneered e-commerce.
7. Internet and E-commerce (Late 20th Century to Present): The advent of the internet led to the rapid emergence of various online business models. Companies like Google and Facebook built their models around online advertising and user data monetization. E-commerce platforms like Amazon and Alibaba created digital marketplaces.
8. Sharing Economy (Early 21st Century): The sharing economy, represented by companies like Airbnb and Uber, introduced novel business models that leveraged underutilized resources, such as spare rooms and private vehicles, to create value.
9. Sustainability and Social Responsibility (Contemporary): In recent years, there has been a growing emphasis on sustainability and social responsibility in business models. Companies are increasingly adopting models that prioritize environmental and social impact alongside profit.

The concept of a business model has evolved in response to changing economic, technological, and societal factors. Today, business models are more diverse and adaptable than ever before, with many companies experimenting with hybrid and innovative approaches to meet the evolving needs of customers and stakeholders.

The difference between business “Models” and “Frameworks”

Definition:

1. Business Model:
   • Definition: A business model is a holistic description of how a company creates, delivers, and captures value. It outlines the core components of a business, including its value proposition, customer segments, revenue streams, cost structure, and key resources.
   • Focus: Business models primarily address how a company operates and generates profit by defining the fundamental aspects of its operations and strategy.
   • Examples: Subscription-based, marketplace, freemium, and direct sales are examples of different business models.
2. Business Frameworks:
   • Definition: Business frameworks are structured methodologies or tools used to analyze, plan, or solve specific business problems or challenges. They provide a systematic approach to decision-making and problem-solving within a business context.
   • Focus: Business frameworks focus on guiding strategic thinking, analysis, and decision-making in various areas, such as market analysis, competitive strategy, financial planning, and organizational design.
   • Examples: SWOT analysis, Porter’s Five Forces, BCG Matrix, Balanced Scorecard, and Ansoff Matrix are examples of well-known business frameworks.

Key Differences:

1. Scope:
   • Business Model: Business models provide a comprehensive view of the entire business, encompassing how it creates, delivers, and captures value.
   • Business Frameworks: Business frameworks are tools or methodologies designed for specific purposes, often focused on analyzing or solving particular business challenges.
2. Purpose:
   • Business Model: Business models are used to define and describe the fundamental structure of a business and how it operates to achieve its goals.
   • Business Frameworks: Business frameworks are used as analytical or decision-making aids, helping businesses assess situations, make strategic choices, or optimize specific aspects of their operations.
3. Components:
   • Business Model: Components of a business model typically include value proposition, customer segments, channels, revenue streams, cost structure, and key resources.
   • Business Frameworks: Frameworks vary widely in their components and focus areas, depending on their intended use. For instance, SWOT analysis examines strengths, weaknesses, opportunities, and threats, while Porter’s Five Forces assesses competitive dynamics.
4. Application:
   • Business Model: Business models are applied to define a company’s overall approach to creating and capturing value in the marketplace.
   • Business Frameworks: Business frameworks are applied to specific situations, such as market analysis, competitive positioning, performance measurement, and strategic planning.
5. Flexibility:
   • Business Model: Business models are relatively stable and describe a company’s overarching approach. They may evolve but usually don’t change frequently.
   • Business Frameworks: Business frameworks are adaptable and can be used as needed to address particular challenges or decisions. Different frameworks may be applied at different times.

In summary, business models provide a high-level description of a company’s entire approach to creating value and generating profit, while business frameworks are tools or methodologies used for specific analytical and decision-making purposes within a business context. Both concepts are valuable in understanding and managing different aspects of a business’s operations and strategy.

Categories of Business Models

Business models can be categorized in various ways based on different criteria. Here are several categories and classifications of business models:

1. Revenue Generation:
   • Product Sales: Companies generate revenue primarily by selling physical or digital products.
   • Service-Based: Revenue is generated through providing services, such as consulting, healthcare, or legal services.
   • Subscription: Businesses charge customers on a recurring basis for access to a product or service.
   • Freemium: A combination of free and premium offerings, where basic features are free, and advanced features are paid.
   • Advertising-Based: Revenue comes from selling advertising space or user data.
   • Transaction-Based: Companies charge a fee or commission for facilitating transactions between parties in a marketplace.
2. Ownership and Asset Control:
   • Asset-Light: Businesses operate with minimal physical assets and focus on intellectual property and network effects.
   • Brick-and-Mortar: Traditional retail businesses with physical stores.
   • Franchise: Companies grant others the right to operate under their brand and business model.
   • Platform: Businesses create ecosystems that facilitate interactions between users or parties.
3. Market Entry and Presence:
   • Online: Businesses primarily operate on the internet, serving a global or online-only customer base.
   • Offline: Companies operate in physical locations, serving local or regional markets.
   • Multichannel: Combining both online and offline channels to reach customers.
4. Customer Segmentation:
   • B2B (Business-to-Business): Companies sell products or services to other businesses.
   • B2C (Business-to-Consumer): Companies sell directly to individual consumers.
   • B2G (Business-to-Government): Focused on selling products or services to government entities.
5. Value Proposition:
   • Innovation: Businesses create new, innovative products or services.
   • Cost Leadership: Competing primarily on cost efficiency.
   • Quality and Premium: Offering high-quality products or services at a premium price.
   • Niche or Specialization: Targeting a specific, often underserved, market segment.
6. Monetization Model:
   • Pay-per-Use: Customers pay based on their actual usage.
   • Subscription-Based: Customers pay regular fees for continuous access.
   • Advertising: Generating revenue through advertisements.
   • Licensing or Royalties: Earning fees for the use of intellectual property.
   • Transaction Fees: Charging a percentage or fixed fee per transaction.
   • Markup or Resale: Selling products at a markup over cost.
7. Economic Characteristics:
   • Profit-Oriented: Focused on generating profits for shareholders.
   • Nonprofit: Aimed at achieving a social or charitable mission, with any surplus reinvested in the organization.
   • Social Enterprise: Balancing social and environmental goals with financial sustainability.
8. Sustainability and Social Responsibility:
   • Sustainable Business Models: Prioritizing environmental and social impact alongside profit.
   • Corporate Social Responsibility (CSR): Integrating responsible business practices into the core model.
9. Timing and Evolution:
   • Startups: Newly established companies with innovative and unproven business models.
   • Legacy Businesses: Established firms that may adapt or evolve their existing models over time.
10. Business Ecosystems:
    • Platform Ecosystems: Creating platforms that enable multiple parties to interact and transact.
    • Supply Chain Ecosystems: Focusing on the management and optimization of supply chains.

These categories are not mutually exclusive, and many businesses may fall into multiple categories or adapt their models over time in response to changing market conditions and opportunities. Successful companies often tailor their business models to their specific industry, customer base, and strategic objectives.

References

•  Baden-Fuller, Charles; Mary S. Morgan (2010). “Business Models as Models” (PDF). Long Range Planning. 43 (2/3): 156–171.
• Business Model Generation, Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010
• Unpacking Sourcing Business Models: 21st Century Solutions for Sourcing Services, The University of Tennessee