BUSINESS MODEL OF THE FIRM. Four types of business model change strategies. Nine basic business model building blocks.
Wednesday, August 5th, 2009BUSINESS MODEL OF THE FIRM
Business model is a conceptualization of the firm’s value proposition for its stakeholders and the unique ways the firms create and deliver value to customers. A firm’s business model is “management’s plan to make money in a particular business,” and is therefore closely related to the firm’s strategy.
Business model is concerned with the revenue–cost–profit economics of the firm’s strategy—it determines “whether the revenues and costs flowing from the strategy demonstrate business viability.” Business models explain how firms work—they identify who the customers are and define the economic logic of delivering value to the customers at appropriate cost so profit can be made. Business models describe how the pieces of a business fit together as a system to create value to the customers. Thus, to be viable as a business, firms are built on sound business models. Business model is often used to define the firm’s unique value configuration, resources, and value propositions. Business model is the firm’s core logic for creating value and making money. It highlights the unique activities and approaches that allow the firm to deliver differentiated products and services to attract customers, employees, and shareholders to sustain a profitable business. Many business model components that can be configured to make up a distinctive business model, such as pricing model, revenue model, channel, commerce process model, Internet-enabled commercial relationship model, organizational model, and value proposition model. Business model is not strategy because business model does not address competition which is core to strategy.
There are four types of business model change strategies:
Realization model: Firms use the realization model to maximize returns from their existing business model operating logic. They leverage their business model by enhancing some part of their operating logic to grow revenue and profit. An example of realization model is where a traditional bank adds
Internet banking to provide convenience to their customers and at the same time extend their reach.
Renewal model: Firms use the renewal model to continuously improve their products and services platforms, brand value propositions, cost structure, technology base, and capabilities to respond to increasing competition. They may even introduce disruptive products to vastly enhance their competitive positioning. Renewal models are commonly used by innovative firms to stay ahead of the price/value curve.
Extension model: Firms use the extension model to expand their business to new markets, new lines of businesses, or new geography. It does not replace the existing business model but adds significantly to it with new capabilities and operating logic. For example, BP Amoco extends their gas and oil vertically integrated business to include retail stores at its gas stations.
Journey model: Firms use the journey model to totally revamp their business models and adopt a new operating logic. For example, a firm may change its business model from a local domestic niche player to become a higher value global player. More dramatically, albeit gradually, a firm may change its business from one industry to another. For example, Nokia changes from rubber and paper business to telecommunications business.
A business model is a conceptual tool that contains a set of elements and their relationships which can be configured to express the business logic of a specific firm. The business model describes the value offered to the different segments of customers, and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital to generate profitable and sustainable revenue streams.
We identify nine basic business model building blocks that can be used to construct a business model based on this definition. The building blocks are structured as follows:
1) Product
Value proposition: Define the firm’s bundle of products or services
2) Customer Interface
Target customer: Describes the segments of customers targeted by the firm to offer value to
Distribution channel: Describes the various means the firm uses to reach its customers
Relationship: Explains the relationships (links) the firm has with its different customer segments
3) Infrastructure Management
Value configuration: Describes the arrangement of activities and resources
Core competency: Outlines the competencies required to execute the firm’s business model
Partner network: Describes the network of cooperative agreements with other companies necessary to efficiently offer and commercialize value
4) Financial Aspects
Cost structure: Defines the cost base of the firm as a result of deploying the business model
Revenue model: Defines the revenue streams of the business model to sustain the firm’s profitability
