Business Model Definition
A business model is a design or draft of how a company intends to generate revenue for its operations and also make a profit. A business model also describes a blueprint upon which the activities, production and operations of a company are premised. This is a plan for how a company intends to manufacture goods, how to deliver the goods and also add values to clients in order to maximise profit.
This business plan includes how revenues will be realized and effectively managed to achieve production and delivery of goods and services. The costs or expenses of running the operations of the company are also captures in a business model.
A Little More on What is a Business Model
A business model is an outline of detailed plans of how a business intends to perform its tasks and also make profits. The actions, ideas and expenses needed to operate a business are included in a business model. Understanding the value proposition of a business is crucial to the business model, it determines whether an individual would come up with a realistic or shabby business plan. The value proposition of a business should be able to distinguish it from other businesses in the same field in terms of production and delivery of value (goods and services) to customers. How to generate revenues, expenses, future plans, marketing strategy among others should be included in the model.
Types of Business Models
Different businesses need different business models to be able to operate and succeed even if they are within the same sector. Business models differ in many aspects, in terms or strategies, work policies, as well as competitive advantages and disadvantages. There are many types of business models, they can fall into broad categories of traditional business models and online business models. Examples of traditional business models include, direct sales, advertising-based, franchising and brick-and-mortar business models. Online business models are often characterized by the combination of a physical presence and an online presence. Companies that produce and sell similar products often have different business models.
Comparing Business Models
Unique business models containing realistic value proposition and approaches help businesses stand aloof of competition. Successful businesses develop and adopt business models that enable them add values to their clients in unique ways. Due to the dynamic nature of businesses, owners of these businesses also periodically revise their business models to suit the changes in their business and also expand to accommodate broader practices.
Business analysts take a look at the gross profit of an organization in measuring how effective the business plan adopted is. Companies increase their gross profits through diverse means, raising price and reducing costs can increase a company’s gross profit.
Assessing the Business Model
The assessment of business models is quite a daunting task to achieve. Also, aside from deficiency of business models, there are some other reasons businesses fail. Joan Magretta, an ex-editor of Harvard Business Review suggested two tests that can be used in assessing business models. The first is the numbers test and the second is sense test. According to Joan, business models fail either because they don’t make sense and/or the numbers just don’t add up to profits.
The airline industry is one with a high number of business models that did not work and companies suffered heavy losses, even bankruptcy because of this.
References for Business Model
Academic Research on Business Model
Business model innovation: opportunities and barriers, Chesbrough, H. (2010). Long range planning, 43(2-3), 354-363.
The entrepreneur’s business model: toward a unified perspective, Morris, M., Schindehutte, M., & Allen, J. (2005). Journal of business research, 58(6), 726-735.
The business model: recent developments and future research, Zott, C., Amit, R., & Massa, L. (2011). Journal of management, 37(4), 1019-1042.
Business model design: an activity system perspective, Zott, C., & Amit, R. (2010). Long range planning, 43(2-3), 216-226.
The role of the business model in capturing value from innovation: evidence from Xerox Corporation’s technology spin‐off companies, Chesbrough, H., & Rosenbloom, R. S. (2002). Industrial and corporate change, 11(3), 529-555.
Business model innovation: it’s not just about technology anymore, Chesbrough, H. (2007). Strategy & leadership, 35(6), 12-17.
Creating value through business model innovation, Amit, R., & Zott, C. (2012). MIT Sloan Management Review, 53(3), 41-49.
Business model evolution: in search of dynamic consistency, Demil, B., & Lecocq, X. (2010). Long range planning, 43(2-3), 227-246.
The business model concept: theoretical underpinnings and empirical illustrations, Hedman, J., & Kalling, T. (2003). European journal of information systems, 12(1), 49-59.
Business model design and the performance of entrepreneurial firms, Zott, C., & Amit, R. (2007). Business model design and the performance of entrepreneurial firms. Organization science, 18(2), 181-199.
The fit between product market strategy and business model: implications for firm performance, Zott, C., & Amit, R. (2008). Strategic management journal, 29(1), 1-26.
Conceptualizing a “sustainability business model”, Stubbs, W., & Cocklin, C. (2008). Organization & Environment, 21(2), 103-127.