Business Model

In the most basic sense, a business model is the method of doing business by which a company can sustain itself i.e. generate revenue. The business model spells-out how a company makes money by specifying where it is positioned in the value chain.

To extract value from an innovation, a start-up or any firm for that matter needs an appropriate business model. Business models convert new technology to economic value.
For some start-ups, familiar business models cannot be applied, so a new model must be devised. Not only is the business model important, in some cases the innovation rests not in the product or service but in the business model itself.

Given the complexities of products, markets, and the environment in which the firm operates, very few individuals, if any, fully understand the organization’s tasks in their entirety. The technical experts know their domain and the business experts know theirs. The business model serves to connect these two domains.

A business model draws on a multitude of business subjects, including economics, entrepreneurship, finance, marketing, operations, and strategy. The business model itself is an important determinant of the profits to be made from an innovation. A mediocre innovation with a great business model may be more profitable than a great innovation with a mediocre business model.

The business model has the following components:
1. Value proposition – a description of 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.

How is Business Model different from Strategy?
Business model is different from strategy in the following ways –
1. Creating value vs. capturing value – the business model focus is on value creation. While the business model also addresses how that value will be captured by the firm, strategy goes further by focusing on building a sustainable competitive advantage.
2. Business value vs. shareholder value – the business model is an architecture for converting innovation to economic value for the business. However, the business model does not focus on delivering that business value to the shareholder. For example, financing methods are not considered by the business model but nonetheless impact shareholder value.
3. Assumed knowledge levels – the business model assumes a limited environmental knowledge, whereas strategy depends on a more complex analysis that requires more certainty in the knowledge of the environment.

How has Internet changed the Business models?
Internet has revolutionized a large number of business aspects. The business parameters have changed due to the flexibility Internet offers. Business models are perhaps the most discussed and least understood aspect of the web. There is so much talk about how the web changes traditional business models.

Some models are quite simple. A company produces a good or service and sells it to customers. If all goes well, the revenues from sales exceed the cost of operation and the company realizes a profit. Other models can be more intricately woven. Broadcasting is a good example. Radio, and later television, programming has been broadcast over the airwaves free to anyone with a receiver for much of the past century. The broadcaster is part of a complex network of distributors, content creators, advertisers and their agencies, and listeners or viewers. Who makes money and how much is not always clear at the outset. The bottom line depends on many competing factors.

Internet commerce will give rise to new kinds of business models. But the web is also likely to reinvent tried-and-true models. Auctions are a perfect example. One of the oldest forms of brokering, auctions have been widely used throughout the world to set prices for such items as agricultural commodities, financial instruments, and unique items like fine art and antiquities. The Web has popularized the auction model and broadened its applicability to a wide array of goods and services. The biggest advantage is that web brings together millions of buyers and sellers on a common platform from different parts of the world. These kinds of transactions were not possible earlier. Similarly, Internet has made possible creation of emarketplaces where thousands of vendors and customers meet and transact. Since it is a platform where the middlemen have no role, the prices become highly competitive.

Business models have been defined and categorized in many different ways. Internet business models continue to evolve. New and interesting variations can be expected in the future.

 
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