Functions of Business Models

The functions of a business model are to:

  • articulate the value proposition, that is, the value created for users by the offering based on the technology;
  • identify a market segment, that is, the users to whom the technology is useful and for what purpose;
  • define the structure of the value chain within the firm required to create and distribute the offering;
  • estimate the cost structure and profit potential of producing the offering, given the value proposition and the value chain structure chosen;
  • describe the position of the firm with the value network linking suppliers and customers, including identification of potential partners and competitors; and
  • formulate the competitive strategy by which the innovating firm will gain and hold competitive advantage over rivals.

Although this description does a great deal to aid our understanding of business models, it also poses a danger. By making more explicit the various elements of a business model, it begins to sound like a business plan. A business model and a business plan are two distinctly different entities. A business model is a conceptual description that may have been given a name like “aggregator.” A business plan is a detailed document that is prepared for strategic guidance and to aid in the acquisition of resources, either internal or external. Some similarity of content exists between the two, but they are not synonymous. Recognising this issue, Chesbrough and Rosenbloom go on to specify the differences between a business model and a strategy:

  • A business model focuses on creating value for the customer and delivering that value to the customer.
  • It focuses on creating business value that can be translated into value for the shareholder.
  • It requires that managers use technical inputs to create economic results in a context of technological and market uncertainty.

Their final point puts the business model concept firmly in the arena of business innovation including Internet-based businesses. It also reinforces the focus on value creation by the firm as a key element of an Internet business model.

From eBusiness Models in Black and White – 2009 Brian Monger – ISBN: 978-0-9805505-2-8 Digital copy available – contact info@marketing.org.au

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