The value of Business Models

Everyone in business has a business model – even if they don’t recognise it.  A business model is how we see how the business should operate

Business models improve understanding

Business models help to capture, visualise, understand, communicate and share the business logic.

Capture.

Although a firm’s business model is a simplified representation of its business concept. It is rarely described explicitly in a conceptual way.  Because people use different mental models, they do not automatically understand a business model in the same way. Thus, a generic and shared concept for describing business models becomes necessary. Such a framework can be understood as a common language between stakeholders to formulate business models in a way that everybody understands.

Visualise

Business operations represent quite complex information. Processing information through a visual model can substantially increases the degree to which complexity can be understood successfully

Understand

The relationship between the different elements of a business model and the decisive success factors are not always immediately observable. Therefore the process of helps identify and make understandable the relevant elements in a specific domain and the relationships among them

Communicate and Share

We already made the point that the business model concept helps in capturing, understanding, and visualising the business logic of firm. Being able to communicate and share this understanding with other stakeholders is a logical consequence of the foregoing. Formalising business models and expressing them in a more tangible way clearly helps managers to communicate and share their understanding of a business among other stakeholders

Business models improve analysis

The business model concept can contribute in analysing the business logic of a firm. The business model becomes a new unit of analysis.

Business models can improve measuring, observing, and comparing the business logic of a firm.

Measure

Having captured the business model, it may become easier to identify the relevant measures to follow to improve management. This ability would facilitate the choice of the indicators of an executive information system for monitoring strategy implementation, using for example a balanced scorecard approach with its financial, customer, internal business, and innovation perspectives

Track and Observe.

The business logic of a firm constantly changes because of inside and outside pressures. Therefore a structured approach to business models is important to understand which particular issues e changed over time.

Compare

Similar to observing a firm’s business model over time, a structured approach allows firms to compare their business model to those of their competitors. This is based on the reasoning that things are only comparable if they are understood in the same way. Furthermore, comparing one’s business model to one of a firm in a completely different industry may provide new insights and foster business model innovation.

Business models improve management

Business models improve the management of the business logic of the firm. The business model concept helps ameliorate the design, planning, changing and implementation of business models. In addition, with a business model approach companies can react faster to changes in the business environment. Finally, the business model concept improves the alignment of strategy, business organisation and technology.

Design

Designing a coherent business model where all the elements are mutually reinforcing or at least optimised individually is not an easy task. Because business models are quite complex, their success is often based on the interaction of a number of apparently minor elements. This is even more the case since technology increases the range of imaginable business models. Having a business model conceptualisation at hand that describes the essential building blocks and their relationships makes it easier for managers to design a sustainable business model.

Plan, Change and Implement

When a firm decides to adopt a new business model or to change an existing one, capturing and visualizing this model will improve planning, change and implementation. It is much easier to go from one point to another, when one can exactly understand, say and show what elements will change. In this regard, we can speak of change models that are the core logic for how a firm will change over time to remain profitable in a dynamic environment.

React.

Capturing, mapping and understanding create the foundation for improving speed and appropriateness of reaction to external pressures. A business model helps business model designers to modify certain elements of an existing business model. This is essential in an uncertain and rapidly changing competitive landscape.

Improve Decision Making.

As the business model enhances understanding and communicating the business logic of the firm it also creates more informed, and hence better business decisions.[

Innovate

Similar to the argument about improving change and increasing reaction capacities in the firm, a formal and modular business model approach can foster innovation.

Examples of business models

  • The open business model
  • The razor and blades business model (bait and hook)
  • BCG matrix product portfolio
  • The pyramid scheme business model
  • The monopolistic business model
  • The cutting out the middleman model
  • The loyalty business models
  • The servitisation of products business model
  • The premium business model
  • The direct sales model
  • Business Process Reengineering model
  • Ansoff Business unit strategy model
  • Positioning model
  • Porter Diamond model
  • Porter Competitive Advantage model
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