What is a Business Model?

Business Models

Business model is a buzzword that everybody used (or overused) during the dotcom boom. In fact, poorly thought out business models were the downfall of many dotcoms.

However, the business model dates back to the earliest days of business; it merely describes the way in which a company makes money. A business model can be simple or very complex. A restaurant’s business model is to make money by cooking and serving food to customers. A website’s business model might not be so clear, as there are many ways in which these types of companies can generate revenue. For example, some make money (or try to) by providing a free service and then selling advertising to other companies, while others might sell a product or service directly to online customers.

The word model is basically, a simplified description and representation of a complex entity or process.

The term business model describes a broad range of informal and formal models that are used by enterprises to represent various aspects of business, such as operational processes, organisational structures, and financial forecasts. Although the term can be traced to the 1950s, it achieved mainstream usage only in the 1990s.

What is a Business Model?

A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a firm offers to one or several segments of customers and of 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.

  • A model is a hypothesis about cause-and-effect relationship
  • A model is a stylised representation of a structure
  • A model is a hypothesis about how a firm (within an Industry) will make money over a certain (strategic) period.
  • A business model describes a firm’s business:
  • A firm’s business model is the way in which it conducts business in order to generate revenue – i.e. unlocking “trapped value”
  • A business model is a method of doing business by which a firm can achieve its goals and generate revenue to sustain itself.

Models define where the firm is positioned in the value chain – that is, by what activities the firm adds value to the product it supplies. (The value chain is the series of value-adding activities that an organisation performs to achieve its goals at various stages of the production process.) Some models are very simple. For example, Target buys merchandise, sells it and generates a profit. In contrast, a TV station provides free broadcasting to its viewers. The station’s survival depends on a complex model involving advertisers and content providers. Public Internet portals, such as Yahoo!, also use a complex business model.

One firm may have several business models.

Business models are a subset of a business plan. Different models can be applied to different parts of a business plan

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