I have long suspected that most business people cannot give a simple definition for the common term of “business model.” It seems to be a nebulous and vague term that escapes most. Most people think they know what it means, but when you ask them to define it, they usually can’t come close to verbalizing it. So I decided to see if a group of business students, those who are in the great business textbooks every day preparing to succeed in business, know what it means.
In a classroom of a well-respected business school today I asked: “Please define business model.” I received the same initial reaction I do from most – some blank stares and a few who started to raise their hands but then realized they didn’t really have much to offer. Finally a brave soul took the plunge with something like this: “It’s the way a company runs and operates.” That sure seems to be part of it, but aren’t we missing something? A few more students offered suggestions that were similarly vague and generally lacking.
My definition is simple – a business model is how your business makes money. Period. It is the accumulation of all of the sales, marketing, operations, administration, R&D, finance, and everything else that goes into a business – all the strategies and tactics – that determine if the company makes money or does not make money. Most definitions are like the ones above – mentioning different parts of running a business but failing to describe it as the company’s overall plan for making a profit.
Understanding this simple and quick definition, here is my two-pronged philosophy for entrepreneurs and their business models:
First, every entrepreneur can pick whatever business model they want. Second, eventually our efficient market will determine the superior business model for each industry. Those who innovate the best model for their industry will most likely win. Those who quickly adopt to this model will likely survive. And those who stay entrenched in their out-dated and archaic models will die.
In our competitive business environment, the best entrepreneurs are the ones that innovate the best business models in their respective industries. I don’t know how many of them can give a quick and precise definition of the term business model, but one thing is for sure – they get it!
Ken –
I agree with your definition but would suggest that you fine tune the next sentence. Focusing on “the accumulation of all…” the parts of the business could get distracting. Every business has finance, HR, marketing and sales.
The essence of the business model is in the unique combination of competencies, processes and relationships that the company uses to create value for its customers (and how they get paid).
A lot of the drivers of the business model are intangible today which can add to the lack of understanding. I have started using Legos to help my clients create a physical model of how all the pieces fit together. You can see it on YouTube under the title “You Can Grow Like Google.”
Your business model can make or break you. Take the Ipod ITunes examples of better business models than the old timers in the business. It worked because it was a better model.
Take a photography business downturn due to high advances in technology, changing the model by changing the product line & deliverables.
Take a commercial heating & cooling business suffering from commercial building owners slow pay and no pay due to the recession, and you change the model to residential, serving individuals, and you get “re-invention” of the business model – same business- different model.
The keys to success in these fast moving times for business owners and entrepreneurs is to make sure that your business model is designed to be fluid and changable to the market.
Chip,
Great examples! I agree – the business model needs to change. That is the test of great entrepreneurs…to see which ones will adapt quickly enough and which ones will innovate the superior business models.
Ken K.
Mary,
Great point. I did not pay a lot of attention to everything after “make a profit.” It seems like one of the major value-driving items of the model should also center the sustainable competencies that generate the most value….or the components of the business model that really are superior to your competitors. Would you agree?
Yes and no. The most compelling parts of a business model are the parts in which you have a sustainable advantage. It’s important to understand that from a strategic perspective.
But you need to identify all of the necessary parts and then evaluate them if you are ever going to improve your model. This is one of the key forms of intangible information that every company needs. Any tangible business accounting would start with an inventory–so should it be with intangibles.
The key things to look at are (all related to the value creation process): key competencies, key processes, key IP and key relationships.
Mary – great insights!
Ken, I find I am a “fan” of your articles; your address to basics and fundamentals often gets to the core of pertinent issues in business.
Your are correct. Small business owners tend to think a business model reflects the operation of the business. For example, I created a virtual business model for my accounting business; this makes me competitive among my peers but not necessarily competitive in all industries. One business owner stated they tried “virtual” and it did not fit within their business model. What he meant was that he could not see how internal administrative processes could be handled in a setting he considered as outsource; his “business model” required a physical presence on site so paper could be tracked down in a manufacturing setting. Obviously he does not “make money” by insisting upon high overhead and physical control of paper and manpower.
I agree the business model an owner adopts can make the difference between failure and success. This fact has never been more evident than in this recessionary period.
From my vantage point however not too many business owners “get it”. Maybe you can consider writing about the virtual business model – how a business owner makes money in a global economy and with the highest technology known to man while offering a service or product. I call it the “virtual hurdle” in the small business world.
Ken – I’ve used this question to help me determine a specific core competency in my interaction with clients. It helps me differentiate leaders that use holistic problem solving, decision making and implementation approaches; from those that use the more common, what I refer to as the “serial-myopic” approach. Thanks for the succinct approach. ~ Jim
Jim,
Thanks for your feedback. All the best!
Michele,
Thanks for being a “fan”
I appreciate your comments on a business model built to create a virtual experience/service offering using technology. There are many people doing this and succeeding with it, and it certainly makes sense from a lot of perspectives. I like your term “virtual hurdle” and I have similarly seen many struggle to jump over it. I tend to believe there is a balance. Too much push towards virtualization can sometimes remove some of the important human senses that are critical to taking care of customers, but a resistance to it means that your business model will eventually become stale and archaic. It seems like the best business models today embrace both.
This can definitely be a topic to further explore later! Just one last thought for you as you pursue your virtual business model…keeping your customers happy and satisfied is certainly up to you. I have found that when offering services virtually, it means we have to have a heightened sense of communication. In fact, I think that you have to feel like you are over-communicating with a client to make sure they feel like they are getting enough communication. Your thoughts on that?
Hi Ken. Great article. I would be one of the many people who would have had a problem with defining what a business model is and this has helped me alot. Thanks for making it easy to understand, oh, and to all the other commentators who have enhanced the lesson!
Barney, thanks for your feedback and candor. Great discussion.
I enjoyed reading “20 Indicators Your Financials are Wrong.” I would like to correspond with you on the subject. Please let me know your email address.
Paul,
Thank You for your comment. You can reach me at ken@cfowise.com.
Great article,Ken!Wonderful comments,commentators!