Business model

From Free net encyclopedia

A business model (also called a business design) is the instrument by which a business intends to generate revenue and profits. It is a summary of how a company means to serve its employees and customers, and involves both strategy (what an business intends to do) as well as an implementation (how the business will carry out its plans).

A business model describes how a business:

Selects its employees and customers,
Defines and differentiates its product offerings,
Creates utility for its employees and customers,
Acquires and keeps employees and customers,
Goes to the market (promotion strategy and distribution strategy),
Defines the tasks to be performed,
Develops a sustainable presence with respect to the environment and society,
Configures its resources, and
Captures profit.

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Types of business models

Generally, the business models of service firms are more complex than those of manufacturers and resellers. The oldest and most basic business model is the shop keeper model. This involves setting up a store in a location where potential customers are likely to be and displaying a product or service.

A business model is a description of how an organization functions, a general template that describes its major activities. It identifies the firm’s customers and the products and services it offers. A model also provides information about how a firm is organized and how it generates revenues and profits. Business models combine with strategy to guide major decisions at a firm. The model also describes products and services, customer markets and business process.

Currently, most of the business models depend on technology. Entrepreneurs on the internet have also created entirely new models that depend entirely on exiting or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs.

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model" or the "tied products business model") was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging excessive amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). An interesting variant of this model is a software developer that gives away its word processor reader for free but charges several hundred dollars for its word processor writer.

In the 1950s new business models came from McDonald's Restaurants and Toyota. In the 1960s the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models from Federal Express and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from Southwest Airlines, eBay, Amazon.com, and Starbucks. Poorly thought out business models were a problem with many dot-coms.

Each of these business model innovations can give the firm a sustainable competitive advantage. But times are changing and companies must continuously rethink their business design. Companies must change their business models as value migrates from industry to industry. Ultimately the success or failure of a company depends first on how well its business design matches their customers' priorities.

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