What is a Business Model?
We often use important business terms loosely and assume that everyone understands what we mean by them. Indeed, we coin them without giving much consideration as to the exact notion we’re trying to convey and how it can be operationalised. Take excellence, quality or value – used with great regularity, yet the array of different interpretations and connotations is vast (see my earlier post here – Defining Quality And Excellence: The Holy Grail).
One important business term most of us use without ever bothering to define it more tightly is ‘business model’. We all assume that people understand what we mean when we coin it, yet closer scrutiny often leads us to realize that this is not so.
Peter Drucker’s take on it was powerful and simple, yet lacked specifics as to what may be included in operationalizing it. According to Drucker “a business model is nothing else than a representation of how an organization makes (or intends to make) money.” And distinguishing the term business model from the terms strategy and tactics, Harvard Professor Cadesus-Masanell (IESE White paper by Cadesus-Masanell and Ricart “From Strategy to Business Models and to Tactics”, 2009) argues that a business model is a firm’s realized strategy, while the term tactics refers to the residual choices made in the context of the business model.
“Put succinctly, business model refers to the logic of the firm, the way it operates and how it creates value for its shareholders. Strategy refers to the choice of business model through which the firm will compete in the market place. Tactics refers to the residual choices open to the firm by virtue of the business model it employs.”
Johnson et al (HBR “Re-inventing your Business Model”, December 2008) offered a framework that consisted of several components: a customer value proposition, a profit formula, and key resources and processes. According to the authors one secret to maintaining a thriving business is recognizing when the business model needs a fundamental change.
In a useful adapation of this and other frameworks, Alexander Osterwalder (www.businessmodelgeneration.com) has proposed a template – that acts as a visualization in the form of a template/canvas. It depicts the firm’s value proposition, infrastructure, customers, and finances in a way that helps align activities by highlighting potential trade-offs.
What other terms do we use, in your view, without bothering to operationalize them, especially in the domain of marketing?